G.R. No.

L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it
to pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon
from the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao
Lumber Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a)
under the first cause of action, for forest charges covering the period from September
10, 1952 to May 24, 1953, defendants admitted that they have a liability of P587.37,
which liability is covered by a bond executed by defendant General Insurance & Surety
Corporation for Mambulao Lumber Company, jointly and severally in character, on July
29, 1953, in favor of herein plaintiff; (b) under the second cause of action, both
defendants admitted a joint and several liability in favor of plaintiff in the sum of
P296.70, also covered by a bond dated November 27, 1953; and (c) under the third
cause of action, both defendants admitted a joint and several liability in favor of plaintiff
for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities
aggregate to P4,802.37. If the liability of defendants in favor of plaintiff in the amount
already mentioned is admitted, then what is the defense interposed by the defendants?
The defense presented by the defendants is quite unusual in more ways than one. It
appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for
'reforestation charges' and for the period commencing from April 30, 1947 to June 24,
1948, said defendant paid P927.08 to the Republic of the Philippines for 'reforestation
charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of
Republic Act 115 which provides that there shall be collected, in addition to the regular
forest charges provided under Section 264 of Commonwealth Act 466 known as the
National Internal Revenue Code, the amount of P0.50 on each cubic meter of timber...
cut out and removed from any public forest for commercial purposes. The amount
collected shall be expended by the director of forestry, with the approval of the
secretary of agriculture and commerce, for reforestation and afforestation of
watersheds, denuded areas ... and other public forest lands, which upon investigation,
are found needing reforestation or afforestation .... The total amount of the reforestation
charges paid by Mambulao Lumber Company is P9,127.50, and it is the contention of
the defendant Mambulao Lumber Company that since the Republic of the Philippines
has not made use of those reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the Republic of the Philippines should
refund said amount, or, if it cannot be refunded, at least it should be compensated with
 what Mambulao Lumber Company owed the Republic of the Philippines for
reforestation charges. In line with this thought, defendant Mambulao Lumber Company
wrote the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of
which said defendant requested "that our account with your bureau be credited with all
the reforestation charges that you have imposed on us from July 1, 1947 to June 14,
1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber
Company was answered by the director of forestry on March 12, 1957, marked Exh. 2,
in which the director of forestry quoted an opinion of the secretary of justice, to the
effect that he has no discretion to extend the time for paying the reforestation charges
and also explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by
defendant-appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956
may be set off or applied to the payment of the sum of P4,802.37 as forest charges due and
owing from appellant to appellee. It is appellant's contention that said sum of P9,127.50, not
having been used in the reforestation of the area covered by its license, the same is refundable
to it or may be applied in compensation of said sum of P4,802.37 due from it as forest
charges.1äw phï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided
for under Section two hundred and sixty-four of Commonwealth Act Numbered Four
Hundred Sixty-six, known as the National Internal Revenue Code, the amount of fifty
centavos on each cubic meter of timber for the first and second groups and forty
centavos for the third and fourth groups cut out and removed from any public forest for
commercial purposes. The amount collected shall be expended by the Director of
Forestry, with the approval of the Secretary of Agriculture and Natural Resources
(commerce), for reforestation and afforestation of watersheds, denuded areas and
cogon and open lands within forest reserves, communal forest, national parks, timber
lands, sand dunes, and other public forest lands, which upon investigation, are found
needing reforestation or afforestation, or needing to be under forest cover for the
growing of economic trees for timber, tanning, oils, gums, and other minor forest
products or medicinal plants, or for watersheds protection, or for prevention of erosion
and floods and preparation of necessary plans and estimate of costs and for
reconnaisance survey of public forest lands and for such other expenses as may be
deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived from
plantations as herein provided shall constitute a fund to be known as Reforestation
Fund, to be expended exclusively in carrying out the purposes provided for under this
Act. All provincial or city treasurers and their deputies shall act as agents of the
Director of Forestry for the collection of the revenues or incomes derived from the
provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges
from a timber licenses or concessionaire shall constitute a fund to be known as the
Reforestation Fund, and that the same shall be expended by the Director of Forestry, with the
approval of the Secretary of Agriculture and Natural Resources for the reforestation or
afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that
the amount collected as reforestation charges should be used exclusively for the reforestation
of the area covered by the license of a licensee or concessionaire, and that if not so used, the
same should be refunded to him. Observe too, that the licensee's area may or may not be
reforested at all, depending on whether the investigation thereof by the Director of Forestry
shows that said area needs reforestation. The conclusion seems to be that the amount paid by
a licensee as reforestation charges is in the nature of a tax which forms a part of the
Reforestation Fund, payable by him irrespective of whether the area covered by his license is
reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out
the purposes provided for thereunder, namely, the reforestation or afforestation, among others,
of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil
Code2 is applicable, such that the sum of P9,127.50 paid by it as reforestation charges may
compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the
view we take of this case, appellant and appellee are not mutually creditors and debtors of
each other. Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their
own right are creditors and debtors of each other. With respect to the forest charges
which the defendant Mambulao Lumber Company has paid to the government, they
are in the coffers of the government as taxes collected, and the government does not
owe anything, crystal clear that the Republic of the Philippines and the Mambulao
Lumber Company are not creditors and debtors of each other, because compensation
refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction
sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are the
positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to
pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate
and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the
collection of the tax must await and abide the result of a lawsuit, and meanwhile the
 financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-
767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects,
with costs against the defendant-appellant. So ordered.
G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price, respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance
of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and
for an order in this Court directing the respondent court below to execute the judgment in favor
of the Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by the
estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55,
issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the
matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims
against the estate the fiscal presented a petition dated June 21, 1961, to the court below for
the execution of the judgment. The petition was, however, denied by the court which held that
the execution is not justifiable as the Government is indebted to the estate under administration
in the amount of P262,200. The orders of the court below dated August 20, 1960 and
September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo
Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before
Notary Public Salvador V. Esguerra, legal adviser in Malacañang to Executive
Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos
P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs.
Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700
appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey,
Inc., represented by the administratrix Simeona K. Price, as directed in the above note
of the President. Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as
ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme
Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of
P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the
balance to be paid by the Government to her without further delay. (Order of August
20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders
that the payment of the claim of the Collector of Internal Revenue be deferred until the
 Government shall have paid its accounts to the administratrix herein amounting to
P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a
debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment
of the latter's account to it, specially taking into consideration that the amount due to
the Government draws interests while the credit due to the present state does not
accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim
of the Government against the estate must be denied for lack of merit. The ordinary procedure
by which to settle claims of indebtedness against the estate of a deceased person, as an
inheritance tax, is for the claimant to present a claim before the probate court so that said court
may order the administrator to pay the amount thereof. To such effect is the decision of
this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec.
29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court
to order the sale of personal estate or the sale or mortgage of real property of the
deceased and all debts or expenses of administrator and with the written notice to all
the heirs legatees and devisees residing in the Philippines, according to Rule 89,
section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be
made, the regulations contained in Rule 90, section 7, should be complied with. 1äw phï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into
possession of their respective portions in the estate prior to settlement and payment of
the debts and expenses of administration and it is later ascertained that there are such
debts and expenses to be paid, in which case "the court having jurisdiction of the
estate may, by order for that purpose, after hearing, settle the amount of their several
liabilities, and order how much and in what manner each person shall contribute, and
may issue execution if circumstances require" (Rule 89, section 6; see also Rule 74,
Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to
settle the estate of a deceased person, the properties belonging to the estate are under the
jurisdiction of the court and such jurisdiction continues until said properties have been
distributed among the heirs entitled thereto. During the pendency of the proceedings all the
estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the
court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has
been recognized and an amount of P262,200 has already been appropriated for the purpose
by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of
the Government for inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable is well as fully liquidated. Compensation, therefore,
takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of
the Civil Code, and both debts are extinguished to the concurrent amount, thus:
 ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts to the
concurrent amount, eventhough the creditors and debtors are not aware of the
compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set
aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot
which was, sold at public auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with
an area of about 328 square meters, is described and covered by Transfer Certificate of Title
No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by
the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount
equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City
pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code
in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the
property.

