G.R. No.

210987 November 24, 2014
THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE,
Respondents.
DECISION
VELASCO, JR., J.:
Nature of the Case
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court assailing and seeking the reversal of the Resolutions of the Court of
Appeals (CA) in CA-G.R. SP No. 127984, dated May 23, 20131 and January 21,
2014, which dismissed outright the petitioner's appeal from the Secretary of
Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.
The Facts
Petitioner The Philippine American Life and General Insurance Company
(Philamlife) used to own 498,590 Class A shares in Philam Care Health Systems,
Inc. (PhilamCare), representing 49.89% of the latter's outstanding capital stock. In
2009, petitioner, in a bid to divest itself of its interests in the health maintenance
organization industry, offered to sell its shareholdings in PhilamCare through
competitive bidding. Thus, on September 24, 2009, petitioner's Class A shares
were sold for USD 2,190,000, or PhP 104,259,330 based on the prevailing
exchange rate at the time of the sale, to STI Investments, Inc., who emerged as
the highest bidder.3
the shares were sold at their actual fair market value and at arm’s length; that as
long as the transaction conducted is at arm’s length––such that a bona fide
business arrangement of the dealings is done inthe ordinary course of business––
a sale for less than an adequate consideration is not subject to donor’s tax; and
that donor’s tax does not apply to saleof shares sold in an open bidding process.
On January 4, 2012, however, respondent Commissioner on Internal Revenue
(Commissioner) denied Philamlife’s request through BIR Ruling No. 015-12. As
determined by the Commissioner, the selling price of the shares thus sold was
lower than their book value based on the financial statements of PhilamCare as of
the end of 2008.6 As such, the Commisioner held, donor’s tax became imposable
on the price difference pursuant to Sec. 100 of the National Internal Revenue Code
(NIRC), viz:
SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where
property, other than real property referred to in Section 24(D), is transferred for
less than an adequate and full consideration in money or money’s worth, then the
amount by which the fair market value of the property exceeded the value of the
consideration shall, for the purpose of the tax imposed by this Chapter, be
deemed a gift, and shall be included in computing the amount of gifts made during
the calendar year.
The afore-quoted provision, the Commissioner added, is implemented by
Revenue Regulation 6-2008 (RR 6-2008), which provides:
SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED
THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B),
27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. —
xxxx

After the sale was completed and the necessary documentary stamp and capital
gains taxes were paid, Philamlife filed an application for a certificate authorizing
registration/tax clearance with the Bureau of Internal Revenue (BIR) Large
Taxpayers Service Division to facilitate the transfer of the shares. Months later,
petitioner was informed that it needed to secure a BIR ruling in connection with
its application due to potential donor’s tax liability. In compliance, petitioner, on
January 4, 2012, requested a ruling4 to confirm that the sale was not subject to
donor’s tax, pointing out, in its request, the following: that the transaction cannot
attract donor’s tax liability since there was no donative intent and,ergo, no taxable
donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009;5 that
(c) Determination of Amount and Recognition of Gain or Loss –
(c.1) In the case of cash sale, the selling price shall be the consideration per deed
of sale.
xxxx
(c.1.4) In case the fair market value of the shares of stock sold, bartered, or
exchanged is greater than the amount of money and/or fair market value of the
property received, the excess of the fair market value of the shares of stock sold,
bartered or exchanged overthe amount of money and the fair market value of the
property, if any, received as consideration shall be deemed a gift subject to the
donor’stax under Section 100 of the Tax Code, as amended.
xxxx
(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this
Section, ‘fair market value’ of the share of stock sold shall be:
xxxx
(c.2.2) In the case of shares of stock not listed and traded in the local stock
exchanges, the book value of the shares of stock as shown in the financial
statements duly certified by an independent certified public accountant nearest
to the date of sale shall be the fair market value.
In view of the foregoing, the Commissioner ruled that the difference between the
book value and the selling price in the sales transaction is taxable donation subject
to a 30% donor’s tax under Section 99(B) of the NIRC.7 Respondent Commissioner
likewise held that BIR Ruling [DA-(DT-065) 715-09], on which petitioner anchored
its claim, has already been revoked by Revenue Memorandum Circular (RMC) No.
25-2011.8
Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to
review BIR Ruling No. 015-12, but to no avail. For on November 26, 2012,
respondent Secretary affirmed the Commissioner’s assailed ruling in its entirety.9
Ruling of the Court of Appeals
Not contented with the adverse results, petitioner elevated the case to the CA via
a petition for review under Rule 43, assigning the following errors:10
A.
The Honorable Secretary of Finance gravely erred in not finding that the
application of Section 7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC 25-11 is
void insofar as it altersthe meaning and scope of Section 100 of the Tax Code.
B.
The Honorable Secretary of Finance gravely erred in finding that Section 100 of
the Tax Code is applicable tothe sale of the Sale of Shares.
1.
The Sale of Shares were sold at their fair market value and for fair and full
consideration in money or money’s worth.
2.
The sale of the Sale Shares is a bona fide business transaction without any
donative intent and is therefore beyond the ambit of Section 100 of the
Tax Code.
3.
It is superfluous for the BIR to require an express provision for the
exemption of the sale of the Sale Shares from donor’s tax since Section
100 of the Tax Code does not explicitly subject the transaction to donor’s
tax.
C.
The Honorable Secretary of Finance gravely erred in failing to find that in the
absence of any of the grounds mentioned in Section 246 of the Tax Code, rules
and regulations, rulings or circulars – such as RMC 25-11 – cannot be given
retroactive application to the prejudice of Philamlife.
On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition,
thusly:
WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack
of jurisdiction.
SO ORDERED.
In disposing of the CA petition, the appellate court ratiocinated that it is the Court
of Tax Appeals (CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA
1125),11 as amended, which has jurisdiction over the issues raised. The outright
dismissal, so the CA held, is predicated on the postulate that BIR Ruling No. 015-
12 was issued in the exercise of the Commissioner’s power to interpret the NIRC
and other tax laws. Consequently, requesting for its review can be categorized as
"other matters arising under the NIRC or other laws administered by the BIR,"
which is under the jurisdiction of the CTA, not the CA.
Philamlife eventually sought reconsideration but the CA, in its equally assailed
January 21, 2014 Resolution, maintained its earlier position. Hence, the instant
recourse.
Issues
Stripped to the essentials, the petition raises the following issues in both
procedure and substance:
1. Whether or not the CA erred in dismissing the CA Petition for lack of
jurisdiction; and
2. Whether or not the price difference in petitioner’s adverted sale of
shares in PhilamCare attracts donor’s tax.
Procedural Arguments
a. Petitioner’s contentions
Insisting on the propriety of the interposed CA petition, Philamlife, while
conceding that respondent Commissioner issued BIR Ruling No. 015-12 in
accordance with her authority to interpret tax laws, argued nonetheless that such
ruling is subject to review by the Secretary of Finance under Sec. 4 of the NIRC, to
wit:
SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. – The power to interpret the provisions of this Code and other tax laws shall
be under the exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in relation thereto, or other matters
arising under this Code orother laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals. Petitioner postulates that there
is a need to differentiate the rulings promulgated by the respondent
Commissioner relating to those rendered under the first paragraph of Sec. 4 of
the NIRC, which are appealable to the Secretary of Finance, from those rendered
under the second paragraph of Sec. 4 of the NIRC, which are subject to review on
appeal with the CTA.
This distinction, petitioner argues, is readily made apparent by Department Order
No. 7-02,12 as circularized by RMC No. 40-A-02.
Philamlife further averred that Sec.7 of RA 1125, as amended, does not find
application in the case at bar since it only governs appeals from the
Commissioner’s rulings under the second paragraph and does not encompass
rulings from the Secretary of Finance in the exercise of his power of review under
the first, as what was elevated to the CA. It added that under RA 1125, as
amended, the only decisions of the Secretary appealable to the CTA are those
rendered in customs cases elevated to him automatically under Section 2315 of
the Tariff and Customs Code.13
There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as
amended, failed to supply where the rulings of the Secretary in its exercise of its
power of review under Sec. 4 of the NIRC are appealable to. This gap, petitioner
submits, was remedied by British American Tobacco v. Camacho14 wherein the
Court ruled that where what is assailed is the validity or constitutionality of a law,
or a rule or regulation issued by the administrative agency, the regular courts have
jurisdiction to pass upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the
exercise of its power of review under Sec. 4 of the NIRC are not within the CTA’s
limited special jurisdiction and, according to petitioner, are appealable to the CA
via a Rule 43 petition for review.
b. Respondents’ contentions
Before the CA, respondents countered petitioner’s procedural arguments by
claiming that even assuming arguendo that the CTA does not have jurisdiction
over the case, Philamlife, nevertheless,committed a fatal error when it failed to
appeal the Secretary of Finance’s ruling to the Office of the President (OP). As
made apparent by the rules, the Department of Finance is not among the agencies
and quasi-judicial bodies enumerated under Sec. 1, Rule 43 of the Rules of Court
whose decisions and rulings are appealable through a petition for review.15 This
is in stark contrast to the OP’s specific mention under the same provision, so
respondents pointed out.
To further reinforce their argument, respondents cite the President’s power of
review emanating from his power of control as enshrined under Sec. 17 of Article
VII of the Constitution, which reads:
Section 17.The President shall have control of all the executive departments,
bureaus, and offices. He shall ensure that the laws be faithfully executed.
The nature and extent of the President’s constitutionally granted power of control
have beendefined in a plethora of cases, most recently in Elma v. Jacobi,16
wherein it was held that:
x x x This power of control, which even Congress cannot limit, let alone withdraw,
means the power of the Chief Executive to review, alter, modify, nullify, or set
aside what a subordinate, e.g., members of the Cabinet and heads of line agencies,
had done in the performance of their duties and to substitute the judgment of the
former for that of the latter.
In their Comment on the instant petition, however, respondents asseverate that
the CA did not err in its holding respecting the CTA’s jurisdiction over the
controversy.
The Court’s Ruling
The petition is unmeritorious.
Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable
to the CTA
To recapitulate, three different, if not conflicting, positions as indicated below
have been advanced by the parties and by the CA as the proper remedy open for
assailing respondents’ rulings:
1. Petitioners: The ruling of the Commissioner is subject to review by the
Secretary under Sec. 4 of the NIRC, and that of the Secretary to the CA via
Rule 43;
2. Respondents: The ruling of the Commissioner is subject to review by
the Secretary under Sec. 4 of the NIRC, and that of the Secretary to the
Office of the President before appealing to the CA via a Rule 43 petition;
and
3. CA: The ruling of the Commissioner is subject to review by the CTA.
We now resolve.
Preliminarily, it bears stressing that there is no dispute that what is involved herein
is the respondent Commissioner’s exercise of power under the first paragraph of
Sec. 4 of the NIRC––the power to interpret tax laws. This, in fact, was recognized
by the appellate court itself, but erroneously held that her action in the exercise
of such power is appealable directly to the CTA. As correctly pointed out by
petitioner, Sec. 4 of the NIRC readily provides that the Commissioner’s power to
interpret the provisions of this Code and other tax laws is subject to review by the
Secretary of Finance. The issue that now arises is this––where does one seek
immediate recourse from the adverse ruling of the Secretary of Finance in its
exercise of its power of review under Sec. 4?
Admittedly, there is no provision in law that expressly provides where exactly the
ruling of the Secretary of Finance under the adverted NIRC provision is appealable
to. However, We find that Sec. 7(a)(1) of RA 1125, as amended, addresses the
seeming gap in the law asit vests the CTA, albeit impliedly, with jurisdiction over
the CA petition as "other matters" arising under the NIRC or other laws
administered by the BIR. As stated:
Sec. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the National Internal Revenue
or other laws administered by the Bureau of Internal Revenue. (emphasis
supplied)
Even though the provision suggests that it only covers rulings of the
Commissioner, We hold that it is, nonetheless, sufficient enough to include
appeals from the Secretary’s review under Sec. 4 of the NIRC.
It is axiomatic that laws should be given a reasonable interpretation which does
not defeat the very purpose for which they were passed.17 Courts should not
follow the letter of a statute when to do so would depart from the true intent of
the legislature or would otherwise yield conclusions inconsistent with the purpose
of the act.18 This Court has, in many cases involving the construction of statutes,
cautioned against narrowly interpreting a statute as to defeat the purpose of the
legislator, and rejected the literal interpretation of statutes if todo so would lead
to unjust or absurd results.19
Indeed, to leave undetermined the mode of appeal from the Secretary of Finance
would be an injustice to taxpayers prejudiced by his adverse rulings. To remedy
this situation, Weimply from the purpose of RA 1125 and its amendatory laws that
the CTA is the proper forum with which to institute the appeal. This is not, and
should not, in any way, be taken as a derogation of the power of the Office of
President but merely as recognition that matters calling for technical knowledge
should be handled by the agency or quasi-judicial body with specialization over
the controversy. As the specialized quasi-judicial agency mandated to adjudicate
tax, customs, and assessment cases, there can be no other court of appellate
jurisdiction that can decide the issues raised inthe CA petition, which involves the
tax treatment of the shares of stocks sold. Petitioner, though, nextinvites
attention to the ruling in Ursal v. Court of Tax Appeals20 to argue against granting
the CTA jurisdiction by implication, viz:
Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket
authority to decide any and all tax disputes. Defining such special court’s
jurisdiction, the Act necessarily limited its authority to those matters enumerated
therein. Inline with this idea we recently approved said court’s order rejecting an
appeal to it by Lopez & Sons from the decision of the Collector ofCustoms, because
in our opinion its jurisdiction extended only to a review of the decisions of the
Commissioner of Customs, as provided bythe statute — and not to decisions of
the Collector of Customs. (Lopez & Sons vs. The Court of Tax Appeals, 100 Phil.,
850, 53 Off. Gaz., [10] 3065).
xxxx
x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates
the matters which the Court of Tax Appeals may consider; such enumeration
excludes all others by implication. Expressio unius est exclusio alterius.
Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of
context, but worse as a precedent, it must be noted that the primary reason for
the dismissal of the said case was that the petitioner therein lacked the personality
to file the suit with the CTA because he was not adversely affected by a decision
or ruling of the Collector of Internal Revenue, as was required under Sec. 11 of RA
1125.21 As held:
We share the view that the assessor had no personality to resort to the Court of
Tax Appeals. The rulings of the Board of Assessment Appeals did not "adversely
affect" him. At most it was the City of Cebu that had been adversely affected in
the sense that it could not thereafter collect higher realty taxes from the
abovementioned property owners. His opinion, it is true had been overruled; but
the overruling inflicted no material damage upon him or his office. And the Court
of Tax Appeals was not created to decide mere conflicts of opinion between
administrative officers or agencies. Imagine an income tax examiner resorting to
the Court of Tax Appeals whenever the Collector of Internal Revenue modifies, or
lower his assessment on the return of a tax payer!22
The appellate power of the CTA includes certiorari
Petitioner is quick to point out, however, that the grounds raised in its CA petition
included the nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt
to divest the CTA jurisdiction over the controversy, petitioner then cites British
American Tobacco, wherein this Court has expounded on the limited jurisdiction
of the CTA in the following wise:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in
general, this does not include cases where the constitutionality of a law or rule is
challenged. Where what is assailed is the validity or constitutionality of a law, or a
rule or regulation issued by the administrative agency in the performance of its
quasi legislative function, the regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation inthe
courts, including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine inan appropriate action
the validity of the acts of the political departments. Judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which
are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the Government.23
Vis-a-vis British American Tobacco, it bears to stress what appears to be a
contrasting ruling in Asia International Auctioneers, Inc. v. Parayno, Jr., to wit:
Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158
(The National Internal Revenue Code, as amended) which states that "[d]ealers in
securities shall pay a tax equivalent to six (6%) per centum of their gross income.
Lending investors shall pay a tax equivalent to five (5%) per cent, of their gross
income," the CIR issued Revenue Memorandum Order (RMO) No. 15-91 imposing
5% lending investor’s tax on pawnshops based on their gross income and requiring
all investigating units of the BIR to investigate and assess the lending investor’s tax
due from them. The issuance of RMO No. 15-91 was an offshoot of the CIR’s
finding that the pawnshop business is akin to that of "lending investors" as defined
in Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91
subjecting pawn tickets to documentary stamp tax. Respondent therein, Josefina
Leal, owner and operator of Josefina’s Pawnshop, asked for a reconsideration of
both RMO No. 15-91 and RMC No. 43-91, but the same was denied by petitioner
CIR. Leal then filed a petition for prohibition with the RTC of San Mateo, Rizal,
seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR,
through the OSG, filed a motion to dismiss on the ground of lack of jurisdiction.
The RTC denied the motion. Petitioner filed a petition for certiorari and prohibition
with the CA which dismissed the petition "for lack of basis." In reversing the CA,
dissolving the Writ of Preliminary Injunction issued by the trial court and ordering
the dismissal of the case before the trial court, the Supreme Court held that "[t]he
questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of
the Commissioner implementing the Tax Code on the taxability of pawnshops."
They were issued pursuant to the CIR’s power under Section 245 of the Tax Code
"to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including ruling on the classification of articles
of sales and similar purposes."The Court held that under R.A. No. 1125 (An Act
Creating the Court of Tax Appeals), as amended, such rulings of the CIR are
appealable to the CTA.
In the case at bar, the assailed revenue regulations and revenue memorandum
circulars are actually rulings or opinions of the CIR on the tax treatment of motor
vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No.
7227 which provides that "exportation or removal of goods from the territory of
the [SSEZ] to the other parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Codeand other relevant tax laws of
the Philippines." They were issued pursuant to the power of the CIR under Section
4 of the National Internal Revenue Code x x x.24 (emphasis added)
The respective teachings in British American Tobacco and Asia International
Auctioneers, at first blush, appear to bear no conflict––that when the validity or
constitutionality of an administrative rule or regulation is assailed, the regular
courts have jurisdiction; and if what is assailed are rulings or opinions of the
Commissioner on tax treatments, jurisdiction over the controversy is lodged with
the CTA. The problem with the above postulates, however, is that they failed to
take into consideration one crucial point––a taxpayer can raise both issues
simultaneously.
Petitioner avers that there is now a trend wherein both the CTA and the CA
disclaim jurisdiction over tax cases: on the one hand, mere prayer for the
declaration of a tax measure’s unconstitutionality or invalidity before the CTA can
result in a petition’s outright dismissal, and on the other hand, the CA will likewise
dismiss the same petition should it find that the primary issue is not the tax
measure’s validity but the assessment or taxability of the transaction or subject
involved. To illustrate this point, petitioner cites the assailed Resolution, thusly:
Admittedly, in British American Tobacco vs. Camacho, the Supreme Court has
ruled that the determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts, not the CTA.
xxxx
Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a
taxable donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC,
Sec. 7 (C.2.2) and RMC 25-11 is merely questioned incidentally since it was used
by the CIR as bases for its unfavourable opinion. Clearly, the Petition involves an
issue on the taxability of the transaction rather than a direct attack on the
constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the
instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.
As a result of the seemingly conflicting pronouncements, petitioner submits that
taxpayers are now at a quandary on what mode of appeal should be taken, to
which court or agency it should be filed, and which case law should be followed.
Petitioner’s above submission is specious.
In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has
ruled that the CTA now has the power of certiorari in cases within its appellate
jurisdiction. To elucidate:
The prevailing doctrine is that the authority to issue writs of certiorari involves the
exercise of original jurisdiction which must be expressly conferred by the
Constitution or by law and cannot be implied from the mere existence of appellate
jurisdiction. Thus, x x x this Court has ruled against the jurisdiction of courts or
tribunals over petitions for certiorari on the ground that there is no law which
expressly gives these tribunals such power. Itmust be observed, however, that x x
x these rulings pertain not to regular courts but to tribunals exercising quasijudicial
powers. With respect tothe Sandiganbayan, Republic Act No. 8249 now provides
that the special criminal court has exclusive original jurisdiction over petitions for
the issuance of the writs of mandamus, prohibition, certiorari, habeas corpus,
injunctions, and other ancillary writs and processes in aid of its appellate
jurisdiction.
In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants
power to the Supreme Court, in the exercise of its original jurisdiction, to issue
writs of certiorari, prohibition and mandamus. With respect to the Court of
Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the appellate
court, also in the exercise of its original jurisdiction, the power to issue, among
others, a writ of certiorari, whether or not in aid of its appellate jurisdiction. As to
Regional Trial Courts, the power to issue a writ of certiorari, in the exercise of their
original jurisdiction, is provided under Section 21 of BP 129.
The foregoing notwithstanding, while there is no express grant of such power,
with respect to the CTA, Section 1, Article VIII of the 1987 Constitution provides,
nonetheless, that judicial power shall be vested in one Supreme Court and in such
lower courts as may be established by law and that judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which
are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted
that the power of the CTA includes that of determining whether or not there has
been grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of the RTC in issuing an interlocutory order in cases falling within the exclusive
appellate jurisdiction of the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to issue writs of certiorari in
these cases.
Indeed, in order for any appellate court to effectively exercise its appellate
jurisdiction, it must have the authority to issue, among others, a writ of certiorari.
In transferring exclusive jurisdiction over appealed tax cases to the CTA, it can
reasonably be assumed that the law intended to transfer also such power as is
deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There
is no perceivable reason why the transfer should only be considered as partial, not
total. (emphasis added)
Evidently, City of Manilacan be considered as a departure from Ursal in that in
spite of there being no express grant in law, the CTA is deemed granted with
powers of certiorari by implication. Moreover, City of Manila diametrically
opposes British American Tobacco to the effect that it is now within the power of
the CTA, through its power of certiorari, to rule on the validity of a particular
administrative ruleor regulation so long as it is within its appellate jurisdiction.
Hence, it can now rule not only on the propriety of an assessment or tax treatment
of a certain transaction, but also on the validity of the revenue regulation or
revenue memorandum circular on which the said assessment is based.
Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA
petition not only contested the applicability of Sec. 100 of the NIRC over the sales
transaction but likewise questioned the validity of Sec. 7 (c.2.2) of RR 06-08 and
RMC 25-11 does not divest the CTA of its jurisdiction over the controversy,
contrary to petitioner's arguments.
The price difference is subject to donor's tax
Petitioner's substantive arguments are unavailing. The absence of donative intent,
if that be the case, does not exempt the sales of stock transaction from donor's
tax since Sec. 100 of the NIRC categorically states that the amount by which the
fair market value of the property exceeded the value of the consideration shall be
deemed a gift.1âwphi1 Thus, even if there is no actual donation, the difference in
price is considered a donation by fiction of law.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely
sets the parameters for determining the "fair market value" of a sale of stocks.
Such issuance was made pursuant to the Commissioner's power to interpret tax
laws and to promulgate rules and regulations for their implementation.
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after
the sale, was being applied retroactively in contravention to Sec. 246 of the
NIRC.26 Instead, it merely called for the strict application of Sec. 100, which was
already in force the moment the NIRC was enacted.
WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of
Appeals in CA-G.R. SP No. 127984 dated May 23, 2013 and January 21, 2014 are
hereby AFFIRMED. SO ORDERED.
G.R. No. 169225 November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
HAMBRECHT & QUIST PHILIPPINES, INC., Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision1 dated August 12, 2005 of the Court of Tax
Appeals (CTA) En Banc in C.T.A. E.B. No. 73 (C.T.A. Case No. 6362), entitled
"Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines, Inc.," which
affirmed the Decision2 dated September 24, 2004 of the CTA Original Division in
C.T.A. Case No. 6362 canceling the assessment issued against respondent for
deficiency income and expanded withholding tax for the year 1989 for failure of
petitioner Commissioner of Internal Revenue (CIR) to enforce collection within the
period allowed by law.
The CTA summarized the pertinent facts of this case, as follows:
In a letter dated February 15, 1993, respondent informed the Bureau of Internal
Revenue (BIR), through its West-Makati District Office of its change of business
address from the 2nd Floor Corinthian Plaza, Paseo de Roxas, Makati City to the
22nd Floor PCIB Tower II, Makati Avenue corner H.V. De la Costa Streets, Makati
City. Said letter was duly received by the BIR-West Makati on February 18, 1993.
On November 4, 1993, respondent received a tracer letter or follow-up letter
dated October 11, 1993 issued by the Accounts Receivable/Billing Division of the
BIR’s National Office and signed by then Assistant Chief Mr. Manuel B. Mina,
demanding for payment of alleged deficiency income and expanded withholding
taxes for the taxable year 1989 amounting to ₱2,936,560.87.
On December 3, 1993, respondent, through its external auditors, filed with the
same Accounts Receivable/Billing Division of the BIR’s National Office, its protest
letter against the alleged deficiency tax assessments for 1989 as indicated in the
said tracer letter dated October 11, 1993.
The alleged deficiency income tax assessment apparently resulted from an
adjustment made to respondent’s taxable income for the year 1989, on account
of the disallowance of certain items of expense, namely, professional fees paid,
donations, repairs and maintenance, salaries and wages, and management fees.
The latter item of expense, the management fees, made up the bulk of the
disallowance, the examiner alleging, among others, that petitioner failed to
withhold the appropriate tax thereon. This is also the same basis for the
imposition of the deficiency withholding tax assessment on the management fees.
Revenue Regulations No. 6-85 (EWT Regulations) does not impose or prescribe
EWT on management fees paid to a non-resident.
On November 7, 2001, nearly eight (8) years later, respondent’s external auditors
received a letter from herein petitioner Commissioner of Internal Revenue dated
October 27, 2001. The letter advised the respondent that petitioner had rendered
a final decision denying its protest on the ground that the protest against the
disputed tax assessment was allegedly filed beyond the 30-day reglementary
period prescribed in then Section 229 of the National Internal Revenue Code.
On December 6, 2001, respondent filed a Petition for Review docketed as CTA
Case No. 6362 before the then Court of Tax Appeals, pursuant to Section 7 of
Republic Act No. 1125, otherwise known as an ‘Act Creating the Court of Tax
Appeals’ and Section 228 of the NIRC, to appeal the final decision of the
Commissioner of Internal Revenue denying its protest against the deficiency
income and withholding tax assessments issued for taxable year 1989.3
In a Decision dated September 24, 2004, the CTA Original Division held that the
subject assessment notice sent by registered mail on January 8, 1993 to
respondent’s former place of business was valid and binding since respondent
only gave formal notice of its change of address on February 18, 1993. Thus, the
assessment had become final and unappealable for failure of respondent to file a
protest within the 30-day period provided by law. However, the CTA (a) held that
the CIR failed to collect the assessed taxes within the prescriptive period; and (b)
directed the cancellation and withdrawal of Assessment Notice No. 001543-89-
5668. Petitioner’s Motion for Reconsideration and Supplemental Motion for
Reconsideration of said Decision filed on October 14, 2004 and November 22,
2004, respectively, were denied for lack of merit.
Undaunted, the CIR filed a Petition for Review with the CTA En Banc but this was
denied in a Decision dated August 12, 2005, the dispositive portion reads:
WHEREFORE, the Petition for Review is DENIED DUE COURSE and the case is
accordingly DISMISSED for lack of merit.4
Hence, the instant Petition wherein the following issues are raised:
I the parameters of the term "other matters" can be supported or even deduced.
WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO
RULE THAT THE GOVERNMENT’S RIGHT TO COLLECT THE TAX HAS
PRESCRIBED.
II
WHETHER OR NOT THE PERIOD TO COLLECT THE ASSESSMENT HAS
PRESCRIBED.5
The petition is without merit.
Anent the first issue, petitioner argues that the CTA had no jurisdiction over the
case since the CTA itself had ruled that the assessment had become final and
unappealable. Citing Protector’s Services, Inc. v. Court of Appeals,6 the CIR argued
that, after the lapse of the 30-day period to protest, respondent may no longer
dispute the correctness of the assessment and its appeal to the CTA should be
dismissed. The CIR took issue with the CTA’s pronouncement that it had
jurisdiction to decide "other matters" related to the tax assessment such as the
issue on the right to collect the same since the CIR maintains that when the law
says that the CTA has jurisdiction over "other matters," it presupposes that the tax
assessment has not become final and unappealable.
We cannot countenance the CIR’s assertion with regard to this point. The
jurisdiction of the CTA is governed by Section 7 of Republic Act No. 1125, as
amended, and the term "other matters" referred to by the CIR in its argument can
be found in number (1) of the aforementioned provision, to wit:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided –
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law as part of law administered by the Bureau of Internal
Revenue. (Emphasis supplied.)
Plainly, the assailed CTA En Banc Decision was correct in declaring that there was
nothing in the foregoing provision upon which petitioner’s theory with regard to
What is rather clearly apparent, however, is that the term "other matters" is
limited only by the qualifying phrase that follows it.
Thus, on the strength of such observation, we have previously ruled that the
appellate jurisdiction of the CTA is not limited to cases which involve decisions of
the CIR on matters relating to assessments or refunds. The second part of the
provision covers other cases that arise out of the National Internal Revenue Code
(NIRC) or related laws administered by the Bureau of Internal Revenue (BIR).7
In the case at bar, the issue at hand is whether or not the BIR’s right to collect
taxes had already prescribed and that is a subject matter falling under Section
223(c) of the 1986 NIRC, the law applicable at the time the disputed assessment
was made. To quote Section 223(c):
Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax. (Emphases supplied.)
In connection therewith, Section 3 of the 1986 NIRC states that the collection of
taxes is one of the duties of the BIR, to wit:
Sec. 3. Powers and duties of Bureau. - The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges and the enforcement of all forfeitures,
penalties, and fines connected therewith including the execution of judgments in
all cases decided in its favor by the Court of Tax Appeals and the ordinary courts.
Said Bureau shall also give effect to and administer the supervisory and police
power conferred to it by this Code or other laws. (Emphasis supplied.)
Thus, from the foregoing, the issue of prescription of the BIR’s right to collect taxes
may be considered as covered by the term "other matters" over which the CTA
has appellate jurisdiction.
Furthermore, the phraseology of Section 7, number (1), denotes an intent to view
the CTA’s jurisdiction over disputed assessments and over "other matters" arising
under the NIRC or other laws administered by the BIR as separate and
independent of each other. This runs counter to petitioner’s theory that the latter
is qualified by the status of the former, i.e., an "other matter" must not be a final
and unappealable tax assessment or, alternatively, must be a disputed
assessment.
Likewise, the first paragraph of Section 11 of Republic Act No. 1125,
as amended by Republic Act No. 9282,8 belies petitioner’s assertion as the
provision is explicit that, for as long as a party is adversely affected by any decision,
ruling or inaction of petitioner, said party may file an appeal with the CTA within
30 days from receipt of such decision or ruling. The wording of the provision does
not take into account the CIR’s restrictive interpretation as it clearly provides that
the mere existence of an adverse decision, ruling or inaction along with the timely
filing of an appeal operates to validate the exercise of jurisdiction by the CTA.
To be sure, the fact that an assessment has become final for failure of the taxpayer
to file a protest within the time allowed only means that the validity or correctness
of the assessment may no longer be questioned on appeal. However, the validity
of the assessment itself is a separate and distinct issue from the issue of whether
the right of the CIR to collect the validly assessed tax has prescribed. This issue of
prescription, being a matter provided for by the NIRC, is well within the jurisdiction
of the CTA to decide.
With respect to the second issue, the CIR insists that its right to collect the tax
deficiency it assessed on respondent is not barred by prescription since the
prescriptive period thereof was allegedly suspended by respondent’s request for
reinvestigation.
Based on the facts of this case, we find that the CIR’s contention is without
basis.1avvphi1 The pertinent provision of the 1986 NIRC is Section 224, to wit:
Section 224. Suspension of running of statute. – The running of the statute of
limitations provided in Sections 203 and 223 on the making of assessment and the
beginning of distraint or levy or a proceeding in court for collection, in respect of
any deficiency, shall be suspended for the period during which the Commissioner
is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court and for sixty days thereafter; when the taxpayer requests for
a re-investigation which is granted by the Commissioner; when the taxpayer cannot
be located in the address given by him in the return filed upon which a tax is being
assessed or collected: Provided, That, if the taxpayer informs the Commissioner of
any change in address, the statute will not be suspended; when the warrant of
distraint and levy is duly served upon the taxpayer, his authorized representative,
or a member of his household with sufficient discretion, and no property could be
located; and when the taxpayer is out of the Philippines. (Emphasis supplied.)
The plain and unambiguous wording of the said provision dictates that two
requisites must concur before the period to enforce collection may be suspended:
(a) that the taxpayer requests for reinvestigation, and (b) that petitioner grants
such request.
On this point, we have previously held that:
The above section is plainly worded. In order to suspend the running of the
prescriptive periods for assessment and collection, the request for reinvestigation
must be granted by the CIR.9 (Emphasis supplied.)
Consequently, the mere filing of a protest letter which is not granted does not
operate to suspend the running of the period to collect taxes. In the case at bar,
the records show that respondent filed a request for reinvestigation on December
3, 1993, however, there is no indication that petitioner acted upon respondent’s
protest. As the CTA Original Division in C.T.A. Case No. 6362 succinctly pointed out
in its Decision, to wit:
It is evident that the respondent did not conduct a reinvestigation, the protest
having been dismissed on the ground that the assessment has become final and
executory. There is nothing in the record that would show what action was taken
in connection with the protest of the petitioner. In fact, petitioner did not hear
anything from the respondent nor received any communication from the
respondent relative to its protest, not until eight years later when the final
decision of the Commissioner was issued (TSN, March 7, 2002, p. 24). In other
words, the request for reinvestigation was not granted. x x x.10 (Emphasis supplied.)
Since the CIR failed to disprove the aforementioned findings of fact of the CTA
which are borne by substantial evidence on record, this Court is constrained to
uphold them as binding and true. This is in consonance with our oft-cited ruling
that instructs this Court to not lightly set aside the conclusions reached by the
CTA, which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has accordingly developed an expertise on the
subject unless there has been an abuse or improvident exercise of authority.11
Indeed, it is contradictory for the CIR to argue that respondent’s December 3,
1993 protest which contained a request for reinvestigation was filed beyond the
reglementary period but still claim that the same request for reinvestigation was
implicitly granted by virtue of its October 27, 2001 letter. We find no cogent
reason to reverse the CTA when it ruled that the prescriptive period for the CIR’s
right to collect was not suspended under the circumstances of this case.

WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Tax
Appeals (CTA) En Banc dated August 12, 2005 is AFFIRMED. No costs.

SO ORDERED.

G.R. No. 198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND
PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION,
Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF
FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income
arising from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued
by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty
Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No.
370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling,
the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners
under Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011
[and] other related rulings issued by BIR of similar tenor and import, for
being unconstitutional and for having been issued without jurisdiction or
with grave abuse of discretion amounting to lack or· excess of jurisdiction
... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or
collecting the 20% FWT from the payment of the face value of the
Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount
of the face value of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ
of preliminary injunction, enjoining Respondents, particularly the BIR and
the BTr, from withholding or collecting 20% FWT on the Government
Bonds and the respondent BIR from enforcing the assailed 2011 BIR
Ruling, as well asother related rulings issued by the BIR of similar tenor
and import, pending the resolution by [the court] of the merits of [the]
Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks
(CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and
Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc. (SEED),"5 requested
an approval from the Department of Finance for the issuance by the Bureau of
Treasury of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-notes
would initially be purchased by a special purpose vehicle on behalf of CODE-NGO,
repackaged and sold at a premium to investors as the PEACe Bonds.7 The net
proceeds from the sale of the Bonds"will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and projects of accredited
non-government organizations (NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for
the issuance of zero-coupon bonds were also presented by banks and financial
institutions, such as First Metro Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security
Bank Corporation and SB Capital Investment Corporation (proposal dated July 25,
2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25, 1999).12
"[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed
Income indicate that the interest income or discount earned on the proposed
zerocoupon bonds would be subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face
value (or at a deep discount), with the face value repaid at the time of maturity.14
It does not make periodic interest payments, or have socalled "coupons," hence
the term zero-coupon bond.15 However, the discount to face value constitutes
the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters
dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax
treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then
Commissioner ofInternal Revenue René G. Bañez confirmed that the PEACe Bonds
would not be classified as deposit substitutes and would not be subject to the
corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be
obtained from twenty (20) or more individuals or corporate lenders at any one
time. In the light of your representation that the PEACe Bonds will be issued only
to one entity, i.e., Code NGO, the same shall not be considered as "deposit
substitutes" falling within the purview of the above definition. Hence, the
withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was
subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and
BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001
Rulings). In sum, these rulings pronounced that to be able to determine whether
the financial assets, i.e., debt instruments and securities are deposit substitutes,
the "20 or more individual or corporate lenders" rule must apply. Moreover, the
determination of the phrase "at any one time" for purposes of determining the
"20 or more lenders" is to be determined at the time of the original issuance. Such
being the case, the PEACe Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo
Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing the
bonds directly to a special purpose vehicle considering that the latter was not a
Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the ADAPS"23
and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury
Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that "₱30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be
issued to not morethan 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue."27 It also required the GSEDs to submit their bids
not later than 12 noon on auction date and to disclose in their bid submissions the
names of the institutions bidding through them to ensure strict compliance with
the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19 lenders
and while taxable shall not be subject to the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula
for the Zero-Coupon Bond." The memo stated inpart that the formula (in
determining the purchase price and settlement amount) "is only applicable to the
zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury
issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines
reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding
tax as the issue will be limited to a maximum of 19 lenders in the primary market
(pursuant to BIR Revenue Regulation No. 020 2001)."33 The Auction Guidelines,
for the first time, also stated that the Bonds are "[e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-
coupon bonds.35 Also on the same date, the Bureau of Treasury issued another
memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal
Revenue concerning the Bonds’ exemption from 20% final withholding tax and the
opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was
very wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the
Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared
as the winning bidder having tendered the lowest bids.42 Accordingly, on October
18, 2001, the Bureau of Treasury issued ₱35 billion worth of Bonds at yield-to-
maturity of 12.75% to RCBC for approximately ₱10.17 billion,43 resulting in a
discount of approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds.45 RCBC
Capital agreed to underwrite46 on a firm basis the offering, distribution and sale
of the 35 billion Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r) of the
underwriting agreement, CODE-NGO represented that "[a]ll income derived from
the Bonds, inclusive of premium on redemption and gains on the trading of the
same, are exempt from all forms of taxation as confirmed by Bureau of Internal
Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue
price of ₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20%
FWT on the Government Bonds and directing the BTr to withhold said final tax at
the maturity thereof, [allegedly without] consultation with Petitioners as bond
holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of
the Secretary of Finance on the proper tax treatment of the discount or interest
income derived from the Government Bonds."51 The Bureau of Internal Revenue,
citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.
007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13,
2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds (including PEACe Bonds), regardless of the number
of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference
between face value and purchase price/discounted value of the bond) is treated
as interest income of the purchaser/holder. Thus, the Php 24.3 interest income
should have been properly subject to the 20% Final Tax as provided in Section
27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not
able tocollect the final tax on the discount/interest income realized by RCBC as a
result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No. 007-04
dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by
stating that the [1997] Tax Code is clear that the "term public means borrowing
from twenty (20) or more individual or corporate lenders at any one time." The
word "any" plainly indicates that the period contemplated is the entire term of
the bond, and not merely the point of origination or issuance. . . . Thus, by taking
the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it
from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created
when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued
by the Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS
Group"). The Memo provides that in view of the pronouncement of the DOF and
the BIR on the applicability of the 20% FWT on the Government Bonds, no
transferof the same shall be allowed to be recorded in the Registry of Scripless
Securities ("ROSS") from 12 October 2011 until the redemption payment date on
18 October 2011. Thus, the bondholders of record appearing on the ROSS as of 18
October 2011, which include the Petitioners, shall be treated by the BTr asthe
beneficial owners of such securities for the relevant [tax] payments to be imposed
thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the
Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that
the final withholding tax due on the discount or interest earned on the PEACe
Bonds should "be imposed and withheld not only on RCBC/CODE NGO but also
[on] ‘all subsequent holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO)60
"enjoining the implementation of BIR Ruling No. 370-2011 against the [PEACe
Bonds,] . . . subject to the condition that the 20% final withholding tax on interest
income there from shall be withheld by the petitioner banks and placed in escrow
pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to
intervene and to admit petition-in-intervention62 dated October 27, 2011, which
was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with
Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO."64 They
alleged that on the same day that the temporary restraining order was issued, the
Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20% final
withholding tax.65 On November 15, 2011, this court directed respondents to:
"(1) SHOW CAUSE why they failed to comply with the October 18, 2011 resolution;
and (2) COMPLY with the Court’s resolution in order that petitioners may place
the corresponding funds in escrow pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit
attached petition-in-intervention with comment on the petitionin-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November
22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They
explained that: 1) "the implementation of [BIR Ruling No. 370-2011], which has
already been performed on October 18, 2011 with the withholding of the 20%
final withholding tax on the face value of the PEACe bonds, is already fait accompli
. . . when the Resolution and TRO were served to and received by respondents BTr
and National Treasurer [on October 19, 2011]";70 and 2) the withheld amount has
ipso facto become public funds and cannot be disbursed or released to petitioners
without congressional appropriation.71 Respondents further aver
that"[i]nasmuch as the . . . TRO has already become moot . . . the condition
attached to it, i.e., ‘that the 20% final withholding tax on interest income
therefrom shall be withheld by the banks and placed in escrow . . .’has also been
rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the
petitions-in-intervention filed by RCBC and RCBC Capital and On November 27,
2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To
Direct Respondents to Comply with the Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent
reiterative motion (to direct respondents to comply with the temporary
restraining order); and (b) required respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their
reply78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to
20% final withholding tax under the 1997 National Internal Revenue
Code. Related to this question is the interpretation of the phrase
"borrowing from twenty (20) or more individual or corporate lenders at
any one time" under Section 22(Y) of the 1997 National Internal Revenue
Code, particularly on whether the reckoning of the 20 lenders includes
trading of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the
government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the
non-impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due
process of law?
c. Will it violate Section 245 of the 1997 National Internal
Revenue Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through
the BTr, the Government is obligated . . . to pay the face value amount of Ph₱35
Billion upon maturity without any deduction whatsoever."79 They add that "the
Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere
eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating due
process"80 and the constitutional principle on non-impairment of contracts.81
Petitioners aver that at the time they purchased the Bonds, they had the right to
expect that they would receive the full face value of the Bonds upon maturity, in
view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR
Rulings are correct, the fact remains that [they] relied [on] good faith thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as
defined under Section 22(Y) of the 1997 National Internal Revenue Code because
there was only one lender (RCBC) to whom the Bureau of Treasury issued the
Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings "erroneously
interpreted that the number of investors that participate in the ‘secondary
market’ is the determining factor in reckoning the existence or non-existence of
twenty (20) or more individual or corporate lenders."85 Furthermore, they
contend that the Bureau of Internal Revenue unduly expanded the definition of
deposit substitutes under Section 22 of the 1997 National Internal Revenue Code
in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of ‘deposit substitutes[.]’"86
Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of
administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain,"
which is exempt from income tax.88 They insist that "[t]hey are not lenders whose
income is considered as ‘interest income or yield’ subject to the 20% FWT under
Section 27 (D)(1) of the [1997 National Internal Revenue Code]"89 because they
"acquired the Government Bonds in the secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit
substitutes, petitioners argue that the collection of the final tax was barred by
prescription.91 They point out that under Section 7 of DOF Department Order No.
141-95,92 the final withholding tax "should have been withheld at the time of
their issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue
Code, "internal revenuetaxes, such as the final tax, [should] be assessed within
three (3) years after the last day prescribed by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR
Ruling without prior notice to them was in violation of their property rights,95
their constitutional right to due process96 as well as Section 246 of the 1997
National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it
would also have "an adverse effect of colossal magnitude on the investors, both
localand foreign, the Philippine capital market, and most importantly, the
country’s standing in the international commercial community."98 Petitioners
explained that "unless enjoined, the government’s threatened refusal to pay the
full value of the Government Bonds will negatively impact on the image of the
country in terms of protection for property rights (including financial assets),
degree of legal protection for lender’s rights, and strength of investor
protection."99 They cited the country’s ranking in the World Economic Forum:
75th in the world in its 2011–2012 Global Competitiveness Index, 111th out of
142 countries worldwide and 2nd to the last among ASEAN countries in terms of
Strength of Investor Protection, and 105th worldwide and last among ASEAN
countries in terms of Property Rights Index and Legal Rights Index.100 It would
also allegedly "send a reverberating message to the whole world that there is no
certainty, predictability, and stability of financial transactions in the capital
markets[.]"101 "[T]he integrity of Government-issued bonds and notes will be
greatly shattered and the credit of the Philippine Government will suffer"102 if
the sudden turnaround of the government will be allowed,103 and it will reinforce
"investors’ perception that the level of regulatory risk for contracts entered into
by the Philippine Government is high,"104 thus resulting in higher interestrate for
government-issued debt instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent
Commissioner of Internal Revenue "gravely and seriously abused her discretion in
the exercise of her rule-making power"106 when she issued the assailed 2011 BIR
Ruling which ruled that "all treasury bonds are ‘deposit substitutes’ regardless of
the number of lenders, in clear disregard of the requirement of twenty (20)or
more lenders mandated under the NIRC."107 They argue that "[b]y her blanket
and arbitrary classification of treasury bonds as deposit substitutes, respondent
CIR not only amended and expanded the NIRC, but effectively imposed a new tax
on privately-placed treasury bonds."108 Petitioners-intervenors RCBC and RCBC
Capital further argue that the 2011 BIR Ruling will cause substantial impairment
of their vested rights109 under the Bonds since the ruling imposes new conditions
by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR, expressly
state that it is not subject to final withholding tax upon their maturity."110 They
added that "[t]he exemption from the twenty percent (20%) final withholding tax
[was] the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that
respondent Commissioner of Internal Revenue violated their rights to due process
when she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing,
and the oppressive timing of such ruling deprived them of the opportunity to
challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-
intervenors RCBC and RCBC Capital claim that respondents Bureau of Treasury and
CODE-NGO should be held liable "as [these] parties explicitly represented . . . that
the said bonds are exempt from the final withholding tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the
implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011]
will have pernicious effects on the integrity of existing securities, which is contrary
to the State policies of stabilizing the financial system and of developing capital
markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA
378-2011 are "invalid because they contravene Section 22(Y) of the 1997 [NIRC]
when the said rulings disregarded the applicability of the ‘20 or more lender’ rule
to government debt instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the
secondary market instead of holding them until maturity, [it] derived . . . long-term
trading gain[s], not interest income, which [are] exempt . . . under Section
32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the
issuance of the PEACe Bonds . . . partakes of a contractual commitment granted
by the Government in exchange for a valid and material consideration [i.e., the
issue price paid and savings in borrowing cost derived by the Government,] thus
protected by the non-impairment clause of the 1987 Constitution"[;]117 and (d)
the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings
since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and
petitioners[-bondholders], nor was there any BIR administrative guidance issued
and published[.]"118 CODE-NGO additionally argues that impleading it in a Rule
65 petition was improper because: (a) it involves determination of a factual
question;119 and (b) it is premature and states no cause of action as it amounts
to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the
2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies
and hierarchy ofcourts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, "the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party
exhausted the administrative remedies, pertains to the Court of Tax Appeals."122
They point out that "a case similar to the present Petition was [in fact] filed with
the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled,
‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs.
Commissioner of Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of the petition and
petitions-in-intervention.124 They argue that under the guise of mainly assailing
the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR
Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks
to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule
65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe
Bonds is not a trading gain but interest income subject to income tax.126 They
explain that "[w]ith the payment of the Ph₱35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about
Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return
of capital – the capital initially invested in the Bonds being approximately Ph₱10.2
Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe
Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered
a material term of the Bonds"[;]128 "[t]here has been no change in the laws
governing the taxability of interest income from deposit substitutes and said laws
are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the
term "deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was
between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final
withholding tax on the PEACe Bonds does not amount to a deprivation of property
without due process of law."133 Their imposition of the 20% final withholding tax
is not arbitrary because they were only performing a duty imposed by law;134
"[t]he 2011 BIR Ruling is aninterpretative rule which merely interprets the
meaning of deposit substitutes [and upheld] the earlier construction given to the
termby the 2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there
was no need to observe the requirements of notice, hearing, and
publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that
Petitioners — all major financial institutions equipped with both internal and
external accounting and compliance departments as wellas access to both internal
and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development prohibiting ‘money being paid out of the Treasury except in pursuance of an
Council; all actively taking part in the regular and special debt issuances of the BTr appropriation made by law[.]’"150 "The remedy of petitioners is to claim a tax
and indeed regularly proposing products for issue by BTr — had actual notice of refund under Section 204(c) of the Tax Code should their position be upheld by
the 2004 and 2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop — the Honorable Court."151
including virtually zero trading for extended periods of six months to almost a year
— in the trading volume of the PEACe Bonds after the release of BIR Ruling No. Respondents also argue that "the implementation of the TRO would violate
007-04 on July 16, 2004 tend to indicate that market participants, including the Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as
Petitioners herein, were aware of the ruling and its consequences for the PEACe amended by Section 9 of Republic Act No. 9282) which prohibits courts, except
Bonds."138 the Court of Tax Appeals, from issuing injunctions to restrain the collection of any
national internal revenue tax imposed by the Tax Code."152
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenue’s rule-making power;139 that it and the 2004 Summary of arguments
and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes
by creating an unwarranted exception to the requirement of having 20 or more In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and
lenders/purchasers;140 and the word "any" in Section 22(Y) of the National CODE-NGO argue that:
Internal Revenue Code plainly indicates that the period contemplated is the entire
term of the bond and not merely the point of origination or issuance.141 1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
National Internal Revenue Code when it declared that all government
Respondents further argue that a retroactive application of the 2011 BIR Ruling debt instruments are deposit substitutes regardless of the 20-lender rule;
will not unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR and
Ruling, Petitioners would be liable topay a 20% final withholding tax just the same
because the PEACe Bonds in their possession are legally in the nature of deposit 2. The 2011 BIR Ruling cannot be applied retroactively because:
substitutes subject to a 20% final withholding tax under the NIRC."143 Section 7
of DOF Department Order No. 141-95 also provides that incomederived from a) It will violate the contract clause;
Treasury bonds is subject to the 20% final withholding tax.144 "[W]hile revenue
regulations as a general rule have no retroactive effect, if the revocation is due to
● It constitutes a unilateral amendment of a material term (tax
the fact that the regulation is erroneous or contrary to law, such revocation shall
exempt status) in the Bonds, represented by the government as
have retroactive operation as to affect past transactions, because a wrong
an inducement and important consideration for the purchase of
construction of the law cannot give rise to a vested right that can be invoked by a
the Bonds;
taxpayer."145
b) It constitutes deprivation ofproperty without due process
Finally, respondents submit that "there are a number of variables and factors
because there was no prior notice to bondholders and hearing
affecting a capital market."146 "[C]apital market itself is inherently unstable."147
and publication;
Thus, "[p]etitioners’ argument that the 20% final withholding tax . . . will wreak
havoc on the financial stability of the country is a mere supposition that is not a
c) It violates the rule on non-retroactivity under the 1997
justiciable issue."148
National Internal Revenue Code;
On the prayer for the temporary restraining order, respondents argue that this
d) It violates the constitutional provision on supporting activities
order "could no longer be implemented [because] the acts sought to be enjoined
of non-government organizations and development of the
are already fait accompli."149 They add that "to disburse the funds withheld to
capital market; and
the Petitioners at this time would violate Section 29[,] Article VI of the Constitution
 e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of
discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue
of the Commissioner of Internal Revenue’s power to interpret the
provisions of the 1997 National Internal Revenue Code and other tax
laws;
b. Commissioner of Internal Revenue merely restates and confirms the
interpretations contained in previously issued BIR Ruling Nos. 007-2004,
DA-491-04,and 008-05, which have already effectively abandoned or
revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her
predecessor’s rulings especially when the latter’s rulings are not in
harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have
perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR
Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final
withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and
of hierarchy of courts.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative
rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.
-The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief
prayed for, [then] special civil actions are generally not entertained."153 The
remedy within the administrative machinery must be resorted to first and pursued
to its appropriate conclusion before the court’s judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its
flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a
violation of due process, (2) when the issue involved is purely a legal question,155
(3) when the administrative action is patently illegal amounting to lack or excess
of jurisdiction,(4) when there is estoppel on the part of the administrative agency
concerned,(5) when there is irreparable injury, (6) when the respondent is a
department secretary whose acts as an alter ego of the President bears the
implied and assumed approval of the latter, (7) when to require exhaustion of
administrative remedies would be unreasonable, (8) when it would amount to a
nullification of a claim, (9) when the subject matter is a private land in land case
proceedings, (10) when the rule does not provide a plain, speedy and adequate
remedy, (11) when there are circumstances indicating the urgency of judicial
intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved
is purely legal, namely: (a) the interpretation of the 20-lender rule in the definition
of the terms public and deposit substitutes under the 1997 National Internal
Revenue Code; and (b) whether the imposition of the 20% final withholding tax on
the PEACe Bonds upon maturity violates the constitutional provisions on non-
impairment of contracts and due process. Judicial intervention is likewise urgent
with the impending maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when
the exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR
Ruling would be a futile exercise because it was upon the request of the Secretary
of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue.
It appears that the Secretary of Finance adopted the Commissioner of Internal
Revenue’s opinions as his own.158 This position was in fact confirmed in the
letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to
withhold the amount corresponding to the 20% final withholding tax on the
interest or discounts allegedly due from the bondholders on the strength of the
2011 BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection
with the implementation of the 1997 National Internal Revenue Code on the
taxability of the interest income from zero-coupon bonds issued by the
government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
amended by Republic Act No. 9282,160 such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the National Internal Revenue
or other laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely
affected by a decision, ruling or inaction of the Commissioner of Internal Revenue,
the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade
and Industry or the Secretary of Agriculture or the Central Board of Assessment
Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty
(30) days after the receipt of such decision or rulingor after the expiration of the
period fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving
matters arising under the National Internal Revenue Code, the Tariff and Customs
Code or the Local Government Code shall be maintained, except as herein
provided, until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162
this court emphasized the jurisdiction of the Court of Tax Appeals over rulings of
the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the
RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions
of the Commissioner implementing the Tax Code on the taxability of pawnshops..
..
....
Such revenue orders were issued pursuant to petitioner's powers under Section
245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and
regulations. — The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or
analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in
connection with the implementation of the provisionsof internal revenue laws,
including ruling on the classification of articles of sales and similar purposes."
(Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of
Internal Revenue, but merely an attempt to nullify General Circular No. V-148,
which does not adjudicate or settle any controversy, and that, accordingly, this
case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers
charged with the collection of taxes and license fees to adhere strictly to the
interpretation given by the defendant tothe statutory provisions
abovementioned, as set forth in the Circular. The same incorporates, therefore, a
decision of the Collector of Internal Revenue (now Commissioner of Internal
Revenue) on the manner of enforcement of the said statute, the administration
of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes
within the purview of Republic Act No. 1125, Section 7 of which provides that the
Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by
appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising
under the National Internal Revenue Code or other law or part of the law
administered by the Bureau of Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when
"dictated by public welfare and the advancement of public policy, or demanded
by the broader interest of justice, or the orders complained of were found to be
patent nullities, or the appeal was considered as clearly an inappropriate
remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The
Secretary, Department of Interior and Local Government,165 this court noted that
the petition for prohibition was filed directly before it "in disregard of the rule on
hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over
the . . . petition and decide the same on its merits in viewof the significant
constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and
banking industry with regard to a definitive declaration of whether government
debt instruments are deposit substitutes under existing laws, and the novelty
thereof, constitute exceptional and compelling circumstances to justify resort to
this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also
any other financial instrument or product that may be issued and traded in the
market. Due to the changing positions of the Bureau of Internal Revenue on this
issue, there isa need for a final ruling from this court to stabilize the expectations
in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies
and hierarchy of courts had been rendered moot by this court’s issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling.
The temporary restraining order effectively recognized the urgency and necessity
of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal
Revenue Code, a final withholdingtax at the rate of 20% is imposed on interest on
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest fromany
currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; . . . Provided, further,
That interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of the certificate
pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall
be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from
a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under
the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit
substitutes was first introduced in the 1977 National Internal Revenue Code
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential
Decree No. 1959, effective on October 15, 1984, formally added the definition of
deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the purpose
of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.These promissory notes,
repurchase agreements, certificates of assignment or participation and similar
instrument with recourse as may be authorized by the Central Bank of the
Philippines, for banks and non-bank financial intermediaries or by the Securities
and Exchange Commission of the Philippines for commercial, industrial, finance
companies and either non-financial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover deficiency in reserves against
deposit liabilities including those between or among banks and quasi-banks shall
not be considered as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No.
1959, adopted verbatim the same definition and specifically identified the
following borrowings as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial
institutions authorized to engage in quasi-banking functions evidenced by
deposit substitutes instruments, except interbank call loans to cover
deficiency in reserves against deposit liabilities as evidenced by interbank
loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines, evidenced
by debt instruments denoted as treasury bonds, bills, notes, certificates
of indebtedness and similar instruments.
 (c) All borrowings of banks, non-bank financial intermediaries, finance
companies, investment companies, trust companies, including the trust
department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National
Internal Revenue Code with the addition of the qualifying phrase for public –
borrowing from 20 or more individual or corporate lenders at any one time. Under
Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When used
in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining
funds from the public(the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time) other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose of relending or purchasing of receivables
and other obligations, or financing their own needs or the needs of their agent or
dealer. These instruments may include, but need not be limited to, bankers’
acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined
"public" to mean "twenty (20) or more individual or corporate lenders at any one
time." Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject
to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr
issued the Government Bonds."169 On the other hand, respondents theorize that
the word "any" "indicates that the period contemplated is the entire term of the
bond and not merely the point of origination or issuance[,]"170 such that if the
debt instruments "were subsequently sold in secondary markets and so on, insuch
a way that twenty (20) or more buyers eventually own the instruments, then it
becomes indubitable that funds would be obtained from the "public" as defined
in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial market,
the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]"173 namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less);
and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174
Whether referring to money marketsecurities or capital market securities,
transactions occur either in the primary market or in the secondary market.175
"Primary markets facilitate the issuance of new securities. Secondary markets
facilitate the trading of existing securities, which allows for a change in the
ownership of the securities."176 The transactions in primary markets exist
between issuers and investors, while secondary market transactions exist among
investors.177
"Over time, the system of financial markets has evolved from simple to more
complex ways of carrying out financial transactions."178 Still, all systems perform
one basic function: the quick mobilization of money from the lenders/investors to
the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange
funds in returnfor financial assets"181 (e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a) "both
borrower and lender must desire to exchange the same amount of funds at the
same time"[;]182 and (b) "both lender and borrower must frequently incur
substantial information costs simply to find each other."183
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time"
for purposes of determining the "20 or more lenders" would mean every
transaction executed in the primary or secondary market in connection with the
purchase or sale of securities.

In semidirect financing, a securities broker or dealer brings surplus and deficit For example, where the financial assets involved are government securities like
units together, thereby reducing information costs.184 A Broker185 is "an bonds, the reckoning of "20 or more lenders/investors" is made at any transaction
individual or financial institution who provides information concerning possible in connection with the purchase or sale of the Government Bonds, such as:
purchases and sales of securities. Either a buyer or a seller of securities may
contact a broker, whose job is simply to bring buyers and sellers together."186 A 1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the
dealer187 "also serves as a middleman between buyers and sellers, but the dealer primary market;
actually acquires the seller’s securities in the hope of selling them at a later time
at a more favorable price."188 Frequently, "a dealer will split up a large issue of 2. Sale and distribution by GSEDs to various lenders/investors in the
primary securities into smaller units affordable by . . . buyers . . . and thereby secondary market;
expand the flow of savings into investment."189 In semi direct financing, "[t]he
ultimate lender still winds up holding the borrower’s securities, and therefore the 3. Subsequent sale or trading by a bondholder to another lender/investor
lender must be willing to accept the risk, liquidity, and maturity characteristics of in the secondary market usually through a broker or dealer; or
the borrower’s [debt security]. There still must be a fundamental coincidence of
wants and needs between [lenders and borrowers] for semidirect financial
4. Sale by a financial intermediary-bondholder of its participation
transactions to take place."190
interests in the bonds to individual or corporate lenders in the secondary
market.
"The limitations of both direct and semidirect finance stimulated the development
of indirect financial transactions, carried out with the help of financial
When, through any of the foregoing transactions, funds are simultaneously
intermediaries"191 or financial institutions, like banks, investment banks, finance
obtained from 20 or morelenders/investors, there is deemed to be a public
companies, insurance companies, and mutual funds.192 Financial intermediaries
borrowing and the bonds at that point intime are deemed deposit substitutes.
accept funds from surplus units and channel the funds to deficit units.193
Consequently, the seller is required to withhold the 20% final withholding tax on
"Depository institutions [such as banks] accept deposits from surplus units and
the imputed interest income from the bonds.
provide credit to deficit units through loans and purchase of [debt] securities."194
Nondepository institutions, like mutual funds, issue securities of their own (usually
For debt instruments that are
in smaller and affordable denominations) to surplus units and at the same time
not deposit substitutes, regular
purchase debt securities of deficit units.195 "By pooling the resources of[small
income tax applies
savers, a financial intermediary] can service the credit needs of large firms
simultaneously."196
It must be emphasized, however, that debt instruments that do not qualify as
deposit substitutes under the 1997 National Internal Revenue Code are subject to
The financial market, therefore, is an agglomeration of financial transactions in
the regular income tax.
securities performed by market participants that works to transfer the funds from
the surplus units (or investors/lenders) to those who need them (deficit units or
borrowers). The phrase "all income derived from whatever source" in Chapter VI, Computation
of Gross Income, Section 32(A) of the 1997 National Internal Revenue Code
discloses a legislative policy to include all income not expressly exempted as within
the class of taxable income under our laws.
"The definition of gross income isbroad enough to include all passive incomes
subject to specific tax rates or final taxes."197 Hence, interest income from
deposit substitutes are necessarily part of taxable income. "However, since these
passive incomes are already subject to different rates and taxed finally at source,
they are no longer included in the computation of gross income, which determines
taxable income."198 "Stated otherwise . . . if there were no withholding tax system
in place in this country, this 20 percent portion of the ‘passive’ income of
[creditors/lenders] would actually be paid to the [creditors/lenders] and then
remitted by them to the government in payment of their income tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be
lost or substantially reduced through failure to file the corresponding returns[;]
and third, to improve the government’s cash flow. This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated
means and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield
from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific
bond issue, the seller isrequired to withhold the 20% final income tax on the
imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains"
contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal
Revenue Code, which exempts gains derived from trading, redemption, or
retirement of long-term securities from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which
represents forbearance for the use of money. Gains from sale or exchange or
retirement of bonds orother certificate of indebtedness fall within the general
category of "gainsderived from dealings in property" under Section 32(A)(3), while
interest from bonds or other certificate of indebtedness falls within the category
of "interests" under Section 32(A)(4).204 The use of the term "gains from sale" in
Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred
under Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized
from the trading of the bonds before their maturity date, which is the difference
between the selling price of the bonds in the secondary market and the price at
which the bonds were purchased by the seller; and (2) gain realized by the last
holder of the bonds when the bonds are redeemed at maturity, which is the
difference between the proceeds from the retirement of the bonds and the price
atwhich such last holder acquired the bonds. For discounted instruments,like the
zero-coupon bonds, the trading gain shall be the excess of the selling price over
the book value or accreted value (original issue price plus accumulated discount
from the time of purchase up to the time of sale) of the instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001
BIR Rulings is not consistent with law.207 Its interpretation of "at any one time"
to mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the
2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number
of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes."208 Being the subject of this petition, it is, thus, declared void
because it completely disregarded the 20 or more lender rule added by Congress
in the 1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations
when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their
constituent provisions must be read together, endeavoring to make every part
effective, harmonious, and sensible.209 That construction which will leave every
word operative will be favored over one that leaves some word, clause, or
sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue
in charge of executing the 1997 National Internal Revenue Code is an authoritative
construction ofgreat weight, but the principle is not absolute and may be
overcome by strong reasons to the contrary. If through a misapprehension of law
an officer has issued an erroneous interpretation, the error must be corrected
when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211
this court upheld the nullification of Revenue Memorandum Circular (RMC) No. 7-
85 issued by the Acting Commissioner of Internal Revenue because it was contrary
to the express provision of Section 230 of the 1977 National Internal Revenue
Codeand, hence, "[cannot] be given weight for to do so would, in effect, amend
the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing
the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts will
not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and implement.213
(Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not
operate to vest a taxpayer with a shield against judicial action [because] there are
no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same."214 In Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which
imposed a 5% lending investor's tax on pawnshops.216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative] power, issue
administrative rulings or circulars not consistent with the law sought to be applied.
Indeed, administrative issuances must not override, supplant or modify the law,
but must remain consistent with the law they intend to carry out. Only Congress
can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary,218 this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors,219 but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether
the rule is within the delegated authority of the administrative agency; (ii) whether
itis reasonable; and (iii) whether it was issued pursuant to proper procedure. But
the court is not free to substitute its judgment as to the desirability or wisdom of
the rule for the legislative body, by its delegation of administrative judgment, has
committed those questions to administrative judgments and not to judicial
judgments. In the case of an interpretative rule, the inquiry is not into the validity
but into the correctness or propriety of the rule. As a matter of power a court,
when confronted with an interpretative rule, is free to (i) give the force of law to
the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give
some intermediate degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner
erred in not considering copra as an "agricultural food product" within the
meaning of § 103(b) of the NIRC. As the Solicitor General contends, "copra per se
is not food, that is, it is not intended for human consumption. Simply stated,
nobody eats copra for food." That previous Commissioners considered it so, is not
reason for holding that the present interpretation is wrong. The Commissioner of
Internal Revenue is not bound by the ruling of his predecessors. To the contrary,
the overruling of decisions is inherent in the interpretation of laws.220 (Emphasis
supplied, citations omitted)
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to
RCBC/CODE-NGO at 10.2 billion; and
 2. The sale and distribution by RCBC Capital (underwriter) on behalf of
CODE-NGO of the PEACe Bonds to undisclosed investors at ₱11.996
billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO —
to whom the PEACe Bonds were issued at the time of origination. However, a
reading of the underwriting agreement221 and RCBC term sheet222 reveals that
the settlement dates for the sale and distribution by RCBC Capital (as underwriter
for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase
price of approximately ₱11.996 would fall on the same day, October 18, 2001,
when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality,
therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury
in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from
the undisclosed number of investors to whom RCBC Capital/CODE-NGO
distributed the PEACe Bonds — all at the time of origination or issuance. At this
point, however, we do not know as to how many investors the PEACe Bonds were
sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the
PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y)
of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would
have been obliged to pay the 20% final withholding tax on the interest or discount
from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on
the corresponding interest from the PEACe Bonds would likewise be required of
any lender/investor had the latter turnedaround and sold said PEACe Bonds,
whether in whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal
Revenue Code, interest income received by individuals from longterm deposits or
investments with a holding period of not less than five (5) years is exempt from
the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National
Internal Revenue Code to assess and collect internal revenue taxes is extended to
10 years in cases of (1) fraudulent returns; (2) false returns with intent to evade
tax; and (3) failureto file a return, to be computed from the time of discovery of
the falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as
provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return
is filed beyond the period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a proceeding in court for the collection
of such tax may be filed without assessment, at any time within ten (10) years
after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection
thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to
20 or more lenders/investors, the Bureau of Internal Revenue may still collect the
unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of
the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by
petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties
affected."224 Moreover, service may be made personally or by mail.225 And,
"[p]ersonal service is complete upon actual delivery [of the order.]"226 This
court’s temporary restraining order was received only on October 19, 2011, or a
day after the PEACe Bonds had matured and the 20% final withholding tax on the
interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the
internet, is not a recognized mode of service of pleadings, court orders, or
processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18, 2011,
and they did not givethe exact contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction
unless it is shown that suchinjunction or order was served on him personally or
that he had notice of the issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself
or herself by withholding the tax due"229 and return the amount of the tax
withheld should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in
withholding the amount corresponding to the 20% final withholding tax from the
proceeds of the PEACe Bonds, as it received this court’s temporary restraining
order only on October 19, 2011, or the day after this tax had been withheld.
Respondents’ retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to petitioners the amount
corresponding to the 20% final withholding tax in order that it may be placed in
escrow as directed by this court constitutes a defiance of this court’s temporary
restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are
not fait accompli. For an act to be considered fait accompli, the act must have
already been fully accomplished and consummated.232 It must be irreversible,
e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235 When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait
accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011
BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of
Treasury had already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it withheld to the
Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been
fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which
prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes it withheld to the Bureau of Internal
Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the
10th day of the following month after the said taxes had been withheld.240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury,241 which shall be the basis for recording the remittance of
the tax collection.242 The Bureau of Internal Revenue will then record the amount
of taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by
government agencies based on its copies of the TRA.243 Respondents did not
submit any withholding tax return or TRA to provethat the 20% final withholding
tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal
Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244
dated October 18, 2011 submitted to this court shows:
Account Debit Amount Credit
Code Amount
Bonds Payable-L/T, Dom- 442-360 35,000,000,000.00
Zero
Coupon T/Bonds
(Peace Bonds) – 10 yr
 provided, that no obligations shall be incurred or payments made from funds thus
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
automatically appropriated except as issued in the form of regular budgetary
Due to BIR 412-002 4,966,207,796.41 allotments.

To record redemption of Section 1 of Presidential Decree No. 1967 states:

10yr Zero
coupon (Peace Bond) net of Section 1. There is hereby appropriated, out of any funds in the National Treasury
the 20% final not otherwise appropriated, such amounts as may be necessary to effect
withholding tax pursuant to payments on foreign or domestic loans, or foreign or domestic loans whereon
BIR Ruling No. creditors make a call on the direct and indirect guarantee of the Republic of the
378-2011, value date, Philippines, obtained by:
October 18, 2011 per
BTr letter authority and BSP a. the Republic of the Philippines the proceeds of which were relent to
Bank government-owned or controlled corporations and/or government
Statements. financial institutions;

b. government-owned or controlled corporations and/or government

The foregoing journal entry, however, does not prove that the amount of
financial institutions the proceeds of which were relent to public or
₱4,966,207,796.41, representing the 20% final withholding tax on the PEACe
private institutions;
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on
October 18, 2011. The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of Internal c. government-owned or controlled corporations and/or financial
Revenue. institutions and guaranteed by the Republic of the Philippines;

We recall the November 15, 2011 resolution issued by this court directing
respondents to "show cause why they failed to comply with the [TRO]; and [to]
comply with the [TRO] in order that petitioners may place the corresponding funds
in escrow pending resolution of the petition."245 The 20% final withholding tax
was effectively placed in custodia legiswhen this court ordered the deposit of the
amount in escrow. The Bureau of Treasury could still release the money withheld
to petitioners for the latter to place in escrow pursuant to this court’s directive.
There was no legal obstacle to the release of the 20% final withholding tax to
petitioners. Congressional appropriation is not required for the servicing of public
debts in view of the automatic appropriations clause embodied in Presidential
Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel
retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated:
d. other public or private institutions and guaranteed by government
owned or controlled corporations and/or government financial
institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final
withholding tax is a lawfuland valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of
the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for
the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to
be the subject of another appropriation legislation: SEC. 2. The Secretary of
Finance shall cause to be paid out of any moneys in the National Treasury not
otherwise appropriated, or from any sinking funds provided for the purpose by
law, any interest falling due, or accruing, on any portion of the public debt
authorized by law. He shall also cause to be paid out of any such money, or from
any such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which redemption has
been demanded in accordance with terms prescribed by him prior to date of issue.
. . In the case of interest-bearing obligations, he shall pay not less than their face
value; in the case of obligations issued at a discount he shall pay the face value at
maturity; or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations were
originally issued. There are hereby appropriated as a continuing appropriation out
of any moneys in the National Treasury not otherwise appropriated, such sums as
may be necessary from time to time to carry out the provisions of this section. The
Secretary of Finance shall transmit to Congress during the first month of each
regular session a detailed statement of all expenditures made under this section
during the calendar year immediately preceding.
Respondent Bureau of Treasury had the duty to obey the temporary restraining
order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED.
BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued
retention of the amount corresponding to the 20% final withholding tax despite
this court's directive in the temporary restraining order and in the resolution
dated November 15, 2011 to deliver the amounts to the banks to be placed in
escrow pending resolution of this case.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and
Treasury bills and bonds shall be made through the National Treasury’s account pay to the bondholders the amount corresponding-to the 20% final withholding
with the Bangko Sentral ng Pilipinas, to wit: tax that it withheld on October 18, 2011.

Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains MARVIC M.V.F. LEONEN
a Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all Associate Justice
proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as
amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.1âwphi1

Regarding these legislative enactments ordaining an automatic appropriations

provision for debt servicing, this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and

Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution,
which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.

Debt service is not included inthe General Appropriation Act, since authorization
therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic
Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, butlargely with annual levels and approval
thereof upon due deliberations as part of the whole obligation program for the
year. Upon such approval, Congress has spoken and cannot be said to
havedelegated its wisdom to the Executive, on whose part lies the implementation
or execution of the legislative wisdom.246 (Citation omitted)
G.R. No. 163583 August 20, 2008
BRITISH AMERICAN TOBACCO, petitioner,
vs.
JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance
and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the Bureau of
Internal Revenue, respondents.
Philip Morris Philippines Manufacturing, Inc., fortune tobacco, corp., MIGHTY
CORPORATION, and JT InTERNATIONAL, S.A., respondents-in-intervention.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the validity of: (1) Section 145 of the National
Internal Revenue Code (NIRC), as recodified by Republic Act (RA) 8424; (2) RA
9334, which further amended Section 145 of the NIRC on January 1, 2005; (3)
Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4) Revenue
Memorandum Order No. 6-2003. Petitioner argues that the said provisions are
violative of the equal protection and uniformity clauses of the Constitution.
RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC,
as Amended and For Other Purposes," took effect on January 1, 1997. In the same
year, Congress passed RA 8424 or The Tax Reform Act of 1997, re-codifying the
NIRC. Section 142 was renumbered as Section 145 of the NIRC.
Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net
retail price per pack of cigarettes. To determine the applicable tax rates of existing
cigarette brands, a survey of the net retail prices per pack of cigarettes was
conducted as of October 1, 1996, the results of which were embodied in Annex
"D" of the NIRC as the duly registered, existing or active brands of cigarettes.
Paragraph (c) of Section 145, 1 states –
SEC. 145. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-
added tax) is above Ten pesos (P10.00) per pack, the tax shall be
Thirteen pesos and forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-
added tax) exceeds Six pesos and fifty centavos (P6.50) but does
not exceed Ten pesos (10.00) per pack, the tax shall be Eight
pesos and ninety-six centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-
added tax) is Five pesos (P5.00) but does not exceed Six pesos
and fifty centavos (P6.50) per pack, the tax shall be Five pesos
and sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (P5.00) per pack, the tax shall be
One peso and twelve centavos (P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of this Act shall be taxed under the
highest classification of any variant of that brand.
xxxx
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the
cigarette is sold on retail in 20 major supermarkets in Metro Manila (for
brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the net retail
price shall mean the price at which the cigarette is sold in five major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex "D" of this Act, shall
remain in force until revised by Congress. (Emphasis supplied)
As such, new brands of cigarettes shall be taxed according to their current net
retail price while existing or "old" brands shall be taxed based on their net retail
price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue
Regulations No. 1-97,2 which classified the existing brands of cigarettes as those
duly registered or active brands prior to January 1, 1997. New brands, or those
registered after January 1, 1997, shall be initially assessed at their suggested retail
price until such time that the appropriate survey to determine their current net
retail price is conducted. Pertinent portion of the regulations reads –
SECTION 2. Definition of Terms.
xxxx
3. Duly registered or existing brand of cigarettes – shall include duly
registered, existing or active brands of cigarettes, prior to January 1,
1997.
xxxx
6. New Brands – shall mean brands duly registered after January 1, 1997
and shall include duly registered, inactive brands of cigarette not sold in
commercial quantity before January 1, 1997.
Section 4. Classification and Manner of Taxation of Existing Brands, New
Brands and Variant of Existing Brands.
xxxx
B. New Brand
New brands shall be classified according to their current net retail price.
In the meantime that the current net retail price has not yet been
established, the suggested net retail price shall be used to determine the
specific tax classification. Thereafter, a survey shall be conducted in 20
major supermarkets or retail outlets in Metro Manila (for brands of
cigarette marketed nationally) or in five (5) major supermarkets or retail
outlets in the region (for brands which are marketed only outside Metro
Manila) at which the cigarette is sold on retail in reams/cartons, three (3)
months after the initial removal of the new brand to determine the actual
net retail price excluding the excise tax and value added tax which shall
then be the basis in determining the specific tax classification. In case the
current net retail price is higher than the suggested net retail price, the
former shall prevail. Any difference in specific tax due shall be assessed
and collected inclusive of increments as provided for by the National
Internal Revenue Code, as amended.
In June 2001, petitioner British American Tobacco introduced into the market
Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes,
with a suggested retail price of P9.90 per pack.3 Pursuant to Sec. 145 (c) quoted
above, the Lucky Strike brands were initially assessed the excise tax at P8.96 per
pack.
On February 17, 2003, Revenue Regulations No. 9-2003,4 amended Revenue
Regulations No. 1-97 by providing, among others, a periodic review every two
years or earlier of the current net retail price of new brands and variants thereof
for the purpose of establishing and updating their tax classification, thus:
For the purpose of establishing or updating the tax classification of new
brands and variant(s) thereof, their current net retail price shall be
reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless
earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new
brands shall remain in force until the same is altered or changed through
the issuance of an appropriate Revenue Regulations.
Pursuant thereto, Revenue Memorandum Order No. 6-20035 was issued on March
11, 2003, prescribing the guidelines and procedures in establishing current net
retail prices of new brands of cigarettes and alcohol products.
Subsequently, Revenue Regulations No. 22-20036 was issued on August 8, 2003 to
implement the revised tax classification of certain new brands introduced in the
market after January 1, 1997, based on the survey of their current net retail price.
The survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike
Menthol Lights, are sold at the current net retail price of P22.54, P22.61 and
P21.23, per pack, respectively.7 Respondent Commissioner of the Bureau of
Internal Revenue thus recommended the applicable tax rate of P13.44 per pack
inasmuch as Lucky Strike’s average net retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial Court (RTC)
of Makati, Branch 61, a petition for injunction with prayer for the issuance of a
temporary restraining order (TRO) and/or writ of preliminary injunction, docketed
as Civil Case No. 03-1032. Said petition sought to enjoin the implementation of
Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and
Revenue Memorandum Order No. 6-2003 on the ground that they discriminate
against new brands of cigarettes, in violation of the equal protection and
uniformity provisions of the Constitution.
Respondent Commissioner of Internal Revenue filed an Opposition8 to the
application for the issuance of a TRO. On September 4, 2003, the trial court denied
the application for TRO, holding that the courts have no authority to restrain the
collection of taxes.9 Meanwhile, respondent Secretary of Finance filed a Motion
to Dismiss,10 contending that the petition is premature for lack of an actual
controversy or urgent necessity to justify judicial intervention.
In an Order dated March 4, 2004, the trial court denied the motion to dismiss and
issued a writ of preliminary injunction to enjoin the implementation of Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-
2003.11 Respondents filed a Motion for Reconsideration12 and Supplemental
Motion for Reconsideration.13 At the hearing on the said motions, petitioner and
respondent Commissioner of Internal Revenue stipulated that the only issue in
this case is the constitutionality of the assailed law, order, and regulations.14
On May 12, 2004, the trial court rendered a decision15 upholding the
constitutionality of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-
2003, 22-2003 and Revenue Memorandum Order No. 6-2003. The trial court also
lifted the writ of preliminary injunction. The dispositive portion of the decision
reads:
WHEREFORE, premises considered, the instant Petition is hereby
DISMISSED for lack of merit. The Writ of Preliminary Injunction previously
issued is hereby lifted and dissolved.
SO ORDERED.16
Petitioner brought the instant petition for review directly with this Court on a pure
question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax Rates
Imposed on Alcohol And Tobacco Products, Amending For The Purpose Sections
131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took effect
on January 1, 2005. The statute, among others,–
(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified according to
their suggested net retail price, until such time that their correct tax bracket is
finally determined under a specified period and, after which, their classification
shall remain in force until revised by Congress;
(3) retained Annex "D" as tax base of those surveyed as of October 1, 1996
including the classification of brands for the same products which, although not
set forth in said Annex "D," were registered on or before January 1, 1997 and were
being commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the effectivity
of this Act. Said classification shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between the
period January 2, 199717 to December 31, 2003, such that said cigarettes shall
remain in the classification under which the BIR has determined them to belong
as of December 31, 2003, until revised by Congress.
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine. – There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos
(P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47)
per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos
(P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos
(P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35)
per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74)
per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14)
per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56)
per pack.
(3) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten
pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35)
per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos
(P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos
(P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06)
per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos
(P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos
(P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall
initially be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of
R.A. No. 8240.
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes
are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the
end of three (3) months from the product launch, the Bureau of Internal
Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct
tax bracket under which a particular new brand of cigarette, as defined
above, shall be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of the time
of revalidation in order to finally determine the correct tax bracket under
which a particular new brand of cigarettes shall be classified; Provided
however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 [should be January 2, 1997] and December 31,
2003 shall remain in the classification under which the Bureau of Internal
Revenue has determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised except by an act of
Congress.
 Net retail price, as determined by the Bureau of Internal Revenue through
a price survey to be conducted by the Bureau of Internal Revenue itself,
or the National Statistics Office when deputized for the purpose by the
Bureau of Internal Revenue, shall mean the price at which the cigarette
is sold in retail in at least twenty (20) major supermarkets in Metro Manila
(for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the "net retail
price" shall mean the price at which the cigarette is sold in at least five (5)
major supermarkets in the region excluding the amount intended to
cover the applicable excise tax and value-added tax.
The classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex "D", including the
classification of brands for the same products which, although not set forth
in said Annex "D", were registered and were being commercially produced
and marketed on or after October 1, 1996, and which continue to be
commercially produced and marketed after the effectivity of this Act, shall
remain in force until revised by Congress. (Emphasis added)
Under RA 9334, the excise tax due on petitioner’s products was increased to
P25.00 per pack. In the implementation thereof, respondent Commissioner
assessed petitioner’s importation of 911,000 packs of Lucky Strike cigarettes at
the increased tax rate of P25.00 per pack, rendering it liable for taxes in the total
sum of P22,775,000.00.18
Hence, petitioner filed a Motion to Admit Attached Supplement19 and a
Supplement20 to the petition for review, assailing the constitutionality of RA 9334
insofar as it retained Annex "D" and praying for a downward classification of Lucky
Strike products at the bracket taxable at P8.96 per pack. Petitioner contended that
the continued use of Annex "D" as the tax base of existing brands of cigarettes
gives undue protection to said brands which are still taxed based on their price as
of October 1996 notwithstanding that they are now sold at the same or even at a
higher price than new brands like Lucky Strike. Thus, old brands of cigarettes such
as Marlboro and Philip Morris which, like Lucky Strike, are sold at or more than
P22.00 per pack, are taxed at the rate of P10.88 per pack, while Lucky Strike
products are taxed at P26.06 per pack.
In its Comment to the supplemental petition, respondents, through the Office of
the Solicitor General (OSG), argued that the passage of RA 9334, specifically the
provision imposing a legislative freeze on the classification of cigarettes
introduced into the market between January 2, 1997 and December 31, 2003,
rendered the instant petition academic. The OSG claims that the provision in
Section 145, as amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, "cured’ the perceived defect of Section 145
considering that, like the cigarettes under Annex "D," petitioner’s brands and
other brands introduced between January 2, 1997 and December 31, 2003, shall
remain in the classification under which the BIR has placed them and only
Congress has the power to reclassify them.
On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated filed a
Motion for Leave to Intervene with attached Comment-in-Intervention.21 This was
followed by the Motions for Leave to Intervene of Fortune Tobacco Corporation,22
Mighty Corporation, 23 and JT International, S.A., with their respective Comments-
in-Intervention. The Intervenors claim that they are parties-in-interest who stand
to be affected by the ruling of the Court on the constitutionality of Section 145 of
the NIRC and its Annex "D" because they are manufacturers of cigarette brands
which are included in the said Annex. Hence, their intervention is proper since the
protection of their interest cannot be addressed in a separate proceeding.
According to the Intervenors, no inequality exists because cigarettes classified by
the BIR based on their net retail price as of December 31, 2003 now enjoy the
same status quo provision that prevents the BIR from reclassifying cigarettes
included in Annex "D." It added that the Court has no power to pass upon the
wisdom of the legislature in retaining Annex "D" in RA 9334; and that the
nullification of said Annex would bring about tremendous loss of revenue to the
government, chaos in the collection of taxes, illicit trade of cigarettes, and cause
decline in cigarette demand to the detriment of the farmers who depend on the
tobacco industry.
Intervenor Fortune Tobacco further contends that petitioner is estopped from
questioning the constitutionality of Section 145 and its implementing rules and
regulations because it entered into the cigarette industry fully aware of the
existing tax system and its consequences. Petitioner imported cigarettes into the
country knowing that its suggested retail price, which will be the initial basis of its
tax classification, will be confirmed and validated through a survey by the BIR to
determine the correct tax that would be levied on its cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR
issuances should have been brought by petitioner before the Court of Tax Appeals
(CTA) and not the RTC because it is the CTA which has exclusive appellate
jurisdiction over decisions of the BIR in tax disputes.
On August 7, 2006, the OSG manifested that it interposes no objection to the
motions for intervention.24 Therefore, considering the substantial interest of the
intervenors, and in the higher interest of justice, the Court admits their
intervention.
Before going into the substantive issues of this case, we must first address the
matter of jurisdiction, in light of Fortune Tobacco’s contention that petitioner
should have brought its petition before the Court of Tax Appeals rather than the
regional trial court.
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as
amended by Republic Act No. 9282. Section 7 thereof states, in pertinent part:
Sec. 7. Jurisdiction. — The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides
a specific period of action, in which case the inaction shall be deemed a
denial; xxx.25
While the above statute confers on the CTA jurisdiction to resolve tax disputes in
general, this does not include cases where the constitutionality of a law or rule is
challenged. Where what is assailed is the validity or constitutionality of a law, or a
rule or regulation issued by the administrative agency in the performance of its
quasi-legislative function, the regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in the
courts, including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine in an appropriate action
the validity of the acts of the political departments. Judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which
are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the Government.26
In Drilon v. Lim,27 it was held:
We stress at the outset that the lower court had jurisdiction to consider
the constitutionality of Section 187, this authority being embraced in the
general definition of the judicial power to determine what are the valid
and binding laws by the criterion of their conformity to the fundamental
law. Specifically, B.P. 129 vests in the regional trial courts jurisdiction over
all civil cases in which the subject of the litigation is incapable of pecuniary
estimation, even as the accused in a criminal action has the right to
question in his defense the constitutionality of a law he is charged with
violating and of the proceedings taken against him, particularly as they
contravene the Bill of Rights. Moreover, Article X, Section 5(2), of the
Constitution vests in the Supreme Court appellate jurisdiction over final
judgments and orders of lower courts in all cases in which the
constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on
the constitutionality of Section 145(C) of the NIRC, as amended, and the validity
of its implementing rules and regulations. In fact, the RTC limited the resolution
of the subject case to the issue of the constitutionality of the assailed provisions.
The determination of whether the assailed law and its implementing rules and
regulations contravene the Constitution is within the jurisdiction of regular courts.
The Constitution vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial
courts.28 Petitioner, therefore, properly filed the subject case before the RTC.
We come now to the issue of whether petitioner is estopped from assailing the
authority of the Commissioner of Internal Revenue. Fortune Tobacco raises this
objection by pointing out that when petitioner requested the Commissioner for a
ruling that its Lucky Strike Soft Pack cigarettes was a "new brand" rather than a
variant of an existing brand, and thus subject to a lower specific tax rate, petitioner
executed an undertaking to comply with the procedures under existing
regulations for the assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of the
Commissioner of Internal Revenue, cannot later on turn around when the ruling
is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents persons from
going back on their own acts and representations, to the prejudice of others who
have relied on them.29 The principle is codified in Article 1431 of the Civil Code,
which provides:
Through estoppel, an admission or representation is rendered conclusive upon
the person making it and cannot be denied or disproved as against the person
relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court, viz:
Sec. 2. Conclusive presumptions. — The following are instances of
conclusive presumptions:
(a) Whenever a party has by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any litigation arising out
of such declaration, act or omission be permitted to falsify it.
The elements of estoppel are: first, the actor who usually must have knowledge,
notice or suspicion of the true facts, communicates something to another in a
misleading way, either by words, conduct or silence; second, the other in fact
relies, and relies reasonably or justifiably, upon that communication; third, the
other would be harmed materially if the actor is later permitted to assert any claim
inconsistent with his earlier conduct; and fourth, the actor knows, expects or
foresees that the other would act upon the information given or that a reasonable
person in the actor's position would expect or foresee such action.30
In the early case of Kalalo v. Luz,31 the elements of estoppel, as related to the party
to be estopped, are: (1) conduct amounting to false representation or
concealment of material facts; or at least calculated to convey the impression that
the facts are other than, and inconsistent with, those which the party
subsequently attempts to assert; (2) intent, or at least expectation that this
conduct shall be acted upon by, or at least influence, the other party; and (3)
knowledge, actual or constructive, of the real facts.
We find that petitioner was not guilty of estoppel. When it made the undertaking
to comply with all issuances of the BIR, which at that time it considered as valid,
petitioner did not commit any false misrepresentation or misleading act. Indeed,
petitioner cannot be faulted for initially undertaking to comply with, and
subjecting itself to the operation of Section 145(C), and only later on filing the
subject case praying for the declaration of its unconstitutionality when the
circumstances change and the law results in what it perceives to be unlawful
discrimination. The mere fact that a law has been relied upon in the past and all
that time has not been attacked as unconstitutional is not a ground for considering
petitioner estopped from assailing its validity. For courts will pass upon a
constitutional question only when presented before it in bona fide cases for
determination, and the fact that the question has not been raised before is not a
valid reason for refusing to allow it to be raised later.32
Now to the substantive issues.
To place this case in its proper context, we deem it necessary to first discuss how
the assailed law operates in order to identify, with precision, the specific
provisions which, according to petitioner, have created a grossly discriminatory
classification scheme between old and new brands. The pertinent portions of RA
8240, as amended by RA 9334, are reproduced below for ready reference:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine. – There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three
centavos (P2.23) per pack;
 Effective on January 1, 2009, Two pesos and forty-seven
centavos (P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two
centavos (P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos
(P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos
(P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four
centavos (P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos
(P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos
(P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten
pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos
(10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight
centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three
centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per
pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos
(P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen
centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty
centavos (P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall
initially be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of
R.A. No. 8240.
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes
are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the
end of three (3) months from the product launch, the Bureau of Internal
Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct
tax bracket under which a particular new brand of cigarette, as defined
above, shall be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of the time
of revalidation in order to finally determine the correct tax bracket under
which a particular new brand of cigarettes shall be classified; Provided
however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 [should be January 2, 1997] and December 31,
2003 shall remain in the classification under which the Bureau of Internal
Revenue has determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised except by an act of
Congress.
 Net retail price, as determined by the Bureau of Internal Revenue through
a price survey to be conducted by the Bureau of Internal Revenue itself,
or the National Statistics Office when deputized for the purpose by the
Bureau of Internal Revenue, shall mean the price at which the cigarette
is sold in retail in at least twenty (20) major supermarkets in Metro Manila
(for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the "net retail
price" shall mean the price at which the cigarette is sold in at least five (5)
major supermarkets in the region excluding the amount intended to
cover the applicable excise tax and value-added tax.
The classification of each brand of cigarettes based on its average net
retail price as of October 1, 1996, as set forth in Annex "D", including the
classification of brands for the same products which, although not set
forth in said Annex "D", were registered and were being commercially
produced and marketed on or after October 1, 1996, and which continue
to be commercially produced and marketed after the effectivity of this
Act, shall remain in force until revised by Congress.
As can be seen, the law creates a four-tiered system which we may refer to as the
low-priced,33 medium-priced,34 high-priced,35 and premium-priced36 tax brackets.
When a brand is introduced in the market, the current net retail price is
determined through the aforequoted specified procedure. The current net retail
price is then used to classify under which tax bracket the brand belongs in order
to finally determine the corresponding excise tax rate on a per pack basis. The
assailed feature of this law pertains to the mechanism where, after a brand is
classified based on its current net retail price, the classification is frozen and only
Congress can thereafter reclassify the same. From a practical point of view, Annex
"D" is merely a by-product of the whole mechanism and philosophy of the assailed
law. That is, the brands under Annex "D" were also classified based on their
current net retail price, the only difference being that they were the first ones so
classified since they were the only brands surveyed as of October 1, 1996, or prior
to the effectivity of RA 8240 on January 1, 1997.37
Due to this legislative classification scheme, it is possible that over time the net
retail price of a previously classified brand, whether it be a brand under Annex "D"
or a new brand classified after the effectivity of RA 8240 on January 1, 1997, would
increase (due to inflation, increase of production costs, manufacturer’s decision
to increase its prices, etc.) to a point that its net retail price pierces the tax bracket
to which it was previously classified.38 Consequently, even if its present day net
retail price would make it fall under a higher tax bracket, the previously classified
brand would continue to be subject to the excise tax rate under the lower tax
bracket by virtue of the legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and Philip
Morris brands, which were permanently classified under Annex "D." As of October
1, 1996, Marlboro had net retail prices ranging from P6.78 to P6.84 while Philip
Morris had net retail prices ranging from P7.39 to P7.48. Thus, pursuant to RA
8240,39 Marlboro and Philip Morris were classified under the high-priced tax
bracket and subjected to an excise tax rate of P8.96 per pack. Petitioner then
presented evidence showing that after the lapse of about seven years or
sometime in 2004, Marlboro’s and Philip Morris’ net retail prices per pack both
increased to about P15.59.40 This meant that they would fall under the premium-
priced tax bracket, with a higher excise tax rate of P13.44 per pack,41 had they
been classified based on their 2004 net retail prices. However, due to the
legislative classification freeze, they continued to be classified under the high-
priced tax bracket with a lower excise tax rate. Petitioner thereafter deplores the
fact that its Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights
cigarettes, introduced in the market sometime in 2001 and validated by a BIR
survey in 2003, were found to have net retail prices of P11.53, P11.59 and
P10.34,42 respectively, which are lower than those of Marlboro and Philip Morris.
However, since petitioner’s cigarettes were newly introduced brands in the
market, they were taxed based on their current net retail prices and, thus, fall
under the premium-priced tax bracket with a higher excise tax rate of P13.44 per
pack. This unequal tax treatment between Marlboro and Philip Morris, on the one
hand, and Lucky Strike, on the other, is the crux of petitioner’s contention that the
legislative classification freeze violates the equal protection and uniformity of
taxation clauses of the Constitution.
It is apparent that, contrary to its assertions, petitioner is not only questioning the
undue favoritism accorded to brands under Annex "D," but the entire mechanism
and philosophy of the law which freezes the tax classification of a cigarette brand
based on its current net retail price. Stated differently, the alleged discrimination
arising from the legislative classification freeze between the brands under Annex
"D" and petitioner’s newly introduced brands arose only because the former were
classified based on their "current" net retail price as of October 1, 1996 and
petitioner’s newly introduced brands were classified based on their "current" net
retail price as of 2003. Without this corresponding freezing of the classification of
petitioner’s newly introduced brands based on their current net retail price, it
would be impossible to establish that a disparate tax treatment occurred between
the Annex "D" brands and petitioner’s newly introduced brands.
This clarification is significant because, under these circumstances, a declaration
of unconstitutionality would necessarily entail nullifying the whole mechanism of
the law and not just Annex "D." Consequently, if the assailed law is declared
unconstitutional on equal protection grounds, the entire method by which a brand
of cigarette is classified would have to be invalidated. As a result, no method to
classify brands under Annex "D" as well as new brands would be left behind and
the whole Section 145 of the NIRC, as amended, would become inoperative.43
To simplify the succeeding discussions, we shall refer to the whole mechanism and
philosophy of the assailed law which freezes the tax classification of a cigarette
brand based on its current net retail price and which, thus, produced different
classes of brands based on the time of their introduction in the market (starting
with the brands in Annex "D" since they were the first brands so classified as of
October 1, 1996) as the classification freeze provision.44
As thus formulated, the central issue is whether or not the classification freeze
provision violates the equal protection and uniformity of taxation clauses of the
Constitution.
In Sison, Jr. v. Ancheta,45 this Court, through Chief Justice Fernando, explained the
applicable standard in deciding equal protection and uniformity of taxation
challenges:
Now for equal protection. The applicable standard to avoid the charge
that there is a denial of this constitutional mandate whether the assailed
act is in the exercise of the police power or the power of eminent domain
is to demonstrate "that the governmental act assailed, far from being
inspired by the attainment of the common weal was prompted by the
spirit of hostility, or at the very least, discrimination that finds no support
in reason. It suffices then that the laws operate equally and uniformly on
all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in
the privileges conferred and the liabilities imposed. Favoritism and undue
preference cannot be allowed. For the principle is that equal protection
and security shall be given to every person under circumstances, which if
not identical are analogous. If law be looks upon in terms of burden or
charges, those that fall within a class should be treated in the same
fashion, whatever restrictions cast on some in the group equally binding
on the rest." That same formulation applies as well to taxation measures.
The equal protection clause is, of course, inspired by the noble concept
of approximating the ideal of the laws's benefits being available to all and
the affairs of men being governed by that serene and impartial
uniformity, which is of the very essence of the idea of law. There is,
however, wisdom, as well as realism, in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is
not a disembodied equality. The Fourteenth Amendment enjoins 'the
equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of
policy arising out of specific difficulties, addressed to the attainment of
specific ends by the use of specific remedies. The Constitution does not
require things which are different in fact or opinion to be treated in law
as though they were the same." Hence the constant reiteration of the view
that classification if rational in character is allowable. As a matter of fact,
in a leading case of Lutz v. Araneta, this Court, through Justice J.B.L.
Reyes, went so far as to hold "at any rate, it is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional
limitation.'"
Petitioner likewise invoked the kindred concept of uniformity. According
to the Constitution: "The rule of taxation shall be uniform and equitable."
This requirement is met according to Justice Laurel in Philippine Trust
Company v. Yatco, decided in 1940, when the tax "operates with the
same force and effect in every place where the subject may be found."
He likewise added: "The rule of uniformity does not call for perfect
uniformity or perfect equality, because this is hardly attainable." The
problem of classification did not present itself in that case. It did not arise
until nine years later, when the Supreme Court held: "Equality and
uniformity in taxation means that all taxable articles or kinds of property
of the same class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes
of taxation, . . . As clarified by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of justice and equity" it
"is not discriminatory within the meaning of this clause and is therefore
uniform." There is quite a similarity then to the standard of equal
protection for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar situation."46 (Emphasis
supplied)
In consonance thereto, we have held that "in our jurisdiction, the standard and
analysis of equal protection challenges in the main have followed the ‘rational
basis’ test, coupled with a deferential attitude to legislative classifications and a
reluctance to invalidate a law unless there is a showing of a clear and unequivocal
breach of the Constitution."47 Within the present context of tax legislation on sin
products which neither contains a suspect classification nor impinges on a
fundamental right, the rational-basis test thus finds application. Under this test, a
legislative classification, to survive an equal protection challenge, must be shown
to rationally further a legitimate state interest.48 The classifications must be
reasonable and rest upon some ground of difference having a fair and substantial
relation to the object of the legislation.49 Since every law has in its favor the
presumption of constitutionality, the burden of proof is on the one attacking the
constitutionality of the law to prove beyond reasonable doubt that the legislative
classification is without rational basis.50 The presumption of constitutionality can
be overcome only by the most explicit demonstration that a classification is a
hostile and oppressive discrimination against particular persons and classes, and
that there is no conceivable basis which might support it.51
A legislative classification that is reasonable does not offend the constitutional
guaranty of the equal protection of the laws. The classification is considered valid
and reasonable provided that: (1) it rests on substantial distinctions; (2) it is
germane to the purpose of the law; (3) it applies, all things being equal, to both
present and future conditions; and (4) it applies equally to all those belonging to
the same class.52
The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency. That
is, since a new brand was not yet in existence at the time of the passage of RA
8240, then Congress needed a uniform mechanism to fix the tax bracket of a new
brand. The current net retail price, similar to what was used to classify the brands
under Annex "D" as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of the tax
classifications now expressly applies not just to Annex "D" brands but to newer
brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new
brand that will be introduced in the future.53 (However, as will be discussed later,
the intent to apply the freezing mechanism to newer brands was already in place
even prior to the amendments introduced by RA 9334 to RA 8240.) This does not
explain, however, why the classification is "frozen" after its determination based
on current net retail price and how this is germane to the purpose of the assailed
law. An examination of the legislative history of RA 8240 provides interesting
answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform Package
then being pushed by the Ramos Administration. It was enacted with the following
objectives stated in the Sponsorship Speech of Senator Juan Ponce Enrile (Senator
Enrile), viz:
First, to evolve a tax structure which will promote fair competition among
the players in the industries concerned and generate buoyant and stable
revenue for the government.
Second, to ensure that the tax burden is equitably distributed not only
amongst the industries affected but equally amongst the various levels of
our society that are involved in various markets that are going to be
affected by the excise tax on distilled spirits, fermented liquor, cigars and
cigarettes.
In the case of firms engaged in the industries producing the products that
we are about to tax, this means relating the tax burden to their market
share, not only in terms of quantity, Mr. President, but in terms of value.
In case of consumers, this will mean evolving a multi-tiered rate structure
so that low-priced products are subject to lower tax rates and higher-
priced products are subject to higher tax rates.
Third, to simplify the tax administration and compliance with the tax laws
that are about to unfold in order to minimize losses arising from
inefficiencies and tax avoidance scheme, if not outright tax evasion.54
In the initial stages of the crafting of the assailed law, the Department of Finance
(DOF) recommended to Congress a shift from the then existing ad valorem
taxation system to a specific taxation system with respect to sin products,
including cigarettes. The DOF noted that the ad valorem taxation system was a
source of massive tax leakages because the taxpayer was able to evade paying the
correct amount of taxes through the undervaluation of the price of cigarettes
using various marketing arms and dummy corporations. In order to address this
problem, the DOF proposed a specific taxation system where the cigarettes would
be taxed based on volume or on a per pack basis which was believed to be less
susceptible to price manipulation. The reason was that the BIR would only need
to monitor the sales volume of cigarettes, from which it could easily compute the
corresponding tax liability of cigarette manufacturers. Thus, the DOF suggested
the use of a three-tiered system which operates in substantially the same manner
as the four-tiered system under RA 8240 as earlier discussed. The proposal of the
DOF was embodied in House Bill (H.B.) No. 6060, the pertinent portions of which
states—
SEC. 142. Cigars and cigarettes.—
(c) Cigarettes packed by machine.— There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the manufacturer’s or importer’s wholesale price (net of excise tax
and value-added tax) per pack exceeds four pesos and twenty centavos
(P4.20), the tax shall be seven pesos and fifty centavos (P7.50);
(2) If the manufacturer’s or importer’s wholesale price (net of excise tax
and value-added tax) per pack exceeds three pesos and ninety centavos
(P3.90) but does not exceed four pesos and twenty centavos (P4.20), the
tax shall be five pesos and fifty centavos (P5.50): provided, that after two
(2) years from the effectivity of this Act, cigarettes otherwise subject to
tax under this subparagraph shall be taxed under subparagraph (1) above.
(3) If the manufacturer’s or importer’s wholesale price (net of excise tax
and value-added tax) per pack does not exceeds three pesos and ninety
centavos (P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes packed by
machine to be introduced in the domestic market after the effectivity of
this Act, shall be taxed under paragraph (c)(1) hereof.
The rates of specific tax on cigars and cigarettes under paragraphs (a), (b),
and (c) hereof, including the price levels for purposes of classifying
cigarettes packed by machine, shall be revised upward two (2) years after
the effectivity of this Act and every two years thereafter by the
Commissioner of Internal Revenue, subject to the approval of the
Secretary of Finance, taking into account the movement of the consumer
price index for cigars and cigarettes as established by the National Statistics
Office: provided, that the increase in taxes and/or price levels shall be equal
to the present change in such consumer price index for the two-year
period: provided, further, that the President, upon the recommendation of
the Secretary of Finance, may suspend or defer the adjustment in price
levels and tax rates when the interest of the national economy and general
welfare so require, such as the need to obviate unemployment, and
economic and social dislocation: provided, finally, that the revised price
levels and tax rates authorized herein shall in all cases be rounded off to
the nearest centavo and shall be in force and effect on the date of
publication thereof in a newspaper of general circulation. x x x (Emphasis
supplied)
What is of particular interest with respect to the proposal of the DOF is that it
contained a provision for the periodic adjustment of the excise tax rates and tax
brackets, and a corresponding periodic resurvey and reclassification of cigarette
brands based on the increase in the consumer price index as determined by the
Commissioner of Internal Revenue subject to certain guidelines. The evident
intent was to prevent inflation from eroding the value of the excise taxes that
would be collected from cigarettes over time by adjusting the tax rate and tax
brackets based on the increase in the consumer price index. Further, under this
proposal, old brands as well as new brands introduced thereafter would be
subjected to a resurvey and reclassification based on their respective values at the
end of every two years in order to align them with the adjustment of the excise
tax rate and tax brackets due to the movement in the consumer price index.55
Of course, we now know that the DOF proposal, insofar as the periodic adjustment
of tax rates and tax brackets, and the periodic resurvey and reclassification of
cigarette brands are concerned, did not gain approval from Congress. The House
and Senate pushed through with their own versions of the excise tax system on
beers and cigarettes both denominated as H.B. No. 7198. For convenience, we
shall refer to the bill deliberated upon by the House as the House Version and that
of the Senate as the Senate Version.
The House’s Committee on Ways and Means, then chaired by Congressman
Exequiel B. Javier (Congressman Javier), roundly rejected the DOF proposal.
Instead, in its Committee Report submitted to the plenary, it proposed a different
excise tax system which used a specific tax as a basic tax with an ad valorem
comparator. Further, it deleted the proposal to have a periodic adjustment of tax
rates and the tax brackets as well as periodic resurvey and reclassification of
cigarette brands, to wit:
The rigidity of the specific tax system calls for the need for frequent
congressional intervention to adjust the tax rates to inflation and to keep
pace with the expanding needs of government for more revenues. The
DOF admits this flaw inherent in the tax system it proposed. Hence, to
obviate the need for remedial legislation, the DOF is asking Congress to
grant to the Commissioner the power to revise, one, the specific tax rates:
and two, the price levels of beer and cigarettes. What the DOF is asking,
Mr. Speaker, is for Congress to delegate to the Commissioner of Internal
Revenue the power to fix the tax rates and classify the subjects of taxation
based on their price levels for purposes of fixing the tax rates. While we
sympathize with the predicament of the DOF, it is not for Congress to
abdicate such power. The power sought to be delegated to be exercised
by the Commissioner of Internal Revenue is a legislative power vested by
the Constitution in Congress pursuant to Section 1, Article VI of the
Constitution. Where the power is vested, there it must remain— in
Congress, a body of representatives elected by the people. Congress may
not delegate such power, much less abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally permissible,
to the Commissioner of Internal Revenue is fraught with ethical
implications. The debates on how much revenue will be raised, how much
money will be taken from the pockets of taxpayers, will inexorably shift
from the democratic Halls of Congress to the secret and non-transparent
corridors of unelected agencies of government, the Department of
Finance and the Bureau of Internal Revenue, which are not accountable
to our people. We cannot countenance the shift for ethical reasons, lest
we be accused of betraying the trust reposed on this Chamber by the
people. x x x
A final point on this proposal, Mr. Speaker, is the exercise of the taxing
power of the Commissioner of Internal Revenue which will be triggered
by inflation rates based on the consumer price index. Simply stated, Mr.
Speaker, the specific tax rates will be fixed by the Commissioner
depending on the price levels of beers and cigarettes as determined by
the consumers’ price index. This is a novel idea, if not necessarily weird in
the field of taxation. What if the brewer or the cigarette manufacturer
sells at a price below the consumers’ price index? Will it be taxed on the
basis of the consumer’s price index which is over and above its wholesale
or retail price as the case may be? This is a weird form of exaction where
the tax is based not on what the brewer or manufacturer actually realized
but on an imaginary wholesale or retail price. This amounts to a taxation
based on presumptive price levels and renders the specific tax a
presumptive tax. We hope, the DOF and the BIR will also honor a
presumptive tax payment.
Moreover, specific tax rates based on price levels tied to consumer’s price
index as proposed by the DOF engenders anti-trust concerns. The
proposal if enacted into law will serve as a barrier to the entry of new
players in the beer and cigarette industries which are presently
dominated by shared monopolies. A new player in these industries will be
denied business flexibility to fix its price levels to promote its product and
penetrate the market as the price levels are dictated by the consumer
price index. The proposed tax regime, Mr. Speaker, will merely enhance
the stranglehold of the oligopolies in the beer and cigarette industries,
thus, reversing the government’s policy of dismantling monopolies and
combinations in restraint of trade.56
For its part, the Senate’s Committee on Ways and Means, then chaired by Senator
Juan Ponce Enrile (Senator Enrile), developed its own version of the excise tax
system on cigarettes. The Senate Version consisted of a four-tiered system and,
interestingly enough, contained a periodic excise tax rate and tax bracket
adjustment as well as a periodic resurvey and reclassification of brands provision
("periodic adjustment and reclassification provision," for brevity) to be conducted
by the DOF in coordination with the BIR and the National Statistics Office based
on the increase in the consumer price index— similar to the one proposed by the
DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code, as amended,
is hereby further amended to read as follows:
"SEC. 142. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos
(P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) per pack, the tax shall be
Eight pesos (P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) up to Six pesos and fifty centavos (P6.50) per
pack, the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00)
per pack.
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of this Act shall be taxed under the
highest classification of any variant of that brand.
xxx
The rates of specific tax on cigars and cigarettes under subparagraph (a),
(b) and (c) hereof, including the net retail prices for purposes of
classification, shall be adjusted on the sixth of January three years after the
effectivity of this Act and every three years thereafter. The adjustment
shall be in accordance with the inflation rate measured by the average
increase in the consumer price index over the three-year period. The
adjusted tax rates and net price levels shall be in force on the eighth of
January.
Within the period hereinabove mentioned, the Secretary of Finance shall
direct the conduct of a survey of retail prices of each brand of cigarettes in
coordination with the Bureau of Internal Revenue and the National
Statistics Office.
For purposes of this Section, net retail price shall mean the price at which
the cigarette is sold on retail in 20 major supermarkets in Metro Manila
(for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the net retail
price shall mean the price at which the cigarette is sold in five major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.
The classification of each brand of cigarettes in the initial year of
implementation of this Act shall be based on its average net retail price as
of October 1, 1996. The said classification by brand shall remain in force
until January 7, 2000.
New brands shall be classified according to their current net retail price.57
(Emphasis supplied)
During the period of interpellations, the late Senator Raul S. Roco (Senator Roco)
expressed doubts as to the legality and wisdom of putting a periodic adjustment
and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be allowed
to be automatically adjusted upwards based on a system of indexing tied
up with the Consumers Price Index (CPI). Although I must add that we
have adopted a similar system in adjusting the personal tax exemption
from income tax of our individual taxpayers.
Senator Roco: They are not exactly the same, Mr. President. But even
then, we do note that this the first time we are trying to put an automatic
adjustment. My concern is, why do we propose now this automatic
adjustment? What is the reason that impels the committee? Maybe we
can be enlightened and maybe we shall embrace it forthwith. But what is
the reason?
Senator Enrile: Mr. President, we will recall that in the House of
Representatives, it has adopted a tax proposal on these products based
on a specific tax as a basic tax with an ad valorem comparator. The
Committee on Ways and Means of the Senate has not seen it fit to adopt
this system, but it recognized the possibility that there may be an
occasion where the price movement in the country might unwarrantedly
move upwards, in which case, if we peg the government to a specific tax
rate of P6.30, P9.30 and P12.30 for beer, since we are talking of beer, 58
the government might lose in the process.
In order to consider the interest of the government in this, Mr. President,
and in order to obviate the possibility that some of these products
categorized under the different tiers with different specific tax rates from
moving upwards and piercing their own tiers and thereby expose
themselves to an incremental tax of higher magnitude, it was felt that we
should adopt a system where, in spite of any escalation in the price of
these products in the future, the tax rates could be adjusted upwards so
that none of these products would leave their own tier. That was the basic
principle under which we crafted this portion of the tax proposal.
Senator Roco: Mr. President, we certainly share the judgment of the
distinguished gentleman as regards the comparator provision in the
House of Representatives and we appreciate the reasons given. But we
are under the impression that the House also, aside from the comparator,
has an adjustment clause that is fixed. It has fixed rates for the
adjustment. So that one of the basic differences between the Senate
proposed version now and the House version is that, the House of
Representatives has manifested its will and judgment as regards the tax
to which we will adjust, whereas the Senate version relegates
fundamentally that judgment to the Department of Finance.
Senator Enrile: That is correct, Mr. President, because we felt that in
imposing a fixed adjustment, we might be fixing an amount that is either
too high or too low. We cannot foresee the economic trends in this
country over a period of two years, three years, let alone ten years. So we
felt that a mechanism ought to be adopted in order to serve the interest
of the government, the interest of the producers, and the interest of the
consuming public.
Senator Roco: This is where, Mr. President, my policy difficulties start.
Under the Constitution— I think it is Article VI, Section 24, and it was the
distinguished chairman of the Committee on Ways and Means who made
this Chamber very conscious of this provision— revenue measures and
tariff measures shall originate exclusively from the House of
Representatives.
The reason for this, Mr. President, is, there is a long history why the House
of Representatives must originate judgments on tax. The House members
represent specific districts. They represent specific constituencies, and
the whole history of parliamentarism, the whole history of Congress as
an institution is founded on the proposition that the direct
representatives of the people must speak about taxes.
Mr. President, while the Senate can concur and can introduce
amendments, the proposed change here is radical. This is the policy
difficulty that I wish to clarify with the gentleman because the judgment
call now on the amount of tax to be imposed is not coming from Congress.
It is shifted to the Department of Finance. True, the Secretary of Finance
may have been the best finance officer two years ago and now the best
finance officer in Asia, but that does not make him qualified to replace
the judgment call of the House of Representatives. That is my first
difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this
rate beforehand. The computation of the rate is the only thing that was
left to the Department of Finance as a tax implementor of Congress. This
is not unusual because we have already, as I said, adopted a system
similar to this. If we adjust the personal exemption of an individual
taxpayer, we are in effect adjusting the applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate, Mr. President,
is that we depart precisely from the mandate of the Constitution that
judgment on revenue must emanate from Congress. Here, it is shifted to
the Department of Finance for no visible or patent reason insofar as I
could understand. The only difference is, who will make the judgment?
Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering sooner than I
should. My understanding of the Constitution is that all revenue
measures must emanate from the House. That is all the Constitution says.
Now, it does not say that the judgment call must belong to the House.
The judgment call can belong both to the House and to the Senate. We
can change whatever proposal the House did. Precisely, we are now
crafting a measure, and we are saying that this is the rate subject to an
adjustment which we also provide. We are not giving any unusual power
to the Secretary of Finance because we tell him, "This is the formula that
you must adopt in arriving at the adjustment so that you do not have to
come back to us."59
Apart from his doubts as to the legality of the delegation of taxing power to the
DOF and BIR, Senator Roco also voiced out his concern about the possible abuse
and corruption that will arise from the periodic adjustment and reclassification
provision. Continuing—
Senator Roco: Mr. President, if that is the argument, that the
distinguished gentleman has a different legal interpretation, we will then
now examine the choice. Because his legal interpretation is different from
mine, then the issues becomes: Is it more advantageous that this
judgment be exercised by the House? Should we not concur or modify in
 terms of the exercise by the House of its power or are we better off giving
this judgment call to the Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more advantageous
to fix the rate so that even if we modify the rates identified by Congress, it
is better and less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to demonstrate
to us how this will be done? On page 8, lines 5 to 9, there is a provision
here as to when the Secretary of Finance shall direct the conduct of
survey of retail prices of each brand of fermented liquor in coordination
with the Bureau of Internal Revenue and the National Statistics Office.
These offices are not exactly noted, Mr. President, for having been
sanctified by the Holy Spirit in their noble intentions. x x x60 (Emphasis
supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-
year period, the Secretary of Finance shall direct the conduct of the
survey. How? When? Which retail prices and what brand shall he
consider? When he coordinates with the Bureau of Internal Revenue,
what is the Bureau of Internal Revenue supposed to be doing? What is
the National Statistics Office supposed to be doing, and under what
guides and standards?
May the gentleman wish to demonstrate how this will be done? My point,
Mr. President, is, by giving the Secretary of Finance, the BIR and the
National Statistics Office discretion over a two-year period will invite
corruption and arbitrariness, which is more dangerous than letting the
House of Representatives and this Chamber set the adjustment rate. Why
not set the adjustment rate? Why should Congress not exercise that
judgment now? x x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman consider
choosing the judgment of this Chamber and the House of Representatives
over a delegated judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of Finance. It has
won awards, and I also trust the undersecretary. But that is beside the
point. Tomorrow, they may not be there.61 (Emphasis supplied)
This point was further dissected by the two senators. There was a genuine
difference of opinion as to which system— one with a fixed excise tax rate and
classification or the other with a periodic adjustment of excise tax rate and
reclassification— was less susceptible to abuse, as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of these
products from the viewpoint of exerted pressures because of the
understandable impact of this measure on the pockets of the major
players producing these products, the committee felt that perhaps to
lessen such pressures, it is best that we now establish a norm where the
tax will be adjusted without incurring too much political controversy as
has happened in the case of this proposal.
Senator Roco: But that is exactly the same reason we say we must rely
upon Congress because Congress, if it is subjected to pressure, at least
balances off because of political factors.
When the Secretary of Finance is now subjected to pressure, are we
saying that the Secretary of Finance and the Department of Finance is
better-suited to withstand the pressure? Or are we saying "Let the
Finance Secretary decide whom to yield"?
I am saying that the temptation and the pressure on the Secretary of
Finance is more dangerous and more corruption-friendly than
ascertaining for ourselves now a fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not agree with
this representation, but in my humble opinion, this formulation is less
susceptible to pressure because there is a definite point of reference
which is the consumer price index, and that consumer price index is not
going to be used only for this purpose. The CPI is used for a national
purpose, and there is less possibility of tinkering with it.62
Further, Senator Roco, like Congressman Javier, expressed the view that the
periodic adjustment and reclassification provision would create an anti-
competitive atmosphere. Again, Senators Roco and Enrile had genuine divergence
of opinions on this matter, to wit:
Senator Roco: x x x On the marketing level, an adjustment clause may, in
fact, be disadvantageous to both companies, whether it is the Lucio Tan
companies or the San Miguel companies. If we have to adjust our
marketing position every two years based on the adjustment clause, the
established company may survive, but the new ones will have
tremendous difficulty. Therefore, this provision tends to indicate an
anticompetitive bias.
It is good for San Miguel and the Lucio Tan companies, but the new
companies— assuming there may be new companies and we want to
encourage them because of the old point of liberalization— will be at a
disadvantage under this situation. If this observation will find receptivity
in the policy consideration of the distinguished Gentleman, maybe we can
also further, later on, seek amendments to this automatic adjustment
clause in some manner.
Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness
of this provision with respect to a new entrant, because a new entrant
will not just come in without studying the market. He is a lousy
businessman if he will just come in without studying the market. If he
comes in, he will determine at what retail price level he will market his
product, and he will be coming under any of the tiers depending upon his
net retail price. Therefore, I do not see how this particular provision will
affect a new entrant.
Senator Roco: Be that as it may, Mr. President, we obviously will not
resort to debate until this evening, and we will have to look for other ways
of resolving the policy options.
Let me just close that particular area of my interpellation, by summarizing
the points we were hoping could be clarified.
1. That the automatic adjustment clause is at best questionable
in law.
2. It is corruption-friendly in the sense that it shifts the discretion
from the House of Representatives and this Chamber to the
Secretary of Finance, no matter how saintly he may be.
3. There is,— although the judgment call of the gentleman
disagrees— to our view, an anticompetitive situation that is
geared at…63
After these lengthy exchanges, it appears that the views of Senator Enrile were
sustained by the Senate Body because the Senate Version was passed on Third
Reading without substantially altering the periodic adjustment and reclassification
provision.
It was actually at the Bicameral Conference Committee level where the Senate
Version underwent major changes. The Senate Panel prevailed upon the House
Panel to abandon the basic excise tax rate and ad valorem comparator as the
means to determine the applicable excise tax rate. Thus, the Senate’s four-tiered
system was retained with minor adjustments as to the excise tax rate per tier.
However, the House Panel prevailed upon the Senate Panel to delete the power
of the DOF and BIR to periodically adjust the excise tax rate and tax brackets, and
periodically resurvey and reclassify the cigarette brands based on the increase in
the consumer price index.
In lieu thereof, the classification of existing brands based on their average net
retail price as of October 1, 1996 was "frozen" and a fixed across-the-board 12%
increase in the excise tax rate of each tier after three years from the effectivity of
the Act was put in place. There is a dearth of discussion in the deliberations as to
the applicability of the freezing mechanism to new brands after their classification
is determined based on their current net retail price. But a plain reading of the
text of RA 8240, even before its amendment by RA 9334, as well as the previously
discussed deliberations would readily lead to the conclusion that the intent of
Congress was to likewise apply the freezing mechanism to new brands. Precisely,
Congress rejected the proposal to allow the DOF and BIR to periodically adjust the
excise tax rate and tax brackets as well as to periodically resurvey and reclassify
cigarettes brands which would have encompassed old and new brands alike. Thus,
it would be absurd for us to conclude that Congress intended to allow the periodic
reclassification of new brands by the BIR after their classification is determined
based on their current net retail price. We shall return to this point when we tackle
the second issue.
In explaining the changes made at the Bicameral Conference Committee level,
Senator Enrile, in his report to the Senate plenary, noted that the fixing of the
excise tax rates was done to avoid confusion.64 Congressman Javier, for his part,
reported to the House plenary the reasons for fixing the excise tax rate and
freezing the classification, thus:
 Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen
classification, rejects the Senate version which seeks to abdicate the
power of Congress to tax by pegging the rates as well as the classification
of sin products to consumer price index which practically vests in the
Secretary of Finance the power to fix the rates and to classify the products
for tax purposes.65 (Emphasis supplied)
Congressman Javier later added that the frozen classification was intended to give
stability to the industry as the BIR would be prevented from tinkering with the
classification since it would remain unchanged despite the increase in the net
retail prices of the previously classified brands.66 This would also assure the
industry players that there would be no new impositions as long as the law is
unchanged.67
From the foregoing, it is quite evident that the classification freeze provision could
hardly be considered arbitrary, or motivated by a hostile or oppressive attitude to
unduly favor older brands over newer brands. Congress was unequivocal in its
unwillingness to delegate the power to periodically adjust the excise tax rate and
tax brackets as well as to periodically resurvey and reclassify the cigarette brands
based on the increase in the consumer price index to the DOF and the BIR.
Congress doubted the constitutionality of such delegation of power, and likewise,
considered the ethical implications thereof. Curiously, the classification freeze
provision was put in place of the periodic adjustment and reclassification provision
because of the belief that the latter would foster an anti-competitive atmosphere
in the market. Yet, as it is, this same criticism is being foisted by petitioner upon
the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of
Congress’s earnest efforts to improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the same with other state
interests. In particular, the questioned provision addressed Congress’s
administrative concerns regarding delegating too much authority to the DOF and
BIR as this will open the tax system to potential areas for abuse and corruption.
Congress may have reasonably conceived that a tax system which would give the
least amount of discretion to the tax implementers would address the problems
of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the DOF
proposal and the Senate Version, the periodic reclassification of brands would
tempt the cigarette manufacturers to manipulate their price levels or bribe the
tax implementers in order to allow their brands to be classified at a lower tax
bracket even if their net retail prices have already migrated to a higher tax bracket
after the adjustment of the tax brackets to the increase in the consumer price
index. Presumably, this could be done when a resurvey and reclassification is
forthcoming. As briefly touched upon in the Congressional deliberations, the
difference of the excise tax rate between the medium-priced and the high-priced
tax brackets under RA 8240, prior to its amendment, was P3.36. For a moderately
popular brand which sells around 100 million packs per year, this easily translates
to P336,000,000.68 The incentive for tax avoidance, if not outright tax evasion,
would clearly be present. Then again, the tax implementers may use the power to
periodically adjust the tax rate and reclassify the brands as a tool to unduly
oppress the taxpayer in order for the government to achieve its revenue targets
for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin
products to remove these potential areas of abuse and corruption from both the
side of the taxpayer and the government. Without doubt, the classification freeze
provision was an integral part of this overall plan. This is in line with one of the
avowed objectives of the assailed law "to simplify the tax administration and
compliance with the tax laws that are about to unfold in order to minimize losses
arising from inefficiencies and tax avoidance scheme, if not outright tax evasion."69
RA 9334 did not alter this classification freeze provision of RA 8240. On the
contrary, Congress affirmed this freezing mechanism by clarifying the wording of
the law. We can thus reasonably conclude, as the deliberations on RA 9334 readily
show, that the administrative concerns in tax administration, which moved
Congress to enact the classification freeze provision in RA 8240, were merely
continued by RA 9334. Indeed, administrative concerns may provide a legitimate,
rational basis for legislative classification.70 In the case at bar, these administrative
concerns in the measurement and collection of excise taxes on sin products are
readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential areas for
abuse and corruption from the tax administration of sin products, the legislative
deliberations also show that the classification freeze provision was intended to
generate buoyant and stable revenues for government. With the frozen tax
classifications, the revenue inflow would remain stable and the government would
be able to predict with a greater degree of certainty the amount of taxes that a
cigarette manufacturer would pay given the trend in its sales volume over time.
The reason for this is that the previously classified cigarette brands would be
prevented from moving either upward or downward their tax brackets despite the
changes in their net retail prices in the future and, as a result, the amount of taxes
due from them would remain predictable. The classification freeze provision
would, thus, aid in the revenue planning of the government.71
All in all, the classification freeze provision addressed Congress’s administrative
concerns in the simplification of tax administration of sin products, elimination of
potential areas for abuse and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of revenues. Consequently, there can
be no denial of the equal protection of the laws since the rational-basis test is
amply satisfied.
Going now to the contention of petitioner that the classification freeze provision
unduly favors older brands over newer brands, we must first contextualize the
basis of this claim. As previously discussed, the evidence presented by the
petitioner merely showed that in 2004, Marlboro and Philip Morris, on the one
hand, and Lucky Strike, on the other, would have been taxed at the same rate had
the classification freeze provision been not in place. But due to the operation of
the classification freeze provision, Lucky Strike was taxed higher. From here,
petitioner generalizes that this differential tax treatment arising from the
classification freeze provision adversely impacts the fairness of the playing field in
the industry, particularly, between older and newer brands. Thus, it is virtually
impossible for new brands to enter the market.
Petitioner did not, however, clearly demonstrate the exact extent of such impact.
It has not been shown that the net retail prices of other older brands previously
classified under this classification system have already pierced their tax brackets,
and, if so, how this has affected the overall competition in the market. Further, it
does not necessarily follow that newer brands cannot compete against older
brands because price is not the only factor in the market as there are other factors
like consumer preference, brand loyalty, etc. In other words, even if the newer
brands are priced higher due to the differential tax treatment, it does not mean
that they cannot compete in the market especially since cigarettes contain
addictive ingredients so that a consumer may be willing to pay a higher price for
a particular brand solely due to its unique formulation. It may also be noted that
in 2003, the BIR surveyed 29 new brands72 that were introduced in the market
after the effectivity of RA 8240 on January 1, 1997, thus negating the sweeping
generalization of petitioner that the classification freeze provision has become an
insurmountable barrier to the entry of new brands. Verily, where there is a claim
of breach of the due process and equal protection clauses, considering that they
are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing,
the presumption of validity must prevail.73
Be that as it may, petitioner’s evidence does suggest that, at least in 2004, Philip
Morris and Marlboro, older brands, would have been taxed at the same rate as
Lucky Strike, a newer brand, due to certain conditions (i.e., the increase of the
older brands’ net retail prices beyond the tax bracket to which they were
previously classified after the lapse of some time) were it not for the classification
freeze provision. It may be conceded that this has adversely affected, to a certain
extent, the ability of petitioner to competitively price its newer brands vis-à-vis
the subject older brands. Thus, to a limited extent, the assailed law seems to
derogate one of its avowed objectives, i.e. promoting fair competition among the
players in the industry. Yet, will this occurrence, by itself, render the assailed law
unconstitutional on equal protection grounds?
We answer in the negative.
Whether Congress acted improvidently in derogating, to a limited extent, the
state’s interest in promoting fair competition among the players in the industry,
while pursuing other state interests regarding the simplification of tax
administration of sin products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue generation, and ease of
projection of revenues through the classification freeze provision, and whether
the questioned provision is the best means to achieve these state interests,
necessarily go into the wisdom of the assailed law which we cannot inquire into,
much less overrule. The classification freeze provision has not been shown to be
precipitated by a veiled attempt, or hostile attitude on the part of Congress to
unduly favor older brands over newer brands. On the contrary, we must
reasonably assume, owing to the respect due a co-equal branch of government
and as revealed by the Congressional deliberations, that the enactment of the
questioned provision was impelled by an earnest desire to improve the efficiency
and effectivity of the tax administration of sin products. For as long as the
legislative classification is rationally related to furthering some legitimate state
interest, as here, the rational-basis test is satisfied and the constitutional
challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is passed by
Congress, which state interest is superior over another, or which method is better
suited to achieve one, some or all of the state’s interests, or what these interests
should be in the first place. This policy-determining power, by constitutional fiat,
belongs to Congress as it is its function to determine and balance these interests
or choose which ones to pursue. Time and again we have ruled that the judiciary
does not settle policy issues. The Court can only declare what the law is and not
what the law should be. Under our system of government, policy issues are within
the domain of the political branches of government and of the people themselves
as the repository of all state power.74 Thus, the legislative classification under the
classification freeze provision, after having been shown to be rationally related to
achieve certain legitimate state interests and done in good faith, must, perforce,
end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited
extent, one of its avowed objectives (i.e. promoting fair competition among the
players in the industry) would suggest that, by Congress’s own standards, the
current excise tax system on sin products is imperfect. But, certainly, we cannot
declare a statute unconstitutional merely because it can be improved or that it
does not tend to achieve all of its stated objectives.75 This is especially true for tax
legislation which simultaneously addresses and impacts multiple state interests.76
Absent a clear showing of breach of constitutional limitations, Congress, owing to
its vast experience and expertise in the field of taxation, must be given sufficient
leeway to formulate and experiment with different tax systems to address the
complex issues and problems related to tax administration. Whatever
imperfections that may occur, the same should be addressed to the democratic
process to refine and evolve a taxation system which ideally will achieve most, if
not all, of the state’s objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its
remedy is with Congress and not this Court. As succinctly articulated in Vance v.
Bradley:77
The Constitution presumes that, absent some reason to infer antipathy,
even improvident decisions will eventually be rectified by the democratic
process, and that judicial intervention is generally unwarranted no matter
how unwisely we may think a political branch has acted. Thus, we will not
overturn such a statute unless the varying treatment of different groups
or persons is so unrelated to the achievement of any combination of
legitimate purposes that we can only conclude that the legislature's
actions were irrational.78
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue
Regulations No. 9-2003, Revenue Regulations No. 22-2003 and Revenue
Memorandum Order No. 6-2003, are invalid insofar as they empower the BIR to
reclassify or update the classification of new brands of cigarettes based on their
current net retail prices every two years or earlier. It claims that RA 8240, even
prior to its amendment by RA 9334, did not authorize the BIR to conduct said
periodic resurvey and reclassification.
The questioned provisions are found in the following sections of the assailed
issuances:
(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended
by Section 2 of Revenue Regulations 9-2003, viz:
For the purpose of establishing or updating the tax classification of new
brands and variant(s) thereof, their current net retail price shall be
reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless
earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new
brands shall remain in force until the same is altered or changed through
the issuance of an appropriate Revenue Regulations.
(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II)
II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to
cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
1. The conduct of survey covered by this Order, for purposes of
determining the current retail prices of new brands of cigarettes and
alcohol products introduced in the market on or after January 1, 1997,
shall be undertaken in the following instances:
xxxx
b. For reclassification of new brands of said excisable products that were
introduced in the market after January 1, 1997.
xxxx
4. The determination of the current retail prices of new brands of the
aforesaid excisable products shall be initiated as follows:
xxxx
 b. After the lapse of the prescribed two-year period or as the
Commissioner may otherwise direct, the appropriate tax reclassification
of these brands based on the current net retail prices thereof shall be
determined by a survey to be conducted upon a written directive by the
Commissioner.
For this purpose, a memorandum order to the Assistant Commissioner,
Large Taxpayers Service, Heads, Excise Tax Areas, and Regional Directors
of all Revenue Regions, except Revenue Region Nos. 4, 5, 6, 7, 8 and 9,
shall be issued by the Commissioner for the submission of the list of major
supermarkets/retail outlets where the above excisable products are
being sold, as well as the list of selected revenue officers who shall be
designated to conduct the said activity(ies).
xxxx
6. The results of the survey conducted in Revenue Region Nos. 4 to 9 shall
be submitted directly to the Chief, LT Assistance Division II (LTAD II),
National Office for consolidation. On the other hand, the results of the
survey conducted in Revenue Regions other than Revenue Region Nos. 4
to 9, shall be submitted to the Office of the Regional Director for regional
consolidation. The consolidated regional survey, together with the
accomplished survey forms shall be transmitted to the Chief, LTAD II for
national consolidation within three (3) days from date of actual receipt
from the survey teams. The LTAD II shall be responsible for the evaluation
and analysis of the submitted survey forms and the preparation of the
recommendation for the updating/revision of the tax classification of
each brand of cigarettes and alcohol products. The said recommendation,
duly validated by the ACIR, LTS, shall be submitted to the Commissioner
for final review within ten (10) days from the date of actual receipt of
complete reports from all the surveying Offices.
7. Upon final review by the Commissioner of the revised tax classification
of the different new brands of cigarettes and alcohol products, the
appropriate revenue regulations shall be prepared and submitted for
approval by the Secretary of Finance.
xxxx
III. PROCEDURES
xxxx
Large Taxpayers Assistance Division II
xxxx
1. Perform the following preparatory procedures on the identification of
brands to be surveyed, supermarkets/retail outlets where the survey shall
be conducted, and the personnel selected to conduct the survey.
xxxx
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the survey
pursuant to the provisions of Item II.2 of this Order containing the
complete description of each brand, existing net retail price and the
corresponding tax rate thereof.
ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets
within the territorial jurisdiction of the concerned revenue regions where
the survey will be conducted to be used as basis in the issuance of Mission
Orders. Ensure that the minimum number of establishments to be
surveyed, as prescribed under existing revenue laws and regulations, is
complied with. In addition, the names and designations of revenue
officers selected to conduct the survey shall be clearly indicated opposite
the names of the establishments to be surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on January 1, 1997, the BIR
issued Revenue Regulations No. 1-97, dated December 13, 1996, which mandates
a one-time classification only.79 Upon their launch, new brands shall be initially
taxed based on their suggested net retail price. Thereafter, a survey shall be
conducted within three (3) months to determine their current net retail prices
and, thus, fix their official tax classifications. However, the BIR made a turnaround
by issuing Revenue Regulations No. 9-2003, dated February 17, 2003, which partly
amended Revenue Regulations No. 1-97, by authorizing the BIR to periodically
reclassify new brands (i.e., every two years or earlier) based on their current net
retail prices. Thereafter, the BIR issued Revenue Memorandum Order No. 6-2003,
dated March 11, 2003, prescribing the guidelines on the implementation of
Revenue Regulations No. 9-2003. This was patent error on the part of the BIR for
being contrary to the plain text and legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Revenue
Memorandum Order No. 6-2003 unjustifiably emasculate the operation of Section
145 of the NIRC because they authorize the Commissioner of Internal Revenue to
update the tax classification of new brands every two years or earlier subject only
to its issuance of the appropriate Revenue Regulations, when nowhere in Section
145 is such authority granted to the Bureau. Unless expressly granted to the BIR,
the power to reclassify cigarette brands remains a prerogative of the legislature
which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent was for new
brands to benefit from the same freezing mechanism accorded to Annex "D"
brands. To reiterate, in enacting RA 8240, Congress categorically rejected the DOF
proposal and Senate Version which would have empowered the DOF and BIR to
periodically adjust the excise tax rate and tax brackets, and to periodically
resurvey and reclassify cigarette brands. (This resurvey and reclassification would
have naturally encompassed both old and new brands.) It would thus, be absurd
for us to conclude that Congress intended to allow the periodic reclassification of
new brands by the BIR after their classification is determined based on their
current net retail price while limiting the freezing of the classification to Annex "D"
brands. Incidentally, Senator Ralph G. Recto expressed the following views during
the deliberations on RA 9334, which later amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed to adopt a
specific tax system [under R.A. 8240], when Congress did not index the
brackets, and Congress did not index the rates but only provided for a one
rate increase in the year 2000, we shifted from ad valorem which was
based on value to a system of specific which is based on volume. Congress
then, in effect, determined the classification based on the prices at that
particular period of time and classified these products accordingly.
Of course, Congress then decided on what will happen to the new brands
or variants of existing brands. To favor government, a variant would be
classified as the highest rate of tax for that particular brand. In case of a
new brand, Mr. President, then the BIR should classify them. But I do not
think it was the intention of Congress then to give the BIR the authority
to reclassify them every so often. I do not think it was the intention of
Congress to allow the BIR to classify a new brand every two years, for
example, because it will be arbitrary for the BIR to do so. x x x80 (Emphasis
supplied)
For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar as
the freezing mechanism is concerned, must be seen merely as underscoring the
legislative intent already in place then, i.e. new brands as being covered by the
freezing mechanism after their classification based on their current net retail
prices.
Unfortunately for petitioner, this result will not cause a downward reclassification
of Lucky Strike. It will be recalled that petitioner introduced Lucky Strike in June
2001. However, as admitted by petitioner itself, the BIR did not conduct the
required market survey within three months from product launch. As a result,
Lucky Strike was never classified based on its actual current net retail price.
Petitioner failed to timely seek redress to compel the BIR to conduct the requisite
market survey in order to fix the tax classification of Lucky Strike. In the meantime,
Lucky Strike was taxed based on its suggested net retail price of P9.90 per pack,
which is within the high-priced tax bracket. It was only after the lapse of two years
or in 2003 that the BIR conducted a market survey which was the first time that
Lucky Strike’s actual current net retail price was surveyed and found to be from
P10.34 to P11.53 per pack, which is within the premium-priced tax bracket. The
case of petitioner falls under a situation where there was no reclassification based
on its current net retail price which would have been invalid as previously
explained. Thus, we cannot grant petitioner’s prayer for a downward
reclassification of Lucky Strike because it was never reclassified by the BIR based
on its actual current net retail price.
It should be noted though that on August 8, 2003, the BIR issued Revenue
Regulations No. 22-2003 which implemented the revised tax classifications of new
brands based on their current net retail prices through the market survey
conducted pursuant to Revenue Regulations No. 9-2003. Annex "A" of Revenue
Regulations No. 22-2003 lists the result of the market survey and the
corresponding recommended tax classification of the new brands therein aside
from Lucky Strike. However, whether these other brands were illegally reclassified
based on their actual current net retail prices by the BIR must be determined on
a case-to-case basis because it is possible that these brands were classified based
on their actual current net retail price for the first time in the year 2003 just like
Lucky Strike. Thus, we shall not make any pronouncement as to the validity of the
tax classifications of the other brands listed therein.
Finally, it must be noted that RA 9334 introduced changes in the manner by which
the current net retail price of a new brand is determined and how its classification
is permanently fixed, to wit:
New brands, as defined in the immediately following paragraph, shall
initially be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of
R.A. No. 8240 [on January 1, 1997].
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes
are intended by the manufacture or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the
end of three (3) months from the product launch, the Bureau of Internal
Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above,
shall be classified. After the end of eighteen (18) months from such
validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under
which a particular new brand of cigarettes shall be classified; Provided
however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 and December 31, 2003 shall remain in the
classification under which the Bureau of Internal Revenue has
determined them to belong as of December 31, 2003. Such classification
of new brands and brands introduced between January 1, 1997 and
December 31, 2003 shall not be revised except by an act of Congress.
(Emphasis supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order No. 6-
2003 should be deemed modified by the above provisions from the date of
effectivity of RA 9334 on January 1, 2005.
In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b),
II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, as pertinent to cigarettes packed by machine,
are invalid insofar as they grant the BIR the power to reclassify or update the
classification of new brands every two years or earlier. Further, these provisions
are deemed modified upon the effectivity of RA 9334 on January 1, 2005 insofar
as the manner of determining the permanent classification of new brands is
concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its implementing
rules and regulations violate the General Agreement on Tariffs and Trade (GATT)
of 1947, as amended, specifically, Paragraph 2, Article III, Part II:
2. The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess
of those applied, directly or indirectly, to like domestic products.
Moreover, no contracting party shall otherwise apply internal taxes or
other internal charges to imported or domestic products in a manner
contrary to the principles set forth in paragraph 1.
It claims that it is the duty of this Court to correct, in favor of the GATT, whatever
inconsistency exists between the assailed law and the GATT in order to prevent
triggering the international dispute settlement mechanism under the GATT-WTO
Agreement.
We disagree.
The classification freeze provision uniformly applies to all newly introduced brands
in the market, whether imported or locally manufactured. It does not purport to
single out imported cigarettes in order to unduly favor locally produced ones.
Further, petitioner’s evidence was anchored on the alleged unequal tax treatment
between old and new brands which involves a different frame of reference vis-à-
vis local and imported products. Petitioner has, therefore, failed to clearly prove
its case, both factually and legally, within the parameters of the GATT.
At any rate, even assuming arguendo that petitioner was able to prove that the
classification freeze provision violates the GATT, the outcome would still be the
same. The GATT is a treaty duly ratified by the Philippine Senate and under Article
VII, Section 2181 of the Constitution, it merely acquired the status of a statute.82
Applying the basic principles of statutory construction in case of irreconcilable
conflict between statutes, RA 8240, as amended by RA 9334, would prevail over
the GATT either as a later enactment by Congress or as a special law dealing with
the taxation of sin products. Thus, in Abbas v. Commission on Elections,83 we had II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum
occasion to explain: Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are
INVALID insofar as they grant the BIR the power to reclassify or update the
Petitioners premise their arguments on the assumption that the Tripoli classification of new brands every two years or earlier.
Agreement is part of the law of the land, being a binding international
agreement. The Solicitor General asserts that the Tripoli Agreement is SO ORDERED.
neither a binding treaty, not having been entered into by the Republic of
the Philippines with a sovereign state and ratified according to the
provisions of the 1973 or 1987 Constitutions, nor a binding international
agreement.

We find it neither necessary nor determinative of the case to rule on the

nature of the Tripoli Agreement and its binding effect on the Philippine
Government whether under public international or internal Philippine
law. In the first place, it is now the Constitution itself that provides for the
creation of an autonomous region in Muslim Mindanao. The standard for
any inquiry into the validity of R.A. No. 6734 would therefore be what is
so provided in the Constitution. Thus, any conflict between the provisions
of R.A. No. 6734 and the provisions of the Tripoli Agreement will not have
the effect of enjoining the implementation of the Organic Act. Assuming
for the sake of argument that the Tripoli Agreement is a binding treaty or
international agreement, it would then constitute part of the law of the
land. But as internal law it would not be superior to R.A. No. 6734, an
enactment of the Congress of the Philippines, rather it would be in the
same class as the latter [SALONGA, PUBLIC INTERNATIONAL LAW 320 (4th
ed., 1974), citing Head Money Cases, 112 U.S. 580 (1884) and Foster v.
Nelson, 2 Pet. 253 (1829)]. Thus, if at all, R.A. No. 6734 would be
amendatory of the Tripoli Agreement, being a subsequent law. Only a
determination by this Court that R.A. No. 6734 contravenes the
Constitution would result in the granting of the reliefs sought. (Emphasis
supplied)

WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional
Trial Court of Makati, Branch 61, in Civil Case No. 03-1032, is AFFIRMED with
MODIFICATION. As modified, this Court declares that:

(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is
CONSTITUTIONAL; and that

(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended
by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6),