Republic of the Philippines
Under this
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188497 February 19, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
RESOLUTION
VILLARAMA, JR., J.:
For resolution are the Motion for Reconsideration dated May
22, 2012 and Supplemental Motion for Reconsideration dated
December 12, 2012 filed by Pilipinas Shell Petroleum
Corporation (respondent). As directed, the Solicitor General on
behalf of petitioner Commissioner of Internal Revenue filed
their Comment, to which respondent filed its Reply.
In our Decision promulgated on April 25, 2012, we ruled that
the Court of Tax Appeals (CTA) erred in granting respondent's
claim for tax refund because the latter failed to establish a tax
exemption in its favor under Section 135(a) of the National
Internal Revenue Code of 1997 (NIRC).
WHEREFORE, the petition for review on certiorari is GRANTED.
The Decision dated March 25, 2009 and Resolution dated June
24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415
are hereby REVERSED and SET ASIDE. The claims for tax refund
or credit filed by respondent Pilipinas Shell Petroleum
Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.1
Respondent argues that a plain reading of Section 135 of the
NIRC reveals that it is the petroleum products sold to
international carriers which are exempt from excise tax for
which reason no excise taxes are deemed to have been due in
the first place. It points out that excise tax being an indirect
tax, Section 135 in relation to Section 148 should be
interpreted as referring to a tax exemption from the point of
production and removal from the place of production
considering that it is only at that point that an excise tax is
imposed. The situation is unlike the value-added tax (VAT)
which is imposed at every point of turnover – from production
to wholesale, to retail and to end-consumer. Respondent thus
concludes that exemption could only refer to the imposition of
the tax on the statutory seller, in this case the respondent. This
is because when a tax paid by the statutory seller is passed on
to the buyer it is no longer in the nature of a tax but an added
cost to the purchase price of the product sold.
Respondent also contends that our ruling that Section 135 only
prohibits local petroleum manufacturers like respondent from
shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic
oil industry. Requiring local petroleum manufacturers to
absorb the tax burden in the sale of its products to
international carriers is contrary to the State’s policy of
"protecting gasoline dealers and distributors from unfair and
onerous trade conditions," and places them at a competitive
disadvantage since foreign oil producers, particularly those
whose governments with which we have entered into bilateral
service agreements, are not subject to excise tax for the same
transaction. Respondent fears this could lead to cessation of
supply of petroleum products to international carriers,
retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or worse,
shutting down of their production of jet A-1 fuel and aviation
gas due to unprofitability of sustaining operations.
scenario, participation of Filipino capital, management and
labor in the domestic oil industry is effectively diminished.
Lastly, respondent asserts that the imposition by the Philippine
Government of excise tax on petroleum products sold to
international carriers is in violation of the Chicago Convention
on International Aviation ("Chicago Convention") to which it is
a signatory, as well as other international agreements (the
Republic of the Philippines’ air transport agreements with the
United States of America, Netherlands, Belgium and Japan).
In his Comment, the Solicitor General underscores the
statutory basis of this Court’s ruling that the exemption under
Section 135 does not attach to the products. Citing Exxonmobil
Petroleum & Chemical Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue,2 which held that the excise
tax, when passed on to the purchaser, becomes part of the
purchase price, the Solicitor General claims this refutes
respondent’s theory that the exemption attaches to the
petroleum product itself and not to the purchaser for it would
have been erroneous for the seller to pay the excise tax and
inequitable to pass it on to the purchaser if the excise tax
exemption attaches to the product.
As to respondent’s reliance in the cases of Silkair (Singapore)
Pte. Ltd. v. Commissioner of Internal Revenue 3 and Exxonmobil
Petroleum & Chemical Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue,4 the Solicitor General
points out that there was no pronouncement in these cases
that petroleum manufacturers selling petroleum products to
international carriers are exempt from paying excise taxes. In
fact, Exxonmobil even cited the case of Philippine Acetylene
Co, Inc. v. Commissioner of Internal Revenue.5 Further, the
ruling in Maceda v. Macaraig, Jr.6 which confirms that Section
135 does not intend to exempt manufacturers or producers of
petroleum products from the payment of excise tax.
The Court will now address the principal arguments proffered
by respondent: (1) Section 135 intended the tax exemption to
apply to petroleum products at the point of production; (2)
Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue and Maceda v. Macaraig, Jr. are inapplicable in the
light of previous rulings of the Bureau of Internal Revenue
(BIR) and the CTA that the excise tax on petroleum products
sold to international carriers for use or consumption outside
the Philippines attaches to the article when sold to said
international carriers, as it is the article which is exempt from
the tax, not the international carrier; and (3) the Decision of
this Court will not only have adverse impact on the domestic
oil industry but is also in violation of international agreements
on aviation.
Under Section 129 of the NIRC, excise taxes are those applied
to goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition and
to things imported. Excise taxes as used in our Tax Code fall
under two types – (1) specific tax which is based on weight or
volume capacity and other physical unit of measurement, and
(2) ad valorem tax which is based on selling price or other
specified value of the goods. Aviation fuel is subject to specific
tax under Section 148 (g) which attaches to said product "as
soon as they are in existence as such."
On this point, the clarification made by our esteemed
colleague, Associate Justice Lucas P. Bersamin regarding the
traditional meaning of excise tax adopted in our Decision, is
well-taken.
The transformation undergone by the term "excise tax" from
its traditional concept up to its current definition in our Tax
Code was explained in the case of Petron Corporation v.
Tiangco,7 as follows:
Admittedly, the proffered definition of an excise tax as "a tax
upon the performance, carrying on, or exercise of some right,
privilege, activity, calling or occupation" derives from the
compendium American Jurisprudence, popularly referred to as
Am Jur and has been cited in previous decisions of this Court,
including those cited by Petron itself. Such a definition would
not have been inconsistent with previous incarnations of our
Tax Code, such as the NIRC of 1939, as amended, or the NIRC
of 1977 because in those laws the term "excise tax" was not
used at all. In contrast, the nomenclature used in those prior
laws in referring to taxes imposed on specific articles was
"specific tax." Yet beginning with the National Internal
Revenue Code of 1986, as amended, the term "excise taxes"
was used and defined as applicable "to goods manufactured or
produced in the Philippines… and to things imported." This
definition was carried over into the present NIRC of 1997.
Further, these two latest codes categorize two different kinds
of excise taxes: "specific tax" which is imposed and based on
weight or volume capacity or any other physical unit of
measurement; and "ad valorem tax" which is imposed and
based on the selling price or other specified value of the goods.
In other words, the meaning of "excise tax" has undergone a
transformation, morphing from the Am Jur definition to its
current signification which is a tax on certain specified goods
or articles.
The change in perspective brought forth by the use of the term
"excise tax" in a different connotation was not lost on the
departed author Jose Nolledo as he accorded divergent
treatments in his 1973 and 1994 commentaries on our tax
laws. Writing in 1973, and essentially alluding to the Am Jur
definition of "excise tax," Nolledo observed:
Are specific taxes, taxes on property or excise taxes –
In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was
held that specific taxes are property taxes, a ruling which
seems to be erroneous. Specific taxes are truly excise taxes for
the fact that the value of the property taxed is taken into
account will not change the nature of the tax. It is correct to
say that specific taxes are taxes on the privilege to import,
manufacture and remove from storage certain articles
specified by law.
In contrast, after the tax code was amended to classify specific
taxes as a subset of excise taxes, Nolledo, in his 1994
commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers to taxes
applicable to certain specified goods or articles
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported into the
Philippines. They are either specific or ad valorem.
2. Nature of excise taxes. – They are imposed directly
on certain specified goods. (infra) They are, therefore,
taxes on property. (see Medina vs. City of Baguio, 91
Phil. 854.)
A tax is not excise where it does not subject directly the
produce or goods to tax but indirectly as an incident to, or in
connection with, the business to be taxed.
In their 2004 commentaries, De Leon and De Leon restate the
Am Jur definition of excise tax, and observe that the term is
"synonymous with ‘privilege tax’ and [both terms] are often
used interchangeably." At the same time, they offer a caveat
that "[e]xcise tax, as [defined by Am Jur], is not to be confused
with excise tax imposed [by the NIRC] on certain specified
articles manufactured or produced in, or imported into, the
Philippines, ‘for domestic sale or consumption or for any other
disposition.’"
It is evident that Am Jur aside, the current definition of an
excise tax is that of a tax levied on a specific article, rather
than one "upon the performance, carrying on, or the exercise
of an activity."
This current definition was already in place when the Code was
enacted in 1991, and we can only presume that it was what
the Congress had intended as it specified that local
government units could not impose "excise taxes on articles
enumerated under the [NIRC]." This prohibition must pertain
to the same kind of excise taxes as imposed by the NIRC, and
not those previously defined "excise taxes" which were not
integrated or denominated as such in our present tax
law.8 (Emphasis supplied.)
That excise tax as presently understood is a tax on property
has no bearing at all on the issue of respondent’s entitlement
to refund. Nor does the nature of excise tax as an indirect tax
supports respondent’s postulation that the tax exemption
provided in Sec. 135 attaches to the petroleum products
themselves and consequently the domestic petroleum
manufacturer is not liable for the payment of excise tax at the
point of production. As already discussed in our Decision, to
which Justice Bersamin concurs, "the accrual and payment of
the excise tax on the goods enumerated under Title VI of the
NIRC prior to their removal at the place of production are
absolute and admit of no exception." This also underscores the
fact that the exemption from payment of excise tax is
conferred on international carriers who purchased the
petroleum products of respondent.
On the basis of Philippine Acetylene, we held that a tax
exemption being enjoyed by the buyer cannot be the basis of a
claim for tax exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer or seller. The
excise tax imposed on petroleum products under Section 148 is
the direct liability of the manufacturer who cannot thus invoke
the excise tax exemption granted to its buyers who are
international carriers. And following our pronouncement in
Maceda v. Macarig, Jr. we further ruled that Section 135(a)
should be construed as prohibiting the shifting of the burden
of the excise tax to the international carriers who buy
petroleum products from the local manufacturers. Said
international carriers are thus allowed to purchase the
petroleum products without the excise tax component which
otherwise would have been added to the cost or price fixed by
the local manufacturers or distributors/sellers.
Excise tax on aviation fuel used for international flights is
practically nil as most countries are signatories to the 1944
Chicago Convention on International Aviation (Chicago
Convention). Article 249 of the Convention has been
interpreted to prohibit taxation of aircraft fuel consumed for
international transport. Taxation of international air travel is
presently at such low level that there has been an intensified
debate on whether these should be increased to "finance
development rather than simply to augment national tax
revenue" considering the "cross-border environmental
damage" caused by aircraft emissions that contribute to global
warming, not to mention noise pollution and congestion at
airports).10 Mutual exemptions given under bilateral air service
agreements are seen as main legal obstacles to the imposition
of indirect taxes on aviation fuel. In response to present
realities, the International Civil Aviation Organization (ICAO)
has adopted policies on charges and emission-related taxes
and charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax
Code represent our Governments’ compliance with the
Chicago Convention, its subsequent resolutions/annexes, and
the air transport agreements entered into by the Philippine
Government with various countries. The rationale for
exemption of fuel from national and local taxes was expressed
by ICAO as follows:
...The Council in 1951 adopted a Resolution and
Recommendation on the taxation of fuel, a Resolution on the
taxation of income and of aircraft, and a Resolution on taxes
related to the sale or use of international air transport (cf. Doc
7145) which were further amended and amplified by the policy
statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the
uniqueness of civil aviation and the need to accord tax exempt
status to certain aspects of the operations of international air
transport and were adopted because multiple taxation on the
aircraft, fuel, technical supplies and the income of
international air transport, as well as taxes on its sale and use,
were considered as major obstacles to the further
development of international air transport. Non-observance of
the principle of reciprocal exemption envisaged in these
policies was also seen as risking retaliatory action with adverse
repercussions on international air transport which plays a
major role in the development and expansion of international
trade and travel.12
In the 6th Meeting of the Worldwide Air Transport Conference
(ATCONF) held on March 18-22, 2013 at Montreal, among
matters agreed upon was that "the proliferation of various
taxes and duties on air transport could have negative impact
on the sustainable development of air transport and on
consumers." Confirming that ICAO’s policies on taxation
remain valid, the Conference recommended that "ICAO
promote more vigorously its policies and with industry
stakeholders to develop analysis and guidance to States on the
impact of taxes and other levies on air transport."13 Even as
said conference was being held, on March 7, 2013, President
Benigno Aquino III has signed into law Republic Act (R.A.) No.
1037814 granting tax incentives to foreign carriers which
include exemption from the 12% value-added tax (VAT) and
2.5% gross Philippine billings tax (GPBT). GPBT is a form of
income tax applied to international airlines or shipping
companies. The law, based on reciprocal grant of similar tax
exemptions to Philippine carriers, is expected to increase
foreign tourist arrivals in the country.
Indeed, the avowed purpose of a tax exemption is always
"some public benefit or interest, which the law-making body
considers sufficient to offset the monetary loss entailed in the
grant of the exemption."15 The exemption from excise tax of
aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty obligation
pursuant to which our Government supports the promotion
and expansion of international travel through avoidance of
multiple taxation and ensuring the viability and safety of
international air travel. In recent years, developing economies
such as ours focused more serious attention to significant gains
for business and tourism sectors as well. Even without such
recent incidental benefit, States had long accepted the need
for international cooperation in maintaining a capital
intensive, labor intensive and fuel intensive airline industry,
and recognized the major role of international air transport in
the development of international trade and travel.
Under the basic international law principle of pacta sunt
servanda, we have the duty to fulfill our treaty obligations in
good faith. This entails harmonization of national legislation
with treaty provisions. In this case, Sec. 135(a) of the NIRC
embodies our compliance with our undertakings under the
Chicago Convention and various bilateral air service
agreements not to impose excise tax on aviation fuel
purchased by international carriers from domestic
manufacturers or suppliers. In our Decision in this case, we
interpreted Section 135 (a) as prohibiting domestic
manufacturer or producer to pass on to international carriers
the excise tax it had paid on petroleum products upon their
removal from the place of production, pursuant to Article 148
and pertinent BIR regulations. Ruling on respondent’s claim for
tax refund of such paid excise taxes on petroleum products
sold to tax-exempt international carriers, we found no basis in
the Tax Code and jurisprudence to grant the refund of an
"erroneously or illegally paid" tax.
Justice Bersamin argues that "(T)he shifting of the tax burden
by manufacturers-sellers is a business prerogative resulting
from the collective impact of market forces," and that it is
"erroneous to construe Section 135(a) only as a prohibition
against the shifting by the manufacturers-sellers of petroleum
products of the tax burden to international carriers, for such
construction will deprive the manufacturers-sellers of their
business prerogative to determine the prices at which they can
sell their products."
We maintain that Section 135 (a), in fulfillment of international
agreement and practice to exempt aviation fuel from excise
tax and other impositions, prohibits the passing of the excise
tax to international carriers who buys petroleum products
from local manufacturers/sellers such as respondent.
However, we agree that there is a need to reexamine the
effect of denying the domestic manufacturers/sellers’ claim for
refund of the excise taxes they already paid on petroleum
products sold to international carriers, and its serious
implications on our Government’s commitment to the goals
and objectives of the Chicago Convention.
The Chicago Convention, which established the legal
framework for international civil aviation, did not deal
comprehensively with tax matters. Article 24 (a) of the
Convention simply provides that fuel and lubricating oils on
board an aircraft of a Contracting State, on arrival in the
territory of another Contracting State and retained on board
on leaving the territory of that State, shall be exempt from
customs duty, inspection fees or similar national or local duties
and charges. Subsequently, the exemption of airlines from
national taxes and customs duties on spare parts and fuel has
become a standard element of bilateral air service agreements
(ASAs) between individual countries.
The importance of exemption from aviation fuel tax was
underscored in the following observation made by a British
author16 in a paper assessing the debate on using tax to control
aviation emissions and the obstacles to introducing excise duty
on aviation fuel, thus:
Without any international agreement on taxing fuel, it is highly
likely that moves to impose duty on international flights,
either at a domestic or European level, would encourage
'tankering': carriers filling their aircraft as full as possible
whenever they landed outside the EU to avoid paying
tax.1âwphi1 Clearly this would be entirely counterproductive.
Aircraft would be travelling further than necessary to fill up in
low-tax jurisdictions; in addition they would be burning up
more fuel when carrying the extra weight of a full fuel tank.