Francia was not present during the auction sale since he was in Iligan City at that time helping
his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of
TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon
verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in
favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of
Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered

dismissing the amended complaint and ordering:
 (a) The Register of Deeds of Pasay City to issue a new Transfer
Certificate of Title in favor of the defendant Ho Fernandez over
the parcel of land including the improvements thereon, subject
to whatever encumbrances appearing at the back of TCT No.
4739 (37795) and ordering the same TCT No. 4739 (37795)
cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of

P1,000.00 as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF

LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND

SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY
NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON
DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS

ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS
TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations
that his property was sold at public auction without notice to him and that the price paid for the
property was shockingly inadequate, amounting to fraud and deprivation without due process
of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised
in his petition upon himself. While we commiserate with him at the loss of his property, the law
and the facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation
of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there
can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is

allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ... (80 C.J.S.,
7374). "The general rule based on grounds of public policy is well-settled that
no set-off admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow
out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of individual taxpayers is not
required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that:
"... internal revenue taxes can not be the subject of compensation: Reason: government and
taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil
Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the
city government while the expropriation was effected by the national government. Moreover,
the amount of P4,116.00 paid by the national government for the 125 square meter portion of
his lot was deposited with the Philippine National Bank long before the sale at public auction of
his remaining property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be shown later,
he claimed that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of
proof therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition
for Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has
the burden of proof to show that there was compliance with all the prescribed requisites for a
tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established

by proof and the general rule is that the purchaser of a tax title is bound to take
upon himself the burden of showing the regularity of all proceedings leading up
to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving
a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v.
Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative
proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have
been complied with, the petitioner can not, however, deny that he did receive the notice for the
auction sale. The records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was
not properly notified of the auction sale. Surprisingly, however, he admitted in
his testimony that he received the letter dated November 21, 1977 (Exhibit "I")
 as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was
not present on December 5, 1977 the date of the auction sale because he went
to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be
assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho

Fernandez notified you that the property in question shall be
sold at public auction to the highest bidder on December 5,
1977 pursuant to Sec. 74 of PD 464. Will you tell the Court
whether you received the original of this letter?

A. I just signed it because I was not able to read the same. It

was just sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and

you signed upon receipt thereof but you did not read the
contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to
court assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.).
See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged
gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is
for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were
sold are unconscionable considering the wide divergence between their
assessed values and the amounts for which they had been actually sold.
However, while in ordinary sales for reasons of equity a transaction may be
invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem, as when a sale is
made at public auction, upon the theory that the lesser the price the easier it is
for the owner to effect the redemption. And so it was aptly said: "When there is
 the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and
thus recover the loss he claims to have suffered by reason of the price obtained
at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long,
et al. (188 Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes,

the collection of taxes in this manner would be greatly embarrassed, if not
rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the inadequacy of
the price given is not a valid objection to the sale." This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be
useless to offer the property. Indeed, it is notorious that the prices habitually
paid by purchasers at tax sales are grossly out of proportion to the value of the
land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al.
(267 P. 555):

Like most cases of this character there is here a certain element of hardship
from which we would be glad to relieve, but do so would unsettle long-
established rules and lead to uncertainty and difficulty in the collection of taxes
which are the life blood of the state. We are convinced that the present rules
are just, and that they bring hardship only to those who have invited it by their
own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated
in value. Precisely because of the widening of Buendia Avenue in Pasay City, which
necessitated the expropriation of adjoining areas, real estate values have gone up in the area.
However, the price quoted by the petitioner for a 203 square meter lot appears quite
exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to
deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are
no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes
for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed the
notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did
not withdraw from the expropriation payment deposited with the Philippine National Bank an
amount sufficient to pay for the back taxes. The petitioner did not pay attention to another
notice sent by the City Treasurer on November 3, 1978, during the period of redemption,
regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the
purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in
his attempt to regain the property by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
decision of the respondent court is affirmed.
G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER
BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P.
CRUZ, respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the
authority of the Commission on Audit (COA) in disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said
Commission's decision denying its claims for recovery of financing charges from the Fund and
reimbursement of underrecovery arising from sales to the National Power Corporation, Atlas
Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining
Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances
against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending
resolution before the Office of Energy Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty
(30) days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the
findings and rulings of the administrator of the fund itself and in disallowing a claim which is still
pending resolution at the OEA level, and (b) "grave abuse of discretion and completely without
jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it
may be required under the law to remit to the OPSF against any amount that it may receive by
way of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules
of Court, and, considering further the importance of the issues raised, the error in the
designation of the remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree
(P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8
reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of

the Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF)
for the purpose of minimizing frequent price changes brought about by
exchange rate adjustments and/or changes in world market prices of crude oil
and imported petroleum products. The Oil Price Stabilization Fund may be
sourced from any of the following:
 a) Any increase in the tax collection from ad valorem tax or
customs duty imposed on petroleum products subject to tax
under this Decree arising from exchange rate adjustment, as
may be determined by the Minister of Finance in consultation
with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of

tax exemptions of government corporations, as may be
determined by the Minister of Finance in consultation with the
Board of Energy;

c) Any additional amount to be imposed on petroleum products

to augment the resources of the Fund through an appropriate
Order that may be issued by the Board of Energy requiring
payment by persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso

costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using
the reference foreign exchange rate as fixed by the Board of
Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil

and imported petroleum products resulting from exchange rate
adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-

recovery incurred as a result of the reduction of domestic prices
of petroleum products. The magnitude of the underrecovery, if
any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by

the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in
the possession of the oil companies at the time
of the price change;

ii. Reduction in internal ad valorem taxes as a

result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the

Ministry of Finance to result in cost
underrecovery.
 The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry
of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred
to as Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted
for the years 1986 and 1988, of the additional tax on petroleum products authorized under the
aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to
P335,037,649.00 and informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification
with the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes
collected against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its
reimbursement certificates from the OPSF covering claims with the Office of Energy Affairs
since June 1987 up to March 1989, invoking in support thereof COA Circular No. 89-299 on the
lifting of pre-audit of government transactions of national government agencies and
government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the
OPSF and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate
COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal
for the payment of the collections and the recovery of claims, since the outright payment of the
sum of P1.287 billion to the OEA as a prerequisite for the processing of said claims against the
OPSF will cause a very serious impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate

monitoring of payments and reimbursements will be
administered by the ERB/Finance Dept./OEA, as agencies
designated by law to administer/regulate OPSF.
 (2) For the retroactive period, Caltex will deliver to OEA, P1.287
billion as payment to OPSF, similarly OEA will deliver to Caltex
the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be

conducted expeditiously.

(4) The review of current claims (1989) will be conducted

expeditiously to preclude further accumulation of
reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting
remittances and reimbursements for the current and ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella,

President, Petron Corporation, and Mr. Francis Ablan, President and Managing
Director, Caltex (Philippines) Inc., for reconsideration of this Commission's
adverse action embodied in its letters dated February 2, 1989 and March 9,
1989, the former directing immediate remittance to the Oil Price Stabilization
Fund of collections made by the firms pursuant to P.D. 1956, as amended by
E.O. No. 137, S. 1987, and the latter reiterating the same directive but further
advising the firms to desist from offsetting collections against their claims with
the notice that "this Commission will hold in abeyance the audit of all . . . claims
for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy

Regulatory Board, the aforenamed oil companies were allowed to offset the
amounts due to the Oil Price Stabilization Fund against their outstanding claims
from the said Fund for the calendar years 1987 and 1988, pending with the
then Ministry of Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to the
propriety of the offsetting of all types of reimbursements from the OPSF against
all categories of remittances, advised these oil companies that such offsetting
was bereft of legal basis. Aggrieved thereby, these companies now seek
reconsideration and in support thereof clearly manifest their intent to make
arrangements for the remittance to the Office of Energy Affairs of the amount of
collections equivalent to what has been previously offset, provided that this
Commission authorizes the Office of Energy Affairs to prepare the
corresponding checks representing reimbursement from the OPSF. It is alleged
that the implementation of such an arrangement, whereby the remittance of
collections due to the OPSF and the reimbursement of claims from the Fund
shall be made within a period of not more than one week from each other, will
benefit the Fund and not unduly jeopardize the continuing daily cash
requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this

Commission perceives no further objectionable feature in the proposed
arrangement, provided that 15% of whatever amount is due from the Fund is
 retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be noted in
the course of audit and surcharges for late remittances without prejudice to
similar future retentions to answer for any deficiency in such surcharges, and
provided further that no offsetting of remittances and reimbursements for the
current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive
Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989,
and based on our initial verification of documents submitted to us by your Office
in support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31,
1989, as well as its outstanding claims against the Oil Price Stabilization Fund
(OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex
(Philippines), Inc. shall be required to remit to OPSF an amount of
P1,505,668,906, representing remittances to the OPSF which were offset
against its claims reimbursements (net of unsubmitted claims). In addition, the
Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to cause
payment of P1,959,182,612 to Caltex, representing claims initially allowed in
audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled

P387,683,535, which included P130,420,235 representing those claims
disallowed by OEA, details of which is (sic) shown in Schedule 1 as
summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

 Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to
indicate that recovery of financing charges by oil companies is not among the
items for which the OPSF may be utilized. Therefore, it is our view that
recovery of financing charges has no legal basis. The mechanism for such
claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA

Order No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity
date that (sic) oil companies should pay OPSF impost on export sales of
petroleum products. Effective February 7, 1987 sales to international
vessels/airlines should not be included as part of its domestic sales. Changing
the effectivity date of the resolution from February 7, 1987 to October 20, 1987
as covered by subsequent ERB Resolution No. 88-12 dated November 18,
1988 has allowed Caltex to include in their domestic sales volumes to
international vessels/airlines and claim the corresponding reimbursements from
OPSF during the period. It is our opinion that the effectivity of the said
resolution should be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions

including the related BLA agreement, as they affect the claims for
reimbursements of ad valorem taxes. We observed that oil companies
immediately settle ad valorem taxes for BLA transaction (sic). Loan balances
therefore are not tax paid inventories of Caltex subject to reimbursements but
those of the borrower. Hence, we recommend reduction of the claim for July,
August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges
whether direct or indirect due and payable by the copper mining companies in
distress to the national and local governments." It is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts as effected
by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the

amount as herein authorized shall be subject to availability of funds of OPSF as
of May 31, 1989 and applicable auditing rules and regulations. With regard to
the disallowances, it is further informed that the aggrieved party has 30 days
within which to appeal the decision of the Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the
decision based on the following grounds: 13
 A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING
RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE
DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD
PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE

OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY
REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR
REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS
VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with
Commissioner Fernandez dissenting in part, handed down Decision No. 1171 affirming the
disallowance for recovery of financing charges, inventory losses, and sales to MARCOPPER
and ATLAS, while allowing the recovery of product sales or those arising from export
sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has
the .authority to recover financing charges from the OPSF on the basis of
Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which
allowed oil companies to "recover cost of financing working capital associated
with crude oil shipments," and provided a schedule of reimbursement in terms
of peso per barrel. It appears that on November 6, 1989, the DOF issued a
memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil

companies (were authorized) to refinance their imports of crude
oil and petroleum products from the normal trade credit of 30
days up to 360 days from date of loading . . . Conformably . . .,
the oil companies deferred their foreign exchange remittances
for purchases by refinancing their import bills from the normal
30-day payment term up to the desired 360 days. This
refinancing of importations carried additional costs (financing
charges) which then became, due to government mandate, an
 inherent part of the cost of the purchases of our country's oil
requirement.

We beg to disagree with such contention. The justification that financing

charges increased oil costs and the schedule of reimbursement rate in peso
per barrel (Exhibit 1) used to support alleged increase (sic) were not validated
in our independent inquiry. As manifested in Exhibit 2, using the same formula
which the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable conclusion is that the
oil companies are actually gaining rather than losing from the extension of
credit because such extension enables them to invest the collections in
marketable securities which have much higher rates than those they incur due
to the extension. The Data we used were obtained from CPI (CALTEX)
Management and can easily be verified from our records.

With respect to product sales or those arising from sales to international

vessels or airlines, . . ., it is believed that export sales (product sales) are
entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is

the considered view of this Commission that the OPSF is not liable to refund
such surtax on inventory losses because these are paid to BIR and not OPSF,
in view of which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you
are entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on
July 17, 1984, since these copper mining companies did not pay CPI (CALTEX)
and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the
CPI (CALTEX) has no authority to claim reimbursement for this uncollected
OPSF impost because LOI 1416 dated July 17, 1984, which exempts
distressed mining companies from "all taxes, duties, import fees and other
charges" was issued when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation. Moreover, it is
evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF

FINANCING CHARGES FROM THE OPSF.

II
 RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING
FROM SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM

EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST
ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS

WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE
DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the
petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted
by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties
to file their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the
Comment filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which
added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as

a result of the reduction of domestic prices of petroleum products. The
magnitude of the underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed cost
 of oil inventories in the possession of the oil companies at the
time of the price change;

ii. Reduction in internal ad valorem taxes as a result of

foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of

Finance to result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department)
of Finance may include financing charges for "in essence, financing charges constitute
unrecovered cost of acquisition of crude oil incurred by the oil companies," as explained in the
6 November 1989 Memorandum to the President of the Department of Finance; they "directly
translate to cost underrecovery in cases where the money market placement rates decline and
at the same time the tax on interest income increases. The relationship is such that the
presence of underrecovery or overrecovery is directly dependent on the amount and extent of
financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on
the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital

associated with crude oil shipments, the following guidelines on the utilization
of the Oil Price Stabilization Fund pertaining to the payment of the foregoing
(sic) exchange risk premium and recovery of financing charges will be
implemented:

1. The OPSF foreign exchange premium shall be reduced to a

flat rate of one (1) percent for the first (6) months and 1/32 of
one percent per month thereafter up to a maximum period of
one year, to be applied on crude oil' shipments from January 1,
1987. Shipments with outstanding financing as of January 1,
1987 shall be charged on the basis of the fee applicable to the
remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil

companies shall be allowed to recover financing charges
directly from the OPSF per barrel of crude oil based on the
following schedule:

F
i
n
a
n
c
i
n
 g
P
e
r
i
o
d
R
e
i
m
b
u
r
s
e
m
e
n
t
R
a
t
e
P
e
s
o
s
p
e
r
B
a
r
r
e
l

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days. 22
Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised
the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and
February 5, 1987 and subsequent discussions held by the Price Review
committee on February 6, 1987.

On the basis of the representations made, the Department of Finance

recognizes the necessity to reduce the foreign exchange risk premium accruing
to the Oil Price Stabilization Fund (OPSF). Such a reduction would allow the
industry to recover partly associated financing charges on crude oil imports.
Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat
charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter
up to a maximum period of one year, effective January 1, 1987. In addition,
since the prevailing company take would still leave unrecovered financing
charges, reimbursement may be secured from the OPSF in accordance with
the provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing
charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges

directly from the OPSF for both crude and product shipments
loaded after January 1, 1987 based on the following rates:

F
i
n
a
n
c
i
n
g
P
e
r
i
 o
d
R
e
i
m
b
u
r
s
e
m
e
n
t
R
a
t
e
(
P
B
b
l
.
)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing
further guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-

87 dated February 18, 1987 which allowed the recovery of financing charges
directly from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment

basis.

2. The claim shall be filed with the Office of Energy Affairs

together with the claim on peso cost differential for a particular
shipment and duly certified supporting documents providedfor
under Ministry of Finance No. 11-85.
 3. The reimbursement shall be on the form of reimbursement
certificate (Annex A) to be issued by the Office of Energy
Affairs. The said certificate may be used to offset against
amounts payable to the OPSF. The oil companies may also
redeem said certificates in cash if not utilized, subject to
availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-
12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in
the light of the determination of executive agencies. The determination by the Department of
Finance and the OEA that financing charges are recoverable from the OPSF is entitled to great
weight and consideration. 27 The function of the COA, particularly in the matter of allowing or
disallowing certain expenditures, is limited to the promulgation of accounting and auditing rules
for, among others, the disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's
claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly
raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular

or unnecessary government expenditures and as the monetary claims of
petitioner are not allowed by law, the COA acted within its jurisdiction in
denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing
charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include
"factors which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-

87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do

not likewise allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the
theory of petitioner –– that such does not extend to the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or use of government funds and
properties, but only to the promulgation of accounting and auditing rules for, among others,
such disallowance –– to be untenable in the light of the provisions of the 1987 Constitution and
related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts
of, and expenditures or uses of funds and property, owned or held in trust by,
or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures, including temporary or
special pre-audit, as are necessary and appropriate to correct the deficiencies.
It shall keep the general accounts, of the Government and, for such period as
may be provided by law, preserve the vouchers and other supporting papers
pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in
this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are
broader and more extensive than that conferred by the 1973 Constitution. Under the latter, the
Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or instrumentalities including government-
owned or controlled corporations, keep the general accounts of the
Government and, for such period as may be provided by law, preserve the
vouchers pertaining thereto; and promulgate accounting and auditing rules and
regulations including those for the prevention of irregular, unnecessary,
excessive, or extravagant expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was markedly
passive. Section 2 of Article XI thereofprovided:
 Sec. 2. The Auditor General shall examine, audit, and settle all accounts
pertaining to the revenues and receipts from whatever source, including trust
funds derived from bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or property pertaining to or
held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the preserve the
vouchers pertaining thereto. It shall be the duty of the Auditor General to bring
to the attention of the proper administrative officer expenditures of funds or
property which, in his opinion, are irregular, unnecessary, excessive, or
extravagant. He shall also perform such other functions as may be prescribed
by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant

expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the
power to issue rules and regulations to prevent the same. His was merely to bring that matter
to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were decided in
the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution
retains that same power and authority, further strengthened by the definition of the COA's
general jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing
rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No.
77-55. Since the COA is responsible for the enforcement of the rules and regulations, it goes
without saying that failure to comply with them is a ground for disapproving the payment of the
proposed expenditure. As observed by one of the Commissioners of the 1986 Constitutional
Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the
1935 Constitution the Auditor General could not correct "irregular, unnecessary,
excessive or extravagant" expenditures of public funds but could only "bring
[the matter] to the attention of the proper administrative officer," under the 1987
Constitution, as also under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations including those for
the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures or uses of government funds and
properties." Hence, since the Commission on Audit must ultimately be
responsible for the enforcement of these rules and regulations, the failure to
comply with these regulations can be a ground for disapproving the payment of
a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more
active role and invested it with broader and more extensive powers, they did not intend merely
to make the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and
independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular
No. 1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA,
issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to
determine "other factors" which may result in cost underrecovery and a consequent
reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing
charges are not included in "cost underrecovery" and, therefore, cannot be considered as one
of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not
explicitly define what "cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without

the corresponding reduction in the landed cost of oil inventories in the
possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery.

These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that
they are in the nature of government mandated price reductions. Hence, any other factor which
seeks to be a part of the enumeration, or which could qualify as a cost underrecovery, must be
of the same class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance
broad and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words are not to
be construed in their widest extent, but are held to be as applying only to persons or things of
the same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and
(ii) easily discloses that they do not have a common characteristic. The first relates to price
reduction as directed by the Board of Energy while the second refers to reduction in internal ad
valoremtaxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these
subparagraphs. What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows
cost underrecovery only if such were incurred as a result of the reduction of domestic prices of
petroleum products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in
the sense that such were incurred as a result of the inability to fully offset financing expenses
from yields in money market placements, they do not, however, fall under the foregoing
provision of P.D. No. 1956, as amended, because the same did not result from the reduction of
the domestic price of petroleum products. Until paragraph (2), Section 8 of the decree, as
amended, is further amended by Congress, this Court can do nothing. The duty of this Court is
not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to
emphasize that as the facts in this case have shown, it was at the behest of the Government
that petitioner refinanced its oil import payments from the normal 30-day trade credit to a
maximum of 360 days. Petitioner could be correct in its assertion that owing to the extended
period for payment, the financial institution which refinanced said payments charged a higher
interest, thereby resulting in higher financing expenses for the petitioner. It would appear then
that equity considerations dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because it accommodated the request
of the Government. Although under Section 29 of the National Internal Revenue Code such
losses may be deducted from gross income, the effect of that loss would be merely to reduce
its taxable income, but not to actually wipe out such losses. The Government then may
consider some positive measures to help petitioner and others similarly situated to obtain
substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation
of legislative power, it clearly appearing that the subject provision does not provide any
standard for the exercise of the authority. It is a fundamental rule that delegation of legislative
power may be sustained only upon the ground that some standard for its exercise
is provided and that the legislature, in making the delegation, has prescribed the manner of the
exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant
by reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to
disprove COA's claim that it had in fact gained in the process. Otherwise stated, petitioner
failed to sufficiently show that it incurred a loss. Such being the case, how can petitioner claim
for reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the
petitioner. The respondents themselves admit in their Comment that underrecovery arising
from sales to NPC are reimbursable because NPC was granted full exemption from the
payment of taxes; to prove this, respondents trace the laws providing for such
exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No. 17-
87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the
National Power Corporation, including those pertaining to its domestic purchases of petroleum
and petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued
on 5 October 1987 by the Office of the President, NPC's tax exemption was confirmed and
approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum

products to the NPC is evident in the recently passed Republic Act No. 6952 establishing the
Petroleum Price Standby Fund to support the OPSF. 41 The pertinent part of Section 2,
Republic Act No. 6952 provides:
 Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies
for (a) cost increases of imported crude oil and finished
petroleum products resulting from foreign exchange rate
adjustments and/or increases in world market prices of crude
oil; (b) cost underrecovery incurred as a result of fuel oil sales to
the National Power Corporation (NPC); and (c) other cost
underrecoveries incurred as may be finally decided by the
Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER,
petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the
suspension of payments of all taxes, duties, fees and other charges, whether direct or indirect,
due and payable by the copper mining companies in distress to the national government.
Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum
Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation
and Marcopper Mining Corporation are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18
August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion
that LOI 1416 which implements the exemption from payment of OPSF imposts as effected by
OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex)
has no authority to claim reimbursement for this uncollected impost because LOI 1416 dated
July 17, 1984, . . . was issued when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover,
it is evident that OPSF was not created to aid distressed mining companies but rather to help
the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have
intended to exempt said distressed mining companies from the payment of OPSF dues for the
following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D.
1956 creating the OPSF was promulgated on October 10, 1984, while E.O.
137, amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies
in line with the government's effort to prevent the collapse of the copper
industry. P.D No. 1956, as amended, was issued for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or
changes in world market prices of crude oil and imported petroleum product's;
and
 c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and
other charges, whether direct or indirect, due and payable by the copper mining
companies in distress to the Notional and Local Governments . . ." On the other
hand, OPSF dues are not payable by (sic) distressed copper companies but by
oil companies. It is to be noted that the copper mining companies do not pay
OPSF dues. Rather, such imposts are built in or already incorporated in the
prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed
mining companies, it does not accord petitioner the same privilege with respect to its obligation
to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of
the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their
publication in the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official

Gazette all unpublished presidential issuances which are of general application,
and unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and
private laws, shall be published as a condition for their effectivity, which shall
begin fifteen days after publication unless a different effectivity date is fixed by
the legislature.

Covered by this rule are presidential decrees and executive orders

promulgated by the President in the exercise of legislative powers whenever
the same are validly delegated by the legislature or, at present, directly
conferred by the Constitution. Administrative rules and regulations must also be
published if their purpose is to enforce or implement existing laws pursuant also
to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall

immediately upon their approval, or as soon thereafter as possible, be
published in full in the Official Gazette, to become effective only after fifteen
days from their publication, or on another date specified by the legislature, in
accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official
Gazette after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on
18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their
publication either in the Official Gazette or in a newspaper of general circulation
in the Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation
pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim
must still fail. Tax exemptions as a general rule are construed strictly against the grantee and
liberally in favor of the taxing authority. 48The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed. The party claiming
exemption must therefore be expressly mentioned in the exempting law or at least be within its
purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to
ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though
LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give
petitioner the same privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its
jurisdiction. 49 Respondents, on the other hand, contend that said amount was already
disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the claims of
petitioner for pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate
its contention that the amount of P130,420,235.00 is still pending before the OEA and the
DOF. Additionally, We find no reason to doubt the submission of respondents that said amount
has already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving
said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF
from petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner
contends that it should be allowed to offset its claims from the OPSF against its contributions to
the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which
provides for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner
also mentions communications from the Board of Energy and the Department of Finance that
supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there
can be no offsetting of taxes against the claims that a taxpayer may have against the
government, as taxes do not arise from contracts or depend upon the will of the taxpayer, but
are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V,
Title I-B of the Revised Administrative Code, is misplaced because "while this provision
empowers the COA to withhold payment of a government indebtedness to a person who is
also indebted to the government and apply the government indebtedness to the satisfaction of
the obligation of the person to the government, like authority or right to make compensation is
not given to the private person." 54 The reason for this, as stated in Commissioner of Internal
Revenue vs. Algue, Inc., 55 is that money due the government, either in the form of taxes or
other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving
petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the
respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as
a result of taxation because "P.D. 1956, amended, did not create a source of taxation; it
instead established a special fund . . .," 56 and that the OPSF contributions do not go to the
general fund of the state and are not used for public purpose, i.e., not for the support of the
government, the administration of law, or the payment of public expenses. This alleged lack of
a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling in
the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall

be used to pay any oil company which has an outstanding
obligation to the Government without said obligation being
offset first, subject to the requirements of compensation or
offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public
purpose because they go to a special fund of the government. Taxation is no longer envisioned
as a measure merely to raise revenue to support the existence of the government; taxes may
be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of the
state. 57 There can be no doubt that the oil industry is greatly imbued with public interest as it
vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of
a majority of the people and cause economic crisis of untold proportions. It would have a chain
reaction in terms of, among others, demands for wage increases and upward spiralling of the
cost of basic commodities. The stabilization then of oil prices is of prime concern which the
state, via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF
is taxation. No amount of semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against
the government. 58Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil
companies merely act as agents for the Government in the latter's collection since the taxes
are, in reality, passed unto the end-users –– the consuming public. In that capacity, the
petitioner, as one of such companies, has the primary obligation to account for and remit the
taxes collected to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be considered merely as a debtor. In
respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no
compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be
said to be mutually debtors and creditors of each other. Secondly, there is no proof that
petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order
that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been
stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by

third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a
practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset
their claims against their OPSF contributions. Instead, it prohibits the government from paying
any amount from the Petroleum Price Standby Fund to oil companies which have outstanding
obligations with the government, without said obligation being offset first subject to the rules on
compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the

challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National Power
Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.
G.R. No. 148187 April 16, 2008

PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court of Appeals
in CA-G.R. SP No. 49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A.
Case No. 5200. Also assailed is the April 3, 2001 Resolution3 denying the motion for
reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement4 with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and
operate the latter’s mining claim, known as the Sto. Nino mine, located in Atok and Tublay,
Benguet Province. The parties’ agreement was denominated as "Power of Attorney" and
provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO.
NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed,
for internal audit purposes, as the owner’s account in the Sto. Nino PROJECT. Any
part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the
Sto. Nino PROJECT, shall be added to such owner’s account.

5. Whenever the MANAGERS shall deem it necessary and convenient in connection

with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or
property to the Sto. Nino PROJECT, in accordance with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the
MANAGERS’ account.

(b) The total of the MANAGERS’ account shall not exceed P11,000,000.00,
except with prior approval of the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein provided cannot be paid in cash
from the Sto. Nino PROJECT, the amount not so paid in cash shall be added to
the MANAGERS’ account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.
 (d) The MANAGERS’ account shall not accrue interest. Since it is the desire of
the PRINCIPAL to extend to the MANAGERS the benefit of subsequent
appreciation of property, upon a projected termination of this Agency, the ratio
which the MANAGERS’ account has to the owner’s account will be determined,
and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims, shall be transferred to the MANAGERS, except that such
transferred assets shall not include mine development, roads, buildings, and
similar property which will be valueless, or of slight value, to the MANAGERS.
The MANAGERS can, on the other hand, require at their option that property
originally transferred by them to the Sto. Nino PROJECT be re-transferred to
them. Until such assets are transferred to the MANAGERS, this Agency shall
remain subsisting.

xxxx

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of
the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall
pay income tax on their compensation, while the PRINCIPAL shall pay income tax on
the net profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS’
compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and,
in the future, may incur other obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’
account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been
paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36-
month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner be
held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d)
hereof shall be operative in case of the MANAGERS’ withdrawal.

x x x x5

In the course of managing and operating the project, Philex Mining made advances of cash
and property in accordance with paragraph 5 of the agreement. However, the mine suffered
continuing losses over the years which resulted to petitioner’s withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine operations on February 20,
1982.6

Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in
Payment"7 wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio
Gold’s tangible assets to petitioner, transferring to the latter Baguio Gold’s equitable title in its
Philodrill assets and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.

On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in
Payment"8 where the parties determined that Baguio Gold’s indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors
that petitioner had assumed as guarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT &
SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by
first assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in
its Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a
remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that
were set up in 1981 and P2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR) disallowed the amount as
deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all
requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing
debt; (b) the debt was ascertained to be worthless; and (c) it was charged off within the taxable
year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into
with Baguio Gold. The bad debt deduction represented advances made by petitioner which,
pursuant to the management contract, formed part of Baguio Gold’s "pecuniary obligations" to
petitioner. It also included payments made by petitioner as guarantor of Baguio Gold’s long-
term loans which legally entitled petitioner to be subrogated to the rights of the original creditor.

Petitioner also asserted that due to Baguio Gold’s irreversible losses, it became evident that it
would not be able to recover the advances and payments it had made in behalf of Baguio Gold.
For a debt to be considered worthless, petitioner claimed that it was neither required to institute
a judicial action for collection against the debtor nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce collection
and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioner’s protest for lack of legal and factual basis. It
held that the alleged debt was not ascertained to be worthless since Baguio Gold remained
existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a
valid and subsisting debt considering that, under the management contract, petitioner was to
be paid fifty percent (50%) of the project’s net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as
follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY

respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus,
20% delinquency interest due computed from February 10, 1995, which is the date
after the 20-day grace period given by the respondent within which petitioner has to
pay the deficiency amount x x x up to actual date of payment.

SO ORDERED.11

The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were
in the nature of a loan. It instead characterized the advances as petitioner’s investment in a
partnership with Baguio Gold for the development and exploitation of the Sto. Nino mine. The
CTA held that the "Power of Attorney" executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of an investment, it
could not be deducted as a bad debt from petitioner’s gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of
Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were
made, Baguio Gold was not in default since its loans were not yet due and demandable. What
petitioner did was to pre-pay the loans as evidenced by the notice sent by Bank of America
showing that it was merely demanding payment of the installment and interests due. Moreover,
Citibank imposed and collected a "pre-termination penalty" for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging
that:

I.

The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the
nature of an investment rather than a loan.

II.

The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the
Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of
the Sto. Nino Mine notwithstanding the clear absence of any intent on the part of Philex
and Baguio Gold to form a partnership.

III.
 The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement
when it construed the nature of the advances made by Philex.

IV.

The Court of Appeals erred in refusing to delve upon the issue of the propriety of the
bad debts write-off.14

Petitioner insists that in determining the nature of its business relationship with Baguio Gold,
we should not only rely on the "Power of Attorney", but also on the subsequent "Compromise
with Dation in Payment" and "Amended Compromise with Dation in Payment" that the parties
executed in 1982. These documents, allegedly evinced the parties’ intent to treat the advances
and payments as a loan and establish a creditor-debtor relationship between them.

The petition lacks merit.

The lower courts correctly held that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold.
Before resort may be had to the two compromise agreements, the parties’ contractual intent
must first be discovered from the expressed language of the primary contract under which the
parties’ business relations were founded. It should be noted that the compromise agreements
were mere collateral documents executed by the parties pursuant to the termination of their
business relationship created under the "Power of Attorney". On the other hand, it is the latter
which established the juridical relation of the parties and defined the parameters of their
dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent
or contemporaneous act that is reflective of the parties’ true intent. The compromise
agreements were executed eleven years after the "Power of Attorney" and merely laid out a
plan or procedure by which petitioner could recover the advances and payments it made under
the "Power of Attorney". The parties entered into the compromise agreements as a
consequence of the dissolution of their business relationship. It did not define that relationship
or indicate its real character.

An examination of the "Power of Attorney" reveals that a partnership or joint venture was
indeed intended by the parties. Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.15 While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its charter, it has been held that
it may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal
definition, but it has been generally understood to mean an organization formed for
some temporary purpose. x x x It is in fact hardly distinguishable from the partnership,
since their elements are similar – community of interest in the business, sharing of
profits and losses, and a mutual right of control. x x x The main distinction cited by
most opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is formed for
 the execution of a single transaction, and is thus of a temporary nature. x x x This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its
object a specific undertaking. x x x It would seem therefore that under Philippine law, a
joint venture is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these
two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. x x x
(Citations omitted) 16

Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties
had intended to create a partnership and establish a common fund for the purpose. They also
had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of
the mine.

Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money,
property and industry to the common fund known as the Sto. Niño mine.17 In this regard, we
note that there is a substantive equivalence in the respective contributions of the parties to the
development and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the joint venture assets under their
respective accounts. Baguio Gold would contribute P11M under its owner’s account plus any of
its income that is left in the project, in addition to its actual mining claim. Meanwhile,
petitioner’s contribution would consist of its expertise in the management and operation of
mines, as well as the manager’s account which is comprised of P11M in funds and property
and petitioner’s "compensation" as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement with
Baguio Gold because it did not "bind" itself to contribute money or property to the project; that
under paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or
property to the Sto. Niño project "(w)henever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the STO. NIÑO MINE."18

The wording of the parties’ agreement as to petitioner’s contribution to the common fund does
not detract from the fact that petitioner transferred its funds and property to the project as
specified in paragraph 5, thus rendering effective the other stipulations of the contract,
particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until
termination of the parties’ business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an obligatory nature as
soon as petitioner had chosen to exercise its option under paragraph 5.

There is no merit to petitioner’s claim that the prohibition in paragraph 5(c) against withdrawal
of advances should not be taken as an indication that it had entered into a partnership with
Baguio Gold; that the stipulation only showed that what the parties entered into was actually a
contract of agency coupled with an interest which is not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by
the principal due to an interest of a third party that depends upon it, or the mutual interest of
both principal and agent.19 In this case, the non-revocation or non-withdrawal under paragraph
5(c) applies to the advances made by petitioner who is supposedly the agent and not the
principal under the contract. Thus, it cannot be inferred from the stipulation that the parties’
relation under the agreement is one of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of
the parties was one of agency and not a partnership. Although the said provision states that
"this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS’ account," it does not necessarily
follow that the parties entered into an agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold.

It should be stressed that the main object of the "Power of Attorney" was not to confer a power
in favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a
business relationship between petitioner and Baguio Gold, in which the former was to manage
and operate the latter’s mine through the parties’ mutual contribution of material resources and
industry. The essence of an agency, even one that is coupled with interest, is the agent’s ability
to represent his principal and bring about business relations between the latter and third
persons.20 Where representation for and in behalf of the principal is merely incidental or
necessary for the proper discharge of one’s paramount undertaking under a contract, the latter
may not necessarily be a contract of agency, but some other agreement depending on the
ultimate undertaking of the parties.21

In this case, the totality of the circumstances and the stipulations in the parties’ agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio
Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances
made by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon
termination of the parties’ business relations, "the ratio which the MANAGER’S account has to
the owner’s account will be determined, and the corresponding proportion of the entire assets
of the STO. NINO MINE, excluding the claims" shall be transferred to petitioner.22 As pointed
out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the
mine’s assets upon dissolution of the parties’ business relations. There was nothing in the
agreement that would require Baguio Gold to make payments of the advances to petitioner as
would be recognized as an item of obligation or "accounts payable" for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets
of the Sto. Niño mine upon termination, a provision that is more consistent with a partnership
than a creditor-debtor relationship. It should be pointed out that in a contract of loan, a person
who receives a loan or money or any fungible thing acquires ownership thereof and
is bound to pay the creditor an equal amount of the same kind and quality.23 In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and
property that it had advanced, but only the return of an amount pegged at a ratio which the
manager’s account had to the owner’s account.

In this connection, we find no contractual basis for the execution of the two compromise
agreements in which Baguio Gold recognized a debt in favor of petitioner, which supposedly
arose from the termination of their business relations over the Sto. Nino mine. The "Power of
Attorney" clearly provides that petitioner would only be entitled to the return of a proportionate
share of the mine assets to be computed at a ratio that the manager’s account had to the
owner’s account. Except to provide a basis for claiming the advances as a bad debt deduction,
there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise
agreements, for any amount over and above the proportion agreed upon in the "Power of
Attorney".

Next, the tax court correctly observed that it was unlikely for a business corporation to lend
hundreds of millions of pesos to another corporation with neither security, or collateral, nor a
specific deed evidencing the terms and conditions of such loans. The parties also did not
provide a specific maturity date for the advances to become due and demandable, and the
manner of payment was unclear. All these point to the inevitable conclusion that the advances
were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it
would receive 50% of the net profits as "compensation" under paragraph 12 of the agreement.
The entirety of the parties’ contractual stipulations simply leads to no other conclusion than that
petitioner’s "compensation" is actually its share in the income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in
the profits of a business is prima facie evidence that he is a partner in the business." Petitioner
asserts, however, that no such inference can be drawn against it since its share in the profits of
the Sto Niño project was in the nature of compensation or "wages of an employee", under the
exception provided in Article 1769 (4) (b).24

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold
who will be paid "wages" pursuant to an employer-employee relationship. To begin with,
petitioner was the manager of the project and had put substantial sums into the venture in
order to ensure its viability and profitability. By pegging its compensation to profits, petitioner
also stood not to be remunerated in case the mine had no income. It is hard to believe that
petitioner would take the risk of not being paid at all for its services, if it were truly just an
ordinary employee.

Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement

actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not
be entitled to an equal share in the income of the mine if it were just an employee of Baguio
Gold.25 It is not surprising that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an almost equal contribution of the
parties to the St. Nino mine. The "compensation" agreed upon only serves to reinforce the
notion that the parties’ relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioner’s advances as investments in a
partnership known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to
petitioner inasmuch as the latter was under no unconditional obligation to return the same to
the former under the "Power of Attorney". As for the amounts that petitioner paid as guarantor
to Baguio Gold’s creditors, we find no reason to depart from the tax court’s factual finding that
Baguio Gold’s debts were not yet due and demandable at the time that petitioner paid the
same. Verily, petitioner pre-paid Baguio Gold’s outstanding loans to its bank creditors and this
conclusion is supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to
the deduction claimed.27 In this case, petitioner failed to substantiate its assertion that the
advances were subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in
C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to
PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20%
delinquency interest computed from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date of payment.
G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is
erroneous. We have carefully studied it and find it is not; on the contrary, it is supported by law
and doctrine. So finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase
price was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments
were made in cash and through irrevocable letters of credit. 3Fourteen promissory notes were
signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the
Republic of the Philippines. 4 Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually
completed and delivered to the NDC in Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest
on the balance of the purchase price. No tax was withheld. The Commissioner then held the
NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The
BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the
claimed amount. 6 The NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum
of P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a
petition for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37
of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. — (a) Gross income from
sources within the Philippines. — The following items of gross income shall be treated
as gross income from sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise;
 xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities — the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC — were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and
collect income tax on interest received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition that 'the activity or
labor — and the sale from which the (interest) income flowed had its situs' in the
Philippines. The law specifies: 'Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident corporations in
the Philippines, or place where the contract is signed. The residence of the obligor who
pays the interest rather than the physical location of the securities, bonds or notes or
the place of payment, is the determining factor of the source of interest income.
(Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc.
10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.)
Accordingly, if the obligor is a resident of the Philippines the interest payment paid by
him can have no other source than within the Philippines. The interest is paid not by
the bond, note or other interest-bearing obligations, but by the obligor. (See mertens,
Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address
and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally
promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory
notes for each vessel, the balance of the contract price of the twelve (12) ocean-going
vessels purchased and acquired by it from the Japanese corporations, including the
interest on the principal sum at the rate of five per cent (5%) per annum. (See Exhs.
"D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.)
And pursuant to the terms and conditions of these promisory notes, which are duly
signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese
shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17,
$1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of
the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of
Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor
which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta.
Mesa, Manila, Philippines; and as a corporation duly organized and existing under the
laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec.
84(c), National Internal Revenue Code.) The interest paid by petitioner, which is
admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly,
 therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961
and 1962 on the unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines subject to income tax
under the then Section 24(b)(1) of the National Internal Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

(b) Exclusion from gross income. — The following items shall not be included in gross
income and shall be exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. — Interest upon the obligations of the

Government of the Republic of the Philippines or any political subdivision thereof, but in
the case of such obligations issued after approval of this Code, only to the extent
provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No.
82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407,
which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry
such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such
securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for
value received, hereby absolutely and unconditionally guarantee (sic), on behalf of the
Republic of the Philippines, the due and punctual payment of both principal and interest
of the above note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has
not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be
merely implied but must be categorically and unmistakably expressed. 11 Any doubt concerning
this question must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by the government in consonance with and certainly
not against the following provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of
real or personal capacity, executors, administrators, receivers, conservators,
 fiduciaries, employers, and all officers and employees of the Government of the
Philippines having control, receipt, custody; disposal or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or categorical gains, profits and
income of any nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in the
cases provided for in subsection (a) of this section) deduct and withhold from such
annual or periodical gains, profits and income a tax to twenty (now 30%) per centum
thereof: ...

Sec. 54. Payment of corporation income tax at source. — In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business within
the Philippines and not having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and upon the same items as
is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and
such tax shall be returned and paid in the same manner and subject to the same
conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it
is governed in its proprietary activities not only by its charter but also by the Corporation Code
and other pertinent laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not
the Republic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure
to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c)
of the Tax Code, thus:

Section 53(c). Return and Payment. — Every person required to deduct and withhold
any tax under this section shall make return thereof, in duplicate, on or before the
fifteenth day of April of each year, and, on or before the time fixed by law for the
payment of the tax, shall pay the amount withheld to the officer of the Government of
the Philippines authorized to receive it. Every such person is made personally liable for
such tax, and is indemnified against the claims and demands of any person for the
amount of any payments made in accordance with the provisions of this section. (As
amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the
responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax
due, and promptly causing a query to be addressed to the Commissioner of Internal
 Revenue for the determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal Revenue decides that the
income paid to an individual is not subject to withholding, the withholding agent may
thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax
Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released
from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law
frowns upon exemption from taxation; hence, an exempting provision should be
construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs.

It is so ordered.
G.R. No. L-54108 January 17, 1984

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS CO. (PHILIPPINE
BRANCH), respondents.

The Solicitor General for petitioner.

Siguion Reyna, Montecillo & Ongsiako and J.C. Castañeda, Jr. and E.C. Alcantara for
respondents.

AQUINO, J.:

This case is about the refund of a 1971 income tax amounting to P324,255. Smith Kline and
French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is
licensed to do business in the Philippines. It is engaged in the importation, manufacture and
sale of pharmaceuticals drugs and chemicals.

In its 1971 original income tax return, Smith Kline declared a net taxable income of P1,489,277
(Exh. A) and paid P511,247 as tax due. Among the deductions claimed from gross income was
P501,040 ($77,060) as its share of the head office overhead expenses. However, in its
amended return filed on March 1, 1973, there was an overpayment of P324,255 "arising from
underdeduction of home office overhead" (Exh. E). It made a formal claim for the refund of the
alleged overpayment.

It appears that sometime in October, 1972, Smith Kline received from its international
independent auditors, Peat, Marwick, Mitchell and Company, an authenticated certification to
the effect that the Philippine share in the unallocated overhead expenses of the main office for
the year ended December 31, 1971 was actually $219,547 (P1,427,484). It further stated in the
certification that the allocation was made on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole. By reason of the new adjustment,
Smith Kline's tax liability was greatly reduced from P511,247 to P186,992 resulting in an
overpayment of P324,255.

On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue on its
claim Smith Kline filed a petition for review with the Court of Tax Appeals.

In its decision of March 21, 1980, the Tax Court ordered the Commissioner to refund the
overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to this Court.

The governing law is found in section 37 of the old National Internal Revenue Code,
Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the
National Internal Revenue Code of 1977 and which reads:

SEC. 37. Income form sources within the Philippines. —

 xxx xxx xxx

(b) Net income from sources in the Philippines. — From the items of gross
income specified in subsection (a) of this section there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated
thereto and a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of gross income. The
remainder, if any, shall be included in full as net income from sources within the
Philippines.

xxx xxx xxx

Revenue Regulations No. 2 of the Department of Finance contains the following provisions on
the deductions to be made to determine the net income from Philippine sources:

SEC. 160. Apportionment of deductions. — From the items specified in section

37(a), as being derived specifically from sources within the Philippines there
shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be allocated to some item or class
of gross income. The remainder shall be included in full as net income from
sources within the Philippines. The ratable part is based upon the ratio of gross
income from sources within the Philippines to the total gross income.

Example: A non-resident alien individual whose taxable year is the calendar

year, derived gross income from all sources for 1939 of P180,000, including
therein:

Interest on bonds of a domestic corporation P9,000

Dividends on stock of a domestic corporation 4,000

Royalty for the use of patents within the Philippines 12,000

Gain from sale of real property located within the Philippines 11,000

Total P36,000

that is, one-fifth of the total gross income was from sources within the
Philippines. The remainder of the gross income was from sources without the
Philippines, determined under section 37(c).

The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources
within the Philippines and the amount of P40,000 is properly allocated to
income from sources without the Philippines.
 The remainder of the expense, P30,000, cannot be definitely allocated to any
class of income. A ratable part thereof, based upon the relation of gross income
from sources within the Philippines to the total gross income, shall be deducted
in computing net income from sources within the Philippines. Thus, these are
deducted from the P36,000 of gross income from sources within the Philippines
expenses amounting to P14,000 [representing P8,000 properly apportioned to
the income from sources within the Philippines and P6,000, a ratable part (one-
fifth) of the expenses which could not be allocated to any item or class of gross
income.] The remainder, P22,000, is the net income from sources within the
Philippines.

From the foregoing provisions, it is manifest that where an expense is clearly related to the
production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine
personnel, rental of office building in the Philippines), that expense can be deducted from the
gross income acquired in the Philippines without resorting to apportionment.

The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which direct benefit its branches all over
the world, including the Philippines, fall under a different category however. These are items
which cannot be definitely allocated or Identified with the operations of the Philippine branch.
For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the
Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible
share a ratable part of such expenses based upon the ratio of the local branch's gross income
to the total gross income, worldwide, of the multinational corporation.

In his petition for review, the Commissioner does not dispute the right of Smith Kline to avail
itself of section 37(b) of the Tax Code and section 160 of the regulations. But the
Commissioner maintains that such right is not absolute and that as there exists a contract (in
this case a service agreement) which Smith Kline has entered into with its home office,
prescribing the amount that a branch can deduct as its share of the main office's overhead
expenses, that contract is binding.

The Commissioner contends that since the share of the Philippine branch has been fixed at
$77,060, Smith Kline itself cannot claim more than the said amount. To allow Smith Kline to
deduct more than what was expressly provided in the agreement would be to ignore its
existence. It is a cardinal rule that a contract is the law between the contracting parties and the
stipulations therein must be respected unless these are proved to be contrary to law, morals,
good customs and public policy. There being allegedly no showing to the contrary, the
provisions thereof must be followed.

The Commissioner also argues that the Tax Court erred in relying on the certification of Peat,
Marwick, Mitchell and Company that Smith Kline is entitled to deduct P1,427,484 ($219,547)
as its allotted share and that Smith Kline has not presented any evidence to show that the
home office expenses chargeable to Philippine operations exceeded $77,060.

On the other hand, Smith Kline submits that the contract between itself and its home office
cannot amend tax laws and regulations. The matter of allocated expenses which are deductible
under the law cannot be the subject of an agreement between private parties nor can the
Commissioner acquiesce in such an agreement.
Smith Kline had to amend its return because it is of common knowledge that audited financial
statements are generally completed three or four months after the close of the accounting
period. There being no financial statements yet when the certification of January 11, 1972 was
made the treasurer could not have correctly computed Smith Kline's share in the home office
overhead expenses in accordance with the gross income formula prescribed in section 160 of
the Revenue Regulations. What the treasurer certified was a mere estimate.

Smith Kline likewise submits that it has presented ample evidence to support its claim for
refund. To this end, it has presented before the Tax Court the authenticated statement of Peat,
Marwick, Mitchell and Company to show that since the gross income of the Philippine branch
was P7,143,155 ($1,098,617) for 1971 as per audit report prepared by Sycip, Gorres, Velayo
and Company, and the gross income of the corporation as a whole was $6,891,052, Smith
Kline's share at 15.94% of the home office overhead expenses was P1,427,484 ($219,547)
(Exh. G to G-2, BIR Records, 4-5).

Clearly, the weight of evidence bolsters its position that the amount of P1,427,484 represents
the correct ratable share, the same having been computed pursuant to section 37(b) and
section 160.

In a manifestation dated July 19, 1983, Smith Kline declared that with respect to its share of
the head office overhead expenses in its income tax returns for the years 1973 to 1981, it
deducted its ratable share of the total overhead expenses of its head office for those years as
computed by the independent auditors hired by the parent company in Philadelphia,
Pennsylvania U.S.A., as soon as said computations were made available to it.

We hold that Smith Kline's amended 1971 return is in conformity with the law and regulations.
The Tax Court correctly held that the refund or credit of the resulting overpayment is in order.

WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs.

SO ORDERED