With the prospect of declining sales of aviation jet fuel sales to

international carriers on account of major domestic oil
companies' unwillingness to shoulder the burden of excise tax,
or of petroleum products being sold to said carriers by local
manufacturers or sellers at still high prices , the practice of
"tankering" would not be discouraged. This scenario does not
augur well for the Philippines' growing economy and the
booming tourism industry. Worse, our Government would be
risking retaliatory action under several bilateral agreements
with various countries. Evidently, construction of the tax
exemption provision in question should give primary
consideration to its broad implications on our commitment
under international agreements.

In view of the foregoing reasons, we find merit in respondent's

motion for reconsideration. We therefore hold that
respondent, as the statutory taxpayer who is directly liable to
pay the excise tax on its petroleum products, is entitled to a
refund or credit of the excise taxes it paid for petroleum
products sold to international carriers, the latter having been
granted exemption from the payment of said excise tax under
Sec. 135 (a) of the NIRC.

WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for

reconsideration filed by respondent Pilipinas Shell
Petroleum Corporation; and

(2) AFFIRM the Decision dated March 25, 2009 and

Resolution dated June 24, 2009 of the Court of Tax
Appeals En Banc in CT A EB No. 415; and DIRECT
petitioner Commissioner of Internal Revenue to
refund or to issue a tax credit certificate to Pilipinas
Shell Petroleum Corporation in the amount of
J195,014,283.00 representing the excise taxes it paid
on petroleum products sold to international carriers
from October 2001 to June 2002.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 189999 June 27, 2012
ANGELES UNIVERSITY FOUNDATION, Petitioner,
vs.
CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of
Angeles City and ENGR. DONATO N. DIZON, in his capacity as Acting
Angeles City Building Official, Respondents.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, which seeks to reverse
and set aside the Decision1 dated July 28, 2009 and Resolution2 dated
October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No.
90591. The CA reversed the Decision3 dated September 21, 2007 of
the Regional Trial Court of Angeles City, Branch 57 in Civil Case No.
12995 declaring petitioner exempt from the payment of building
permit and other fees and ordering respondents to refund the same
with interest at the legal rate.
The factual antecedents:
Petitioner Angeles University Foundation (AUF) is an educational
institution established on May 25, 1962 and was converted into a
non-stock, non-profit education foundation under the provisions of
Republic Act (R.A.) No. 60554 on December 4, 1975.
Sometime in August 2005, petitioner filed with the Office of the City
Building Official an application for a building permit for the
construction of an 11-storey building of the Angeles University
Foundation Medical Center in its main campus located at MacArthur
Highway, Angeles City, Pampanga. Said office issued a Building Permit
Fee Assessment in the amount of P126,839.20. An Order of Payment
was also issued by the City Planning and Development Office, Zoning
Administration Unit requiring petitioner to pay the sum of
P238,741.64 as Locational Clearance Fee.
In separate letters dated November 15, 2005 addressed to
respondents City Treasurer Juliet G. Quinsaat and Acting City Building
Official Donato N. Dizon, petitioner claimed that it is exempt from the
payment of the building permit and locational clearance fees, citing
legal opinions rendered by the Department of Justice (DOJ). Petitioner
also reminded the respondents that they have previously issued
building permits acknowledging such exemption from payment of
building permit fees on the construction of petitioner’s 4-storey AUF
Information Technology Center building and the AUF Professional
Schools building on July 27, 2000 and March 15, 2004, respectively.
Respondent City Treasurer referred the matter to the Bureau of Local
Government Finance (BLGF) of the Department of Finance, which in
turn endorsed the query to the DOJ. Then Justice Secretary Raul M.
Gonzalez, in his letter-reply dated December 6, 2005, cited previous
issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147,
s. 1982) declaring petitioner to be exempt from the payment of
building permit fees. Under the 1st Indorsement dated January 6,
2006, BLGF reiterated the aforesaid opinion of the DOJ stating further
that "xxx the Department of Finance, thru this Bureau, has no
authority to review the resolution or the decision of the DOJ."7
Petitioner wrote the respondents reiterating its request to reverse the
disputed assessments and invoking the DOJ legal opinions which have
been affirmed by Secretary Gonzalez. Despite petitioner’s plea,
however, respondents refused to issue the building permits for the
construction of the AUF Medical Center in the main campus and
renovation of a school building located at Marisol Village. Petitioner
then appealed the matter to City Mayor Carmelo F. Lazatin but no
written response was received by petitioner.8
Consequently, petitioner paid under protest9 the following:
Petitioner likewise paid the following sums as required by the City
Assessor’s Office:
By reason of the above payments, petitioner was issued the
corresponding Building Permit, Wiring Permit, Electrical Permit and
Sanitary Building Permit. On June 9, 2006, petitioner formally
requested the respondents to refund the fees it paid under protest.
Under letters dated June 15, 2006 and August 7, 2006, respondent
City Treasurer denied the claim for refund.
On August 31, 2006, petitioner filed a Complaint before the trial court
seeking the refund of P826,662.99 plus interest at the rate of 12% per
annum, and also praying for the award of attorney’s fees in the
amount of P300,000.00 and litigation expenses. In its
Answer, respondents asserted that the claim of petitioner cannot be
Medical Center (new construction)
Building Permit and Electrical Fee P 217,475.20
Locational Clearance Fee 283,741.64
Fire Code Fee 144,690.00
Total - P 645,906.84
School Building (renovation)
Building Permit and Electrical Fee P 37,857.20
Locational Clearance Fee 6,000.57
Fire Code Fee 5,967.74
Total - P 49,825.51
granted because its structures are not among those mentioned in Sec.
Real Property Tax – Basic Fee P 86,531.10
SEF 43,274.54
Locational Clearance Fee 1,125.00
Total – P130,930.6410
[GRAND TOTAL - P 826,662.99]
209 of the National Building Code as exempted from the building
permit fee. Respondents argued that R.A. No. 6055 should be
considered repealed on the basis of Sec. 2104 of the National Building
Code. Since the disputed assessments are regulatory in nature, they
are not taxes from which petitioner is exempt. As to the real property
taxes imposed on petitioner’s property located in Marisol Village,
respondents pointed out that said premises will be used as a school
dormitory which cannot be considered as a use exclusively for
educational activities.
Petitioner countered that the subject building permit are being
collected on the basis of Art. 244 of the Implementing Rules and
Regulations of the Local Government Code, which impositions are
really taxes considering that they are provided under the chapter on
"Local Government Taxation" in reference to the "revenue raising
power" of local government units (LGUs). Moreover, petitioner
contended that, as held in Philippine Airlines, Inc. v. Edu, fees may be
regarded as taxes depending on the purpose of its exaction. In any
case, petitioner pointed out that the Local Government Code of
1991 provides in Sec. 193 that non-stock and non-profit educational
institutions like petitioner retained the tax exemptions or incentives
which have been granted to them. Under Sec. 8 of R.A. No. 6055 and
applicable jurisprudence and DOJ rulings, petitioner is clearly exempt
from the payment of building permit fees.15
On September 21, 2007, the trial court rendered judgment in favor of
the petitioner and against the respondents. The dispositive portion of
the trial court’s decision16 reads:
WHEREFORE, premises considered, judgment is rendered as follows:
a. Plaintiff is exempt from the payment of building permit
and other fees Ordering the Defendants to refund the total amount of
Eight Hundred Twenty Six Thousand Six Hundred Sixty Two Pesos and
99/100 Centavos (P826,662.99) plus legal interest thereon at the rate
of twelve percent (12%) per annum commencing on the date of extra-
judicial demand or June 14, 2006, until the aforesaid amount is fully
paid.
b. Finding the Defendants liable for attorney’s fees in the
amount of Seventy Thousand Pesos (Php70,000.00), plus litigation
expenses.
c. Ordering the Defendants to pay the costs of the suit.
SO ORDERED.17
Respondents appealed to the CA which reversed the trial court,
holding that while petitioner is a tax-free entity, it is not exempt from
the payment of regulatory fees. The CA noted that under R.A. No.
6055, petitioner was granted exemption only from income tax derived
from its educational activities and real property used exclusively for
educational purposes. Regardless of the repealing clause in
the National Building Code, the CA held that petitioner is still not
exempt because a building permit cannot be considered as the other
"charges" mentioned in Sec. 8 of R.A. No. 6055 which refers to
impositions in the nature of tax, import duties, assessments and other
collections for revenue purposes, following the ejusdem generisrule.
The CA further stated that petitioner has not shown that the fees
collected were excessive and more than the cost of surveillance,
inspection and regulation. And while petitioner may be exempt from
the payment of real property tax, petitioner in this case merely
alleged that "the subject property is to be used actually, directly and
exclusively for educational purposes," declaring merely that such
premises is intended to house the sports and other facilities of the
university but by reason of the occupancy of informal settlers on the
area, it cannot yet utilize the same for its intended use. Thus, the CA
concluded that petitioner is not entitled to the refund of building
permit and related fees, as well as real property tax it paid under
protest.
Petitioner filed a motion for reconsideration which was denied by the
CA.
Hence, this petition raising the following grounds:
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR
AND DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN
ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS OF THE
HONORABLE COURT AND HAS DEPARTED FROM THE ACCEPTED AND
USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE
HONORABLE COURT’S EXERCISE OF ITS POWER OF SUPERVISION
CONSIDERING THAT:
I. IN REVERSING THE TRIAL COURT’S DECISION DATED 21
SEPTEMBER 2007, THE COURT OF APPEALS EFFECTIVELY WITHDREW
THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-
PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 WHICH
WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF
APPEALS TO DO.
A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE
AND EFFECT. HENCE, THE COURT OF APPEALS ERRED WHEN IT RULED
IN THE QUESTIONED DECISION THAT NON-STOCK, NON-PROFIT
EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.
B. THE COURT OF APPEALS’ APPLICATION OF THE PRINCIPLE
OF EJUSDEM GENERIS IN RULING IN THE QUESTIONED DECISION THAT
THE TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT"
UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE BUILDING PERMIT
AND OTHER RELATED FEES AND/OR CHARGES IS BASED ON ITS
ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES,
IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF
EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL
FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE
PURPOSES.
C. EVEN ASSUMING THAT THE BUILDING PERMIT AND
OTHER RELATED FEES AND/OR CHARGES ARE NOT INCLUDED IN THE
TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT" UNDER
SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX
MEASURE AND THEREFORE, STILL COVERED UNDER THE PRIVILEGE OF
EXEMPTION.
II. THE COURT OF APPEALS’ DENIAL OF PETITIONER AUF’S
EXEMPTION FROM REAL PROPERTY TAXES CONTAINED IN ITS
QUESTIONED DECISION AND QUESTIONED RESOLUTION IS CONTRARY
TO APPLICABLE LAW AND JURISPRUDENCE.
Petitioner stresses that the tax exemption granted to educational
stock corporations which have converted into non-profit foundations
was broadened to include any other charges imposed by the
Government as one of the incentives for such conversion. These
incentives necessarily included exemption from payment of building
permit and related fees as otherwise there would have been no
incentives for educational foundations if the privilege were only
limited to exemption from taxation, which is already provided under
the Constitution.
Petitioner further contends that this Court has consistently held in
several cases that the primary purpose of the exaction determines its
nature. Thus, a charge of a fixed sum which bears no relation to the
cost of inspection and which is payable into the general revenue of
the state is a tax rather than an exercise of the police power. The
standard set by law in the determination of the amount that may be
imposed as license fees is such that is commensurate with the cost of
regulation, inspection and licensing. But in this case, the amount
representing the building permit and related fees and/or charges is
such an exorbitant amount as to warrant a valid imposition; such
amount exceeds the probable cost of regulation. Even with the
alleged criteria submitted by the respondents (e.g., character of
occupancy or use of building/structure, cost of construction, floor
area and height), and the construction by petitioner of an 11-storey
building, the costs of inspection will not amount to P645,906.84,
presumably for the salary of inspectors or employees, the expenses of
transportation for inspection and the preparation and reproduction of
documents. Petitioner thus concludes that the disputed fees are
substantially and mainly for purposes of revenue rather than
regulation, so that even these fees cannot be deemed "charges"
mentioned in Sec. 8 of R.A. No. 6055, they should properly be treated
as tax from which petitioner is exempt.
In their Comment, respondents maintain that petitioner is not exempt
from the payment of building permit and related fees since the only
exemptions provided in the National Building Code are public
buildings and traditional indigenous family dwellings. Inclusio unius
est exclusio alterius. Because the law did not include petitioner’s
buildings from those structures exempt from the payment of building
permit fee, it is therefore subject to the regulatory fees imposed
under the National Building Code.
Respondents assert that the CA correctly distinguished a building
permit fee from those "other charges" mentioned in Sec. 8 of R.A. No.
6055. As stated by petitioner itself, charges refer to pecuniary
liability, as rents, and fees against persons or property. Respondents
point out that a building permit is classified under the term "fee." A
fee is generally imposed to cover the cost of regulation as activity or
privilege and is essentially derived from the exercise of police power;
on the other hand, impositions for services rendered by the local
government units or for conveniences furnished, are referred to as
"service charges".
Respondents also disagreed with petitioner’s contention that the fees
imposed and collected are exorbitant and exceeded the probable
expenses of regulation. These fees are based on computations and
assessments made by the responsible officials of the City Engineer’s
Office in accordance with the Schedule of Fees and criteria provided
in the National Building Code. The bases of assessment cited by
petitioner (e.g. salary of employees, expenses of transportation and
preparation and reproduction of documents) refer to charges and fees
on business and occupation under Sec. 147 of the Local Government
Code, which do not apply to building permit fees. The parameters set
by the National Building Code can be considered as complying with
the reasonable cost of regulation in the assessment and collection of
building permit fees. Respondents likewise contend that the
presumption of regularity in the performance of official duty applies
in this case. Petitioner should have presented evidence to prove its
allegations that the amounts collected are exorbitant or
unreasonable.
For resolution are the following issues: (1) whether petitioner is
exempt from the payment of building permit and related fees
imposed under the National Building Code; and (2) whether the parcel
of land owned by petitioner which has been assessed for real
property tax is likewise exempt.
R.A. No. 6055 granted tax exemptions to educational institutions like
petitioner which converted to non-stock, non-profit educational
foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt from the payment of all
taxes, import duties, assessments, and other charges imposed by the
Government onall income derived from or property, real or personal,
used exclusively for the educational activities of the
Foundation.(Emphasis supplied.)
On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued
adopting the National Building Code of the Philippines. The said Code
requires every person, firm or corporation, including any agency or
instrumentality of the government to obtain a building permit for any
construction, alteration or repair of any building or
structure.19Building permit refers to "a document issued by the
Building Official x x x to an owner/applicant to proceed with the
construction, installation, addition, alteration, renovation,
conversion, repair, moving, demolition or other work activity of a
specific project/building/structure or portions thereof after the
accompanying principal plans, specifications and other pertinent
documents with the duly notarized application are found satisfactory
and substantially conforming with the National Building Code of the
Philippines x x x and its Implementing Rules and Regulations
(IRR)."20Building permit fees refers to the basic permit fee and other
charges imposed under the National Building Code.
Exempted from the payment of building permit fees are: (1) public
buildings and (2) traditional indigenous family dwellings.21 Not being
expressly included in the enumeration of structures to which the
building permit fees do not apply, petitioner’s claim for exemption
rests solely on its interpretation of the term "other charges imposed
by the National Government" in the tax exemption clause of R.A. No.
6055.
A "charge" is broadly defined as the "price of, or rate for, something,"
while the word "fee" pertains to a "charge fixed by law for services of
public officers or for use of a privilege under control of
government."22 As used in the Local Government Code of 1991 (R.A.
No. 7160), charges refers to pecuniary liability, as rents or fees against
persons or property, while fee means a charge fixed by law or
ordinance for the regulation or inspection of a business or activity.23
That "charges" in its ordinary meaning appears to be a general term
which could cover a specific "fee" does not support petitioner’s
position that building permit fees are among those "other charges"
from which it was expressly exempted. Note that the "other charges"
mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words
"imposed by the Government on all x x x property used exclusively for
the educational activities of the foundation." Building permit fees are
not impositions on property but on the activity subject of government
regulation. While it may be argued that the fees relate to particular
properties, i.e., buildings and structures, they are actually imposed on
certain activities the owner may conduct either to build such
structures or to repair, alter, renovate or demolish the same. This is
evident from the following provisions of the National Building Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the State to safeguard life,
health, property, and public welfare, consistent with theprinciples of
sound environmental management and control; and tothis end, make
it the purpose of this Code to provide for allbuildings and structures, a
framework of minimum standards and requirements to regulate and
control their location, site, design quality of materials, construction,
use, occupancy, and maintenance.
Section 103. Scope and Application
(a) The provisions of this Code shall apply to the design,location,
sitting, construction, alteration, repair,conversion, use, occupancy,
maintenance, moving, demolitionof, and addition to public and
private buildings andstructures, except traditional indigenous family
dwellingsas defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any agency
orinstrumentality of the government shall erect, construct, alter,
repair, move, convert or demolish any building or structure or
causethe same to be done without first obtaining a building
permittherefor from the Building Official assigned in the place where
thesubject building is located or the building work is to be done.
(Italics supplied.)
That a building permit fee is a regulatory imposition is highlighted by
the fact that in processing an application for a building permit, the
Building Official shall see to it that the applicant satisfies and
conforms with approved standard requirements on zoning and land
use, lines and grades, structural design, sanitary and sewerage,
environmental health, electrical and mechanical safety as well as with
other rules and regulations implementing the National Building
Code.24 Thus, ancillary permits such as electrical permit, sanitary
permit and zoning clearance must also be secured and the
corresponding fees paid before a building permit may be issued. And
as can be gleaned from the implementing rules and regulations of the
National Building Code, clearances from various government
authorities exercising and enforcing regulatory functions affecting
buildings/structures, like local government units, may be further
required before a building permit may be issued.25
Since building permit fees are not charges on property, they are not
impositions from which petitioner is exempt.
As to petitioner’s argument that the building permit fees collected by
respondents are in reality taxes because the primary purpose is to
raise revenues for the local government unit, the same does not hold
water.
A charge of a fixed sum which bears no relation at all to the cost of
inspection and regulation may be held to be a tax rather than an
exercise of the police power.26 In this case, the Secretary of Public
Works and Highways who is mandated to prescribe and fix the
amount of fees and other charges that the Building Official shall
collect in connection with the performance of regulatory
functions,27 has promulgated and issued the Implementing Rules and
Regulations28 which provide for the bases of assessment of such fees,
as follows:
1. Character of occupancy or use of building
2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I),
8,000 (F), 6,000 (J)
3. Floor area
4. Height
Petitioner failed to demonstrate that the above bases of assessment
were arbitrarily determined or unrelated to the activity being
regulated. Neither has petitioner adduced evidence to show that the
rates of building permit fees imposed and collected by the
respondents were unreasonable or in excess of the cost of regulation
and inspection.
In Chevron Philippines, Inc. v. Bases Conversion Development
Authority,29 this Court explained:
In distinguishing tax and regulation as a form of police power, the
determining factor is the purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it will be deemed a tax
even though the measure results in some form of regulation. On the
other hand, if the purpose is primarily to regulate, then it is deemed a
regulation and an exercise of the police power of the state, even
though incidentally, revenue is generated. Thus, in Gerochi v.
Department of Energy, the Court stated:
"The conservative and pivotal distinction between these two (2)
powers rests in the purpose for which the charge is made. If
generation of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that revenue is incidentally raised does not make
the imposition a tax."30(Emphasis supplied.)
Concededly, in the case of building permit fees imposed by the
National Government under the National Building Code, revenue is
incidentally generated for the benefit of local government units. Thus:
Section 208. Fees
Every Building Official shall keep a permanent record and accurate
account of all fees and other charges fixed and authorized by the
Secretary to be collected and received under this Code.
Subject to existing budgetary, accounting and auditing rules and
regulations, the Building Official is hereby authorized to retain not
more than twenty percent of his collection for the operating expenses
of his office.
The remaining eighty percent shall be deposited with the provincial,
city or municipal treasurer and shall accrue to the General Fund of the
province, city or municipality concerned. Petitioner’s reliance on Sec.
193 of the Local Government Code of 1991 is likewise misplaced. Said
provision states:
SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009
otherwise provided in this Code, tax exemptions or incentives granted and Resolution dated October 12, 2009 of the Court of Appeals in CA-
to, or presently enjoyed by all persons, whether natural or juridical, G.R. CV No. 90591 are AFFIRMED.
including government-owned or controlled corporations, except local No pronouncement as to costs.
water districts, cooperatives duly registered under R.A. No. 6938, SO ORDERED.
non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Emphasis
supplied.)

Considering that exemption from payment of regulatory fees was not

among those "incentives" granted to petitioner under R.A. No. 6055,
there is no such incentive that is retained under the Local
Government Code of 1991. Consequently, no reversible error was
committed by the CA in ruling that petitioner is liable to pay the
subject building permit and related fees.

Now, on petitioner’s claim that it is exempted from the payment of

real property tax assessed against its real property presently occupied
by informal settlers.
Section 28(3), Article VI of the 1987 Constitution provides:
xxxx
(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly and exclusively used
for religious, charitable or educational purposes shall be exempt from
taxation.
x x x x (Emphasis supplied.)
Section 234(b) of the Local Government Code of 1991 implements the
foregoing constitutional provision by declaring that --
SECTION 234. Exemptions from Real Property Tax.– The following are
exempted from payment of the real property tax:
xxxx
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries and
all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes;
x x x x (Emphasis supplied.)
In Lung Center of the Philippines v. Quezon City,31 this Court held that
only portions of the hospital actually, directly and exclusively used for
charitable purposes are exempt from real property taxes, while those
portions leased to private entities and individuals are not exempt
from such taxes. We explained the condition for the tax exemption
privilege of charitable and educational institutions, as follows:
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law. Solely is
synonymous with exclusively.1âwphi1

What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from
the real property that is determinative of whether the property is
used for tax-exempt purposes.32 (Emphasis and underscoring
supplied.)

Petitioner failed to discharge its burden to prove that its real property
is actually, directly and exclusively used for educational purposes.
While there is no allegation or proof that petitioner leases the land to
its present occupants, still there is no compliance with the
constitutional and statutory requirement that said real property is
actually, directly and exclusively used for educational purposes. The
respondents correctly assessed the land for real property taxes for the
taxable period during which the land is not being devoted solely to
petitioner’s educational activities. Accordingly, the CA did not err in
ruling that petitioner is likewise not entitled to a refund of the real
property tax it paid under protest.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and
THE COURT OF TAX APPEALS, respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of
Appeals promulgated on April 8, 1996 in CA-G.R. SP No.
36975 1 affirming the Court of Tax Appeals decision in CTA Case No.
4872 dated March 16, 1995 2 ordering it to pay the amount of
P110,677,668.52 as excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest
from August 6, 1994 until fully paid pursuant to Sections 248 and 249
of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex
asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of
1991 as well as the 1st and 2nd quarter of 1992 in the total amount of
P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL
EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16
19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
————— ————— —————— ——————
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
————— ————— —————— ——————
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
————— ————— —————— ——————
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
————— ————— —————— ——————
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3
========= ========= ========= =========
In a letter dated August 20, 1992, 4 Philex protested the demand for
payment of the tax liabilities stating that it has pending claims for VAT
input credit/refund for the taxes it paid for the years 1989 to 1991 in
the amount of P119,977,037.02 plus interest. Therefore these claims
for tax credit/refund should be applied against the tax liabilities,
citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit
in Philex's position. Since these pending claims have not yet been
established or determined with certainty, it follows that no legal
compensation can take place. Hence, the BIR reiterated its demand
that Philex settle the amount plus interest within 30 days from the
receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT
input credit/refund against its excise tax obligation, Philex raised the
issue to the Court of Tax Appeals on November 6, 1992. 7 In the
course of the proceedings, the BIR issued Tax Credit Certificate SN
001795 in the amount of P13,144,313.88 which, applied to the total
tax liabilities of Philex of P123,821,982.52; effectively lowered the
latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex
to pay the remaining balance of P110,677,688.52 plus interest,
elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must
be liquidated and demandable. "Liquidated" debts are those where
the exact amount has already been determined (PARAS, Civil Code of
the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the
instant case, the claims of the Petitioner for VAT refund is still
pending litigation, and still has to be determined by this Court (C.T.A.
Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the
government cannot, therefore, be set-off against the unliquidated
claim which Petitioner conceived to exist in its favor (see Compañia
General de Tabacos vs. French and Unson, No. 14027, November 8,
1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be
subject to set-off on compensation since claim for taxes is not a debt
or contract." 9 The dispositive portion of the CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack
of merit and Petitioner is hereby ORDERED to PAY the Respondent
the amount of P110,677,668.52 representing excise tax liability for
the period from the 2nd quarter of 1991 to the 2nd quarter of 1992
plus 20% annual interest from August 6, 1994 until fully paid pursuant
to Section 248 and 249 of the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the
Court of Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless, on
April 8, 1996, the Court of Appeals a Affirmed the Court of Tax
Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby
DISMISSED and the decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless,
denied in a Resolution dated July 11, 1996. 13
However, a few days after the denial of its motion for
reconsideration, Philex was able to obtain its VAT input credit/refund
not only for the taxable year 1989 to 1991 but also for 1992 and 1994,
computed as follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex
now contends that the same should, ipso jure, off-set its excise tax
liabilities 15 since both had already become "due and demandable, as
well as fully liquidated;" 16 hence, legal compensation can properly
take place.
We see no merit in this contention. In several instances prior to the
instant case, we have already made the pronouncement that taxes
cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each
other. 17 There is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are
due to the Government in its sovereign capacity. 18 We find no cogent
reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate
Court, 19 we categorically held that taxes cannot be subject to set-off
or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a
lawsuit against the government.
The ruling in Francia has been applied to the subsequent case
of Caltex Philippines, Inc. v. Commission on Audit, 20which reiterated
that:
. . . a taxpayer may not offset taxes due from the claims that he may
have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be
set-off.
Further, Philex's reliance on our holding in Commissioner of Internal
Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending
refund may be set off against an existing tax liability even though the
refund has not yet been approved by the Commissioner, 21 is no
longer without any support in statutory law.
It is important to note, that the premise of our ruling in the
aforementioned case was anchored on Section 51 (d) of the National
Revenue Code of 1939. However, when the National Internal Revenue
Code of 1977 was enacted, the same provision upon which
the Itogon-Suyoc pronouncement was based was
omitted. 22 Accordingly, the doctrine enunciated in Itogon-
Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it
asserts that the imposition of surcharge and interest for the non-
payment of the excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it
still has pending claims for VAT input credit/refund with BIR. 23
We fail to see the logic of Philex's claim for this is an outright
disregard of the basic principle in tax law that taxes are the lifeblood
of the government and so should be collected without unnecessary
hindrance. 24 Evidently, to countenance Philex's whimsical reason
would render ineffective our tax collection system. Too simplistic, it
finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax
liabilities on the ground that it has a pending tax claim for refund or
credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain. 25 Hence, a tax does not
depend upon the consent of the taxpayer. 26 If any taxpayer can defer
the payment of taxes by raising the defense that it still has a pending
claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that
the collection of the tax is contingent on the result of the lawsuit it
filed against the government. 27 Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit
and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input
claim/refund with the government is immaterial for the imposition of
charges and penalties prescribed under Section 248 and 249 of the
Tax Code of 1977. The payment of the surcharge is mandatory and the
BIR is not vested with any authority to waive the collection
thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar
to the one advanced by Philex in justifying its non-payment of its tax
liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the
National Internal Revenue Code of 1977, which requires the refund of
input taxes within 60 days, 31 when it took five years for the latter to
grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a
claimant has the burden of proof to establish the factual basis of his
or her claim for tax credit or refund, 33 however, once the claimant
has submitted all the required documents it is the function of the BIR
to assess these documents with purposeful dispatch. After all, since
taxpayers owe honestly to government it is but just that government
render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to
1991 but the refund of these erroneously paid taxes was only granted
in 1996. Obviously, had the BIR been more diligent and judicious with
their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of
wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge of its function. As aptly
held in Roxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays the
golden egg" And, in order to maintain the general public's trust and
confidence in the Government this power must be used justly and not
treacherously.
Despite our concern with the lethargic manner by which the BIR
handled Philex's tax claim, it is a settled rule that in the performance
of governmental function, the State is not bound by the neglect of its
agents and officers. Nowhere is this more true than in the field of
taxation. 37 Again, while we understand Philex's predicament, it must
be stressed that the same is not a valid reason for the non-payment of
its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy
against public servants or employees, especially BIR examiners who,
in investigating tax claims are seen to drag their feet needlessly. First,
if the BIR takes time in acting upon the taxpayer's claim for refund,
the latter can seek judicial remedy before the Court of Tax Appeals in
the manner prescribed by law. 38 Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil
Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because
a public servant or employee refuses or neglects, without just cause,
to perform his official duty may file an action for damages and other
relief against the latter, without prejudice to any disciplinary action
that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue
Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum
collected in the performance of duty or wilfully neglecting to perform,
any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and
unreasonable delay in the performance of official duties. 39 In no
uncertain terms must we stress that every public employee or servant
must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service.
The BIR, being the government collecting arm, must and should do no
less. It simply cannot be apathetic and laggard in rendering service to
the taxpayer if it wishes to remain true to its mission of hastening the
country's development. We take judicial notice of the taxpayer's
generally negative perception towards the BIR; hence, it is up to the
latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in
performing its duties, still, the same cannot justify Philex's non-
payment of its tax liabilities. The adage "no one should take the law
into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April
8, 1996 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Kapunan and Purisima, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal
Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court
of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of
the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for
petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of
the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos,
presiding, seeking to annul certain orders of the court and for an
order in this Court directing the respondent court below to
execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C.
Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared
as final and executory the order for the payment by the estate of
the estate and inheritance taxes, charges and penalties,
amounting to P40,058.55, issued by the Court of First Instance of
Leyte in, special proceedings No. 14 entitled "In the matter of the
Intestate Estate of the Late Walter Scott Price." In order to
enforce the claims against the estate the fiscal presented a
petition dated June 21, 1961, to the court below for the execution
of the judgment. The petition was, however, denied by the court
which held that the execution is not justifiable as the Government
is indebted to the estate under administration in the amount of
P262,200. The orders of the court below dated August 20, 1960
and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs.
Simeona K. Price, Administratrix of the estate of her late husband
Walter Scott Price and Director Zoilo Castrillo of the Bureau of
Lands dated September 19, 1956 and acknowledged before
Notary Public Salvador V. Esguerra, legal adviser in Malacañang to
Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated
August 2, 1958, directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act No.
2700 appropriating the sum of P262.200.00 for the payment to
the Leyte Cadastral Survey, Inc., represented by the administratrix
Simeona K. Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July
30, 1960 in G.R. No. L-14674, be deducted from the amount of
P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to
her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20,
1960 and it orders that the payment of the claim of the Collector
of Internal Revenue be deferred until the Government shall have
paid its accounts to the administratrix herein amounting to
P262,200.00. It may not be amiss to repeat that it is only fair for
the Government, as a debtor, to its accounts to its citizens-
creditors before it can insist in the prompt payment of the latter's
account to it, specially taking into consideration that the amount
due to the Government draws interests while the credit due to the
present state does not accrue any interest. (Order of September
28, 1960)
The petition to set aside the above orders of the court below and
for the execution of the claim of the Government against the
estate must be denied for lack of merit. The ordinary procedure
by which to settle claims of indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to
present a claim before the probate court so that said court may
order the administrator to pay the amount thereof. To such effect
is the decision of this Court in Aldamiz vs. Judge of the Court of
First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the
Rules of Court for the payment of debts and expenses of
administration. The proper procedure is for the court to order the
sale of personal estate or the sale or mortgage of real property of
the deceased and all debts or expenses of administrator and with
the written notice to all the heirs legatees and devisees residing in
the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made,
the regulations contained in Rule 90, section 7, should be
complied with.1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs
have entered into possession of their respective portions in the
estate prior to settlement and payment of the debts and expenses
of administration and it is later ascertained that there are such
debts and expenses to be paid, in which case "the court having
jurisdiction of the estate may, by order for that purpose, after
hearing, settle the amount of their several liabilities, and order
how much and in what manner each person shall contribute, and
may issue execution if circumstances require" (Rule 89, section
6; see also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.
The legal basis for such a procedure is the fact that in the testate
or intestate proceedings to settle the estate of a deceased person,
the properties belonging to the estate are under the jurisdiction of
the court and such jurisdiction continues until said properties
have been distributed among the heirs entitled thereto. During
the pendency of the proceedings all the estate is in custodia
legis and the proper procedure is not to allow the sheriff, in case
of the court judgment, to seize the properties but to ask the court
for an order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is
the fact that the court having jurisdiction of the estate had found
that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act
No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate
for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore,
takes place by operation of law, in accordance with the provisions
of Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are
present, compensation takes effect by operation of law, and
extinguished both debts to the concurrent amount, eventhough
the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to
execute the judgment for taxes against the estate of the deceased
Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the
petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, definition14 of Gross Philippine Billings under Section 28(A)(3)(a)
Regala and Makalintal, JJ., concur. of the 1997 National Internal Revenue Code:
Bengzon, C.J., took no part.
SEC. 28. Rates of Income Tax on Foreign Corporations. -
January 11, 2016
G.R. No. 169507 (A) Tax on Resident Foreign Corporations. -
AIR CANADA, Petitioner,
vs.
....
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.: (3) International Carrier. - An international carrier doing business
An offline international air carrier selling passage tickets in the in the Philippines shall pay a tax of two and onehalf percent (2
Philippines, through a general sales agent, is a resident foreign 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
corporation doing business in the Philippines. As such, it is taxable
under Section 28(A)(l), and not Section 28(A)(3) of the 1997 (a) International Air Carrier. - ‘Gross Philippine Billings’ refers to
National Internal Revenue Code, subject to any applicable tax the amount of gross revenue derived from carriage of persons,
treaty to which the Philippines is a signatory. Pursuant to Article 8 excess baggage, cargo and mail originating from the Philippines in
of the Republic of the Philippines-Canada Tax Treaty, Air Canada a continuous and uninterrupted flight, irrespective of the place of
may only be imposed a maximum tax of 1 ½% of its gross sale or issue and the place of payment of the ticket or passage
revenues earned from the sale of its tickets in the Philippines. document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
This is a Petition for Review1 appealing the August 26, 2005 Philippine Billings if the passenger boards a plane in a port or
Decision2 of the Court of Tax Appeals En Banc, which in turn point in the Philippines: Provided, further, That for a flight which
affirmed the December 22, 2004 Decision3 and April 8, 2005 originates from the Philippines, but transshipment of passenger
Resolution4 of the Court of Tax Appeals First Division denying Air takes place at any port outside the Philippines on another airline,
Canada’s claim for refund. only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment
shall form part of Gross Philippine Billings. (Emphasis supplied)
Air Canada is a "foreign corporation organized and existing under
the laws of Canada[.]"5 On April 24, 2000, it was granted an
authority to operate as an offline carrier by the Civil Aeronautics To prevent the running of the prescriptive period, Air Canada filed
Board, subject to certain conditions, which authority would expire a Petition for Review before the Court of Tax Appeals on
on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not November 29, 2002.15 The case was docketed as C.T.A. Case No.
have flights originating from or coming to the Philippines [and 6572.16
does not] operate any airplane [in] the Philippines[.]" 7
On December 22, 2004, the Court of Tax Appeals First Division
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., rendered its Decision denying the Petition for Review and, hence,
Corp. (Aerotel) as its general sales agent in the the claim for refund.17 It found that Air Canada was engaged in
Philippines.8 Aerotel "sells [Air Canada’s] passage documents in business in the Philippines through a local agent that sells airline
the Philippines."9 tickets on its behalf. As such, it should be taxed as a resident
foreign corporation at the regular rate of 32%.18 Further,
according to the Court of Tax Appeals First Division, Air Canada
For the period ranging from the third quarter of 2000 to the
was deemed to have established a "permanent
second quarter of 2002, Air Canada, through Aerotel, filed
establishment"19 in the Philippines under Article V(2)(i) of the
quarterly and annual income tax returns and paid the income tax
Republic of the Philippines-Canada Tax Treaty20 by the
on Gross Philippine Billings in the total amount of
appointment of the local sales agent, "in which [the] petitioner
₱5,185,676.77,10 detailed as follows:hi1
uses its premises as an outlet where sales of [airline] tickets are
made[.]"21
Applicable Date Filed/Paid Amount of Tax
Quarter[/]Year Air Canada seasonably filed a Motion for Reconsideration, but the
Motion was denied in the Court of Tax Appeals First Division’s
3rd Qtr 2000 November 29, P 395,165.00
Resolution dated April 8, 2005 for lack of merit.22 The First
2000
Division held that while Air Canada was not liable for tax on its
Annual ITR 2000 April 16, 381,893.59 Gross Philippine Billings under Section 28(A)(3), it was
2001 nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the
1st Qtr 2001 May 30, 2001 522,465.39 Philippines pursuant to Section 28(A)(1).23
2nd Qtr 2001 August 29, 2001 1,033,423.34
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals
3rd Qtr 2001 November 29, 765,021.28 En Banc.24 The appeal was docketed as CTA EB No. 86.25
2001

Annual ITR 2001 April 15, 2002 328,193.93 In the Decision dated August 26, 2005, the Court of Tax Appeals En
Banc affirmed the findings of the First Division.26 The En Banc
1st Qtr 2002 May 30, 2002 594,850.13 ruled that Air Canada is subject to tax as a resident foreign
corporation doing business in the Philippines since it sold airline
2nd Qtr 2002 August 29, 2002 1,164,664.11 tickets in the Philippines.27 The Court of Tax Appeals En Banc
TOTAL P 11 disposed thus:
5,185,676.77
WHEREFORE, premises considered, the instant petition is
On November 28, 2002, Air Canada filed a written claim for refund
hereby DENIED DUE COURSE, and accordingly, DISMISSED for lack
of alleged erroneously paid income taxes amounting to
of merit.28
₱5,185,676.77 before the Bureau of Internal Revenue,12 Revenue
District Office No. 47-East Makati.13It found basis from the revised
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international
carrier selling passage documents through a general sales agent in
the Philippines, is a resident foreign corporation within the
meaning of Section 28(A)(1) of the 1997 National Internal Revenue
Code;
Second, whether petitioner Air Canada is subject to the 2½% tax
on Gross Philippine Billings pursuant to Section 28(A)(3). If not,
whether an offline international carrier selling passage documents
through a general sales agent can be subject to the regular
corporate income tax of 32%30 on taxable income pursuant to
Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty
applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is
enforceable;
b. Whether the appointment of a local general sales agent in the
Philippines falls under the definition of "permanent
establishment" under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of
₱5,185,676.77 pertaining allegedly to erroneously paid tax on
Gross Philippine Billings from the third quarter of 2000 to the
second quarter of 2002.
Petitioner claims that the general provision imposing the regular
corporate income tax on resident foreign corporations provided
under Section 28(A)(1) of the 1997 National Internal Revenue
Code does not apply to "international carriers,"31 which are
especially classified and taxed under Section 28(A)(3).32 It adds
that the fact that it is no longer subject to Gross Philippine Billings
tax as ruled in the assailed Court of Tax Appeals Decision "does
not render it ipso facto subject to 32% income tax on taxable
income as a resident foreign corporation."33 Petitioner argues that
to impose the 32% regular corporate income tax on its income
would violate the Philippine government’s covenant under Article
VIII of the Republic of the Philippines-Canada Tax Treaty not to
impose a tax higher than 1½% of the carrier’s gross revenue
derived from sources within the Philippines.34 It would also
allegedly result in "inequitable tax treatment of on-line and off-
line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of
airline tickets in the Philippines was income from services and not
income from sales of personal property.36 Petitioner cites the
deliberations of the Bicameral Conference Committee on House
Bill No. 9077 (which eventually became the 1997 National Internal
Revenue Code), particularly Senator Juan Ponce Enrile’s
statement,37 to reveal the "legislative intent to treat the revenue
derived from air carriage as income from services, and that the
carriage of passenger or cargo as the activity that generates the
income."38 Accordingly, applying the principle on the situs of
taxation in taxation of services, petitioner claims that its income
derived "from services rendered outside the Philippines [was] not
subject to Philippine income taxation."39
Petitioner further contends that by the appointment of Aerotel as
its general sales agent, petitioner cannot be considered to have a
"permanent establishment"40 in the Philippines pursuant to
Article V(6) of the Republic of the Philippines-Canada Tax
Treaty.41 It points out that Aerotel is an "independent general
sales agent that acts as such for . . . other international airline
companies in the ordinary course of its business."42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission
for its services.43 Petitioner states that even the Bureau of Internal
Revenue—through VAT Ruling No. 003-04 dated February 14,
2004—has conceded that an offline international air carrier,
having no flight operations to and from the Philippines, is not
deemed engaged in business in the Philippines by merely
appointing a general sales agent.44 Finally, petitioner maintains
that its "claim for refund of erroneously paid Gross Philippine
Billings cannot be denied on the ground that [it] is subject to
income tax under Section 28 (A) (1)"45 since it has not been
assessed at all by the Bureau of Internal Revenue for any income
tax liability.46
On the other hand, respondent maintains that petitioner is
subject to the 32% corporate income tax as a resident foreign
corporation doing business in the Philippines. Petitioner’s total
payment of ₱5,185,676.77 allegedly shows that petitioner was
earning a sizable income from the sale of its plane tickets within
the Philippines during the relevant period.47 Respondent further
points out that this court in Commissioner of Internal Revenue v.
American Airlines, Inc.,48 which in turn cited the cases involving
the British Overseas Airways Corporation and Air India, had
already settled that "foreign airline companies which sold tickets
in the Philippines through their local agents . . . [are] considered
resident foreign corporations engaged in trade or business in the
country."49 It also cites Revenue Regulations No. 6-78 dated April
25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines
by offline international airlines either by themselves or through
their agents."50
Respondent further contends that petitioner is not entitled to its
claim for refund because the amount of ₱5,185,676.77 it paid as
tax from the third quarter of 2000 to the second quarter of 2001
was still short of the 32% income tax due for the
period.51 Petitioner cannot allegedly claim good faith in its failure
to pay the right amount of tax since the National Internal Revenue
Code became operative on January 1, 1998 and by 2000,
petitioner should have already been aware of the implications of
Section 28(A)(3) and the decided cases of this court’s ruling on the
taxability of offline international carriers selling passage tickets in
the Philippines.52
I
At the outset, we affirm the Court of Tax Appeals’ ruling that
petitioner, as an offline international carrier with no landing rights
in the Philippines, is not liable to tax on Gross Philippine Billings
under Section 28(A)(3) of the 1997 National Internal Revenue
Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business
in the Philippines shall pay a tax of two and one-half percent (2
1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to
the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment
shall form part of Gross Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the
carriage of persons, excess baggage, cargo, and mail originated
from the Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly
not liable for the Gross Philippine Billings tax.
 II
Petitioner, an offline carrier, is a resident foreign corporation for
income tax purposes. Petitioner falls within the definition of
resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code, thus, it may be subject to
32%53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-
five percent (35%) of the taxable income derived in the preceding
taxable year from all sources within the Philippines: Provided,
That effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate shall
be thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%54). (Emphasis
supplied)
The definition of "resident foreign corporation" has not
substantially changed throughout the amendments of the
National Internal Revenue Code. All versions refer to "a foreign
corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal
Revenue Code and approved on June 15, 1939, defined "resident
foreign corporation" as applying to "a foreign corporation
engaged in trade or business within the Philippines or having an
office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as
amended by Republic Act No. 6110, approved on August 4, 1969,
reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized,
or existing under the laws of any foreign country, except a foreign
life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding
taxable year from all sources within the Philippines.56 (Emphasis
supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977
amending certain sections of the 1939 National Internal Revenue
Code. Section 24(b)(2) on foreign resident corporations was
amended, but it still provides that "[a] corporation organized,
authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all
sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v.
British Overseas Airways Corporation58declared British Overseas
Airways Corporation, an international air carrier with no landing
rights in the Philippines, as a resident foreign corporation engaged
in business in the Philippines through its local sales agent that sold
and issued tickets for the airline company.59 This court discussed
that:
There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. Each case must be judged
in the light of its peculiar environmental circumstances. The term
implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident
to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization. "In order that a
foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character.["]
BOAC, during the periods covered by the subject-assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of
trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and
are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale
of tickets, its main activity, is the very lifeblood of the airline
business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in
the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also
provides guidance with its definition of "doing business" with
regard to foreign corporations. Section 3(d) of the law enumerates
the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison" offices
or branches; appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay in the country
for a period or periods totalling one hundred eighty (180) days or
more; participating in the management, supervision or control of
any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of
the business organization: Provided, however, That the phrase
"doing business" shall not be deemed to include mere investment
as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business
in its own name and for its own account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative
or distributor domiciled in the Philippines which transacts
business in its own name and for its own account" is not
considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing
business" includes "appointing representatives or
distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one
hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not certificated by the
[Civil Aeronautics] Board, but who maintains office or who has
designated or appointed agents or employees in the Philippines,
who sells or offers for sale any air transportation in behalf of said
foreign air carrier and/or others, or negotiate for, or holds itself
out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier
[must] apply to the [Civil Aeronautics] Board for such
authority."64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on
the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received. 65
Petitioner is undoubtedly "doing business" or "engaged in trade
or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are
incidental and beneficial to the purpose of petitioner’s business.
The activities of Aerotel bring direct receipts or profits to
petitioner.66 There is nothing on record to show that Aerotel
solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the
contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of
[the latter,]"67 and it must perform its functions according to the
standards required by petitioner.68 Through Aerotel, petitioner is
able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an
authority to operate as an offline carrier in the Philippines for a
period of five years, or from April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is
taxable on its income derived from sources within the Philippines.
Petitioner’s income from sale of airline tickets, through Aerotel, is
income realized from the pursuit of its business activities in the
Philippines.
III
However, the application of the regular 32% tax rate under
Section 28(A)(1) of the 1997 National Internal Revenue Code must
consider the existence of an effective tax treaty between the
Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of
Internal Revenue,70 this court held that Section 28(A)(3)(a) does
not categorically exempt all international air carriers from the
coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is
applicable to a taxpayer, then the general rule under Section
28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not
apply, an international air carrier would be liable for the tax under
Section 28(A)(1).71
This court in South African Airways declared that the correct
interpretation of these provisions is that: "international air
carrier[s] maintain[ing] flights to and from the Philippines . . . shall
be taxed at the rate of 2½% of its Gross Philippine Billings[;] while
international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in
the country [like sale of airline tickets] will be taxed at the rate of
32% of such [taxable] income."72
In this case, there is a tax treaty that must be taken into
consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign
states "for purposes of eliminating double taxation on income and
capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to
foreign residents or nationals."73 Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a
tax treaty:
The purpose of these international agreements is to reconcile the
national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with
a view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against
double taxation is crucial in creating such a climate.75 (Emphasis in
the original, citations omitted)
Observance of any treaty obligation binding upon the government
of the Philippines is anchored on the constitutional provision that
the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]"76 Pacta sunt
servanda is a fundamental international law principle that
requires agreeing parties to comply with their treaty obligations in
good faith.77
Hence, the application of the provisions of the National Internal
Revenue Code must be subject to the provisions of tax treaties
entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal
Revenue,78 this court stressed the binding effects of tax treaties. It
dealt with the issue of "whether the failure to strictly comply with
[Revenue Memorandum Order] RMO No. 1-200079 will deprive
persons or corporations of the benefit of a tax
treaty."80 Upholding the tax treaty over the administrative
issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles
of international law as part of the law of the land. The time-
honored international principle of pacta sunt servanda demands
the performance in good faith of treaty obligations on the part of
the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be
performed by them in good faith. More importantly, treaties have
the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies
that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter
and for identical periods. The apparent rationale for doing away
with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate
and the protection against double taxation is crucial in creating
such a climate." Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical
double taxation, which is why they are also known as double tax
treaty or double tax agreements.
"A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may be
necessary to ensure the fulfillment of the obligations undertaken."
Thus, laws and issuances must ensure that the reliefs granted
under tax treaties are accorded to the parties entitled thereto. The
BIR must not impose additional requirements that would negate
the availment of the reliefs provided for under international
agreements. More so, when the RPGermany Tax Treaty does not
provide for any pre-requisite for the availment of the benefits
under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of
application for the availment of tax treaty relief as required by
RMO No. 1-2000 should not operate to divest entitlement to the
relief as it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence
over the objective of RMO No. 1-2000. Logically, noncompliance
with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve
an administrative procedure, these may be remedied through
other system management processes, e.g., the imposition of a
fine or penalty. But we cannot totally deprive those who are
entitled to the benefit of a treaty for failure to strictly comply with
an administrative issuance requiring prior application for tax
treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of
the Republic of the Philippines and for the government of Canada
signed the Convention between the Philippines and Canada for
the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income (Republic of the
Philippines-Canada Tax Treaty). This treaty entered into force on
December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty
defines "permanent establishment" as a "fixed place of business
in which the business of the enterprise is wholly or partly carried
on."84
Even though there is no fixed place of business, an enterprise of a
Contracting State is deemed to have a permanent establishment
in the other Contracting State if under certain conditions there is a
person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada
Tax Treaty states that "[a] person acting in a Contracting State on
behalf of an enterprise of the other Contracting State (other than
an agent of independent status to whom paragraph 6 applies)
shall be deemed to be a permanent establishment in the first-
mentioned State if . . . he has and habitually exercises in that
State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the purchase of
goods or merchandise for that enterprise[.]" The provision seems
to refer to one who would be considered an agent under Article
186885 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a
Contracting State shall not be deemed to have a permanent
establishment in the other Contracting State merely because it
carries on business in that other State through a broker, general
commission agent or any other agent of an independent status,
where such persons are acting in the ordinary course of their
business."
Considering Article XV86 of the same Treaty, which covers
dependent personal services, the term "dependent" would imply
a relationship between the principal and the agent that is akin to
an employer-employee relationship.
Thus, an agent may be considered to be dependent on the
principal where the latter exercises comprehensive control and
detailed instructions over the means and results of the activities
of the agent.87
Section 3 of Republic Act No. 776, as amended, also known as The
Civil Aeronautics Act of the Philippines, defines a general sales
agent as "a person, not a bonafide employee of an air carrier, who
pursuant to an authority from an airline, by itself or through an
agent, sells or offers for sale any air transportation, or negotiates
for, or holds himself out by solicitation, advertisement or
otherwise as one who sells, provides, furnishes, contracts or
arranges for, such air transportation."88 General sales agents and
their property, property rights, equipment, facilities, and franchise
are subject to the regulation and control of the Civil Aeronautics
Board.89 A permit or authorization issued by the Civil Aeronautics
Board is required before a general sales agent may engage in such
an activity.90
Through the appointment of Aerotel as its local sales agent,
petitioner is deemed to have created a "permanent
establishment" in the Philippines as defined under the Republic of
the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent
to perform the sale of transportation on petitioner and handle
reservations, appointment, and supervision of International Air
Transport Associationapproved and petitioner-approved sales
agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air
Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and
entirely for the benefit of AC in every matter relating to this
Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the
reissuance, in the Territory of the GSA [Philippines], of traffic
documents issued by AC outside the said territory of the GSA
[Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of
timetables, fare sheets, tariffs and publicity material provided by
AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media
and reference of any press or public relations inquiries to AC;
....
o) Submission for AC’s approval, of an annual written sales plan
on or before a date to be determined by AC and in a form
acceptable to AC;
....
q) Submission of proposals for AC’s approval of passenger sales
agent incentive plans at a reasonable time in advance of proposed
implementation.
r) Provision of assistance on request, in its relations with
Governmental and other authorities, offices and agencies in the
Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and
customer complaints and, unless otherwise stated in the
guidelines, refer all such claims and complaints to AC.91
Under the terms of the Passenger General Sales Agency
Agreement, Aerotel will "provide at its own expense and
acceptable to [petitioner Air Canada], adequate and suitable
premises, qualified staff, equipment, documentation, facilities and
supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and
incidental to the Agency."92 "[I]t is the sole employer of its
employees and . . . is responsible for [their] actions . . . or those of
any subcontractor."93 In remuneration for its services, Aerotel
would be paid by petitioner a commission on sales of
transportation plus override commission on flown
revenues.94 Aerotel would also be reimbursed "for all authorized
expenses supported by original supplier invoices."95
Aerotel is required to keep "separate books and records of
account, including supporting documents, regarding all
transactions at, through or in any way connected with [petitioner
Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent
all carriers in an unbiased way."97 Aerotel cannot "accept
additional appointments as General Sales Agent of any other
carrier without the prior written consent of [petitioner Air
Canada]."98
The Passenger General Sales Agency Agreement "may be
terminated by either party without cause upon [no] less than 60
days’ prior notice in writing[.]"99 In case of breach of any
provisions of the Agreement, petitioner may require Aerotel "to
cure the breach in 30 days failing which [petitioner Air Canada]
may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s dependent status:
First, Aerotel must give petitioner written notice "within 7 days of
the date [it] acquires or takes control of another entity or merges
with or is acquired or controlled by another person or
entity[.]"101 Except with the written consent of petitioner, Aerotel
must not acquire a substantial interest in the ownership,
management, or profits of a passenger sales agent affiliated with
the International Air Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated passenger sales agent
acquire a substantial interest in Aerotel as to influence its
commercial policy and/or management decisions.102 Aerotel must
also provide petitioner "with a report on any interests held by [it],
its owners, directors, officers, employees and their immediate
families in companies and other entities in the aviation industry or
. . . industries related to it[.]"103 Petitioner may require that any
interest be divested within a set period of time.104
Second, in carrying out the services, Aerotel cannot enter into any
contract on behalf of petitioner without the express written
consent of the latter;105 it must act according to the standards
required by petitioner;106 "follow the terms and provisions of the
[petitioner Air Canada] GSA Manual [and all] written instructions
of [petitioner Air Canada;]"107 and "[i]n the absence of an
applicable provision in the Manual or instructions, [Aerotel must]
carry out its functions in accordance with [its own] standard
practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by
[petitioner Air Canada] for all transportation over [its]
services[.]"109 All use of petitioner’s name, logo, and marks must
be with the written consent of petitioner and according to
petitioner’s corporate standards and guidelines set out in the
Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in
connection with the transportation sold by Aerotel are for the
account of petitioner, except in the case of negligence of
Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms
of the Passenger General Sales Agency Agreement executed
between the parties. It has the authority or power to conclude
contracts or bind petitioner to contracts entered into in the
Philippines. A third-party liability on contracts of Aerotel is to
petitioner as the principal, and not to Aerotel, and liability to such
third party is enforceable against petitioner. While Aerotel
maintains a certain independence and its activities may not be
devoted wholly to petitioner, nonetheless, when representing
petitioner pursuant to the Agreement, it must carry out its
functions solely for the benefit of petitioner and according to the
latter’s Manual and written instructions. Aerotel is required to
submit its annual sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the transportation
business of petitioner. It is a conduit or outlet through which
petitioner’s airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the
Philippines-Canada Tax Treaty, the "business profits" of an
enterprise of a Contracting State is "taxable only in that State[,]
unless the enterprise carries on business in the other Contracting
State through a permanent establishment[.]"113 Thus, income
attributable to Aerotel or from business activities effected by
petitioner through Aerotel may be taxed in the Philippines.
However, pursuant to the last paragraph114 of Article VII in
relation to Article VIII115 (Shipping and Air Transport) of the same
Treaty, the tax imposed on income derived from the operation of
ships or aircraft in international traffic should not exceed 1½% of
gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under
Section 28(A)(1) of the 1997 National Internal Revenue Code on its
taxable income116 from sale of airline tickets in the Philippines, it
could only be taxed at a maximum of 1½% of gross
revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to petitioner as a
"foreign corporation organized and existing under the laws of
Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence
has applied the statutory construction principle that specific laws
prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on
December 21, 1977 and became valid and effective on that date.
On the other hand, the applicable provisions120 relating to the
taxability of resident foreign corporations and the rate of such tax
found in the National Internal Revenue Code became effective on
January 1, 1998.121 Ordinarily, the later provision governs over the
earlier one.122 In this case, however, the provisions of the Republic
of the Philippines-Canada Tax Treaty are more specific than the
provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the
sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall
be valid and effective unless concurred in by at least two-thirds of
all the Members of the Senate.
This provision states the second of two ways through which
international obligations become binding. Article II, Section 2 of
the Constitution deals with international obligations that are
incorporated, while Article VII, Section 21 deals with international
obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define
rights and duties as well as definite prestations have effects
equivalent to a statute. Thus, these specific treaty provisions may
amend statutory provisions. Statutory provisions may also amend
these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are
not international obligations erga omnes. We are also not
required to rule in this case on the effect of international
customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from
sources within a Contracting State derived by an enterprise of the
other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but
the tax so charged shall not exceed the lesser of a) one and one-
half per cent of the gross revenues derived from sources in that
State; and b) the lowest rate of Philippine tax imposed on such
profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the
Philippines and the government of Canada on Air Transport,
entered into on January 14, 1997, reiterates the effectivity of
Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions
of Article VIII of the Convention between the Philippines and
Canada for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income, signed at
Manila on March 31, 1976 and entered into force on December
21, 1977, and any amendments thereto, in respect of the
operation of aircraft in international traffic.123
Petitioner’s income from sale of ticket for international carriage of
passenger is income derived from international operation of
aircraft. The sale of tickets is closely related to the international
operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have
agreed to have our right to tax limited to a certain
extent[.]"124 Thus, we are bound to extend to a Canadian air
carrier doing business in the Philippines through a local sales
agent the benefit of a lower tax equivalent to 1½% on business
profits derived from sale of international air transportation.
V not be collected in a case involving solely the issue of the
Finally, we reject petitioner’s contention that the Court of Tax
Appeals erred in denying its claim for refund of erroneously paid
Gross Philippine Billings tax on the ground that it is subject to
income tax under Section 28(A)(1) of the National Internal
Revenue Code because (a) it has not been assessed at all by the
Bureau of Internal Revenue for any income tax liability;125 and (b)
internal revenue taxes cannot be the subject of set-off or
compensation,126citing Republic v. Mambulao Lumber Co., et
al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal
Revenue,129 we have ruled that "[i]n an action for the refund of
taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in
lieu of the taxes paid."130 The determination of the proper
category of tax that should have been paid is incidental and
necessary to resolve the issue of whether a refund should be
granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction
to subject it to 6% capital gains tax or other taxes at the first
instance. The Court of Tax Appeals has no power to make an
assessment.
As earlier established, the Court of Tax Appeals has no assessment
powers. In stating that petitioner’s transactions are subject to
capital gains tax, however, the Court of Tax Appeals was not
making an assessment. It was merely determining the proper
category of tax that petitioner should have paid, in view of its
claim that it erroneously imposed upon itself and paid the 5% final
tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner
should have paid is an incidental matter necessary for the
resolution of the principal issue, which is whether petitioner was
entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with
the issue of the proper taxes that are due from petitioner. A claim
for tax refund carries the assumption that the tax returns filed
were correct. If the tax return filed was not proper, the
correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must
determine if a taxpayer claiming refund of erroneously paid taxes
is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal
Revenue, South African Airways claimed for refund of its
erroneously paid 2½% taxes on its gross Philippine billings. This
court did not immediately grant South African’s claim for refund.
This is because although this court found that South African
Airways was not subject to the 2½% tax on its gross Philippine
billings, this court also found that it was subject to 32% tax on its
taxable income.
In this case, petitioner’s claim that it erroneously paid the 5% final
tax is an admission that the quarterly tax return it filed in 2000
was improper. Hence, to determine if petitioner was entitled to
the refund being claimed, the Court of Tax Appeals has the duty to
determine if petitioner was indeed not liable for the 5% final tax
and, instead, liable for taxes other than the 5% final tax. As
in South African Airways, petitioner’s request for refund can
neither be granted nor denied outright without such
determination.
If the taxpayer is found liable for taxes other than the erroneously
paid 5% final tax, the amount of the taxpayer’s liability should be
computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may
taxpayer’s entitlement to refund. The question of tax deficiency is
distinct and unrelated to the question of petitioner’s entitlement
to refund. Tax deficiencies should be subject to assessment
procedures and the rules of prescription. The court cannot be
expected to perform the BIR’s duties whenever it fails to do so
either through neglect or oversight. Neither can court processes
be used as a tool to circumvent laws protecting the rights of
taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioner’s claim
for refund of allegedly erroneously paid tax on its Gross Philippine
Billings, on the ground that it was liable instead for the regular
32% tax on its taxable income received from sources within the
Philippines. Its determination of petitioner’s liability for the 32%
regular income tax was made merely for the purpose of
ascertaining petitioner’s entitlement to a tax refund and not for
imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an
issue. Besides, the cases cited are based on different
circumstances. In both cited cases,133 the taxpayer claimed that his
(its) tax liability was off-set by his (its) claim against the
government.
Specifically, in Republic v. Mambulao Lumber Co., et al.,
Mambulao Lumber contended that the amounts it paid to the
government as reforestation charges from 1947 to 1956, not
having been used in the reforestation of the area covered by its
license, may be set off or applied to the payment of forest charges
still due and owing from it.134Rejecting Mambulao’s claim of legal
compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors
of each other. Consequently, the law on compensation is
inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when
two persons in their own right are creditors and debtors of each
other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they
are in the coffers of the government as taxes collected, and the
government does not owe anything to defendant Mambulao
Lumber Company. So, it is crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not creditors
and debtors of each other, because compensation refers to mutual
debts. * * *.
And the weight of authority is to the effect that internal revenue
taxes, such as the forest charges in question, can not be the
subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off under the statutes of set-off, which are
construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they
do not arise out of the contract or transaction sued on. * * *. (80
C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-settled
that no set-off is admissible against demands for taxes levied for
general or local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of
contracts between the party and party but grow out of a duty to,
and are the positive acts of the government, to the making and
enforcing of which, the personal consent of individual taxpayers is
not required. * * * If the taxpayer can properly refuse to pay his
tax when called upon by the Collector, because he has a claim
against the governmental body which is not included in the tax
levy, it is plain that some legitimate and necessary expenditure
must be curtailed. If the taxpayer’s claim is disputed, the
collection of the tax must await and abide the result of a lawsuit,
and meanwhile the financial affairs of the government will be
thrown into great confusion. (47 Am. Jur. 766–767.)135 (Emphasis
supplied)
In Francia, this court did not allow legal compensation since not
all requisites of legal compensation provided under Article 1279
were present.136 In that case, a portion of Francia’s property in
Pasay was expropriated by the national government,137 which did
not immediately pay Francia. In the meantime, he failed to pay
the real property tax due on his remaining property to the local
government of Pasay, which later on would auction the property
on account of such delinquency.138 He then moved to set aside the
auction sale and argued, among others, that his real property tax
delinquency was extinguished by legal compensation on account
of his unpaid claim against the national government.139 This court
ruled against Francia:
There is no legal basis for the contention. By legal compensation,
obligations of persons, who in their own right are reciprocally
debtors and creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he
be at the same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have
consistently ruled that there can be no off-setting of taxes against
the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
....
There are other factors which compel us to rule against the
petitioner. The tax was due to the city government while the
expropriation was effected by the national
government. Moreover, the amount of ₱4,116.00 paid by the
national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the
sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner
on September 30, 1977. The petitioner admitted in his testimony
that he knew about the ₱4,116.00 deposited with the bank but he
did not withdraw it. It would have been an easy matter to
withdraw ₱2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases
of Caltex Philippines, Inc. v. Commission on Audit141 and Philex
Mining Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may
have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to
be set-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between
a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign
capacity."144 Rejecting Philex Mining’s assertion that the
imposition of surcharge and interest was unjustified because it
had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still had pending claims for
VAT input credit/refund with the Bureau of Internal Revenue, this
court explained:
To be sure, we cannot allow Philex to refuse the payment of its
tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is
that it is compulsory rather than a matter of bargain. Hence, a tax
does not depend upon the consent of the taxpayer. If any tax
payer can defer the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this would adversely
affect the government revenue system. A taxpayer cannot refuse
to pay his taxes when they fall due simply because he has a claim
against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the
government. Moreover, Philex’s theory that would automatically
apply its VAT input credit/refund against its tax liabilities can
easily give rise to confusion and abuse, depriving the government
of authority over the manner by which taxpayers credit and offset
their tax liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the
taxpayer cannot simply refuse to pay tax on the ground that the
tax liabilities were off-set against any alleged claim the taxpayer
may have against the government. Such would merely be in
keeping with the basic policy on prompt collection of taxes as the
lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on
account of the Court of Tax Appeals’ finding of its liability for
another tax in lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.
Squarely applicable is South African Airways where this court
rejected similar arguments on the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals,
however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred
in denying petitioner’s supplemental motion for reconsideration
alleging bringing to said court’s attention the existence of the
deficiency income and business tax assessment against Citytrust.
The fact of such deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank to
claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity
and a polarity in conceptual effects. Herein private respondent
cannot be entitled to refund and at the same time be liable for a
tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax
return is valid, that is, the facts stated therein are true and
correct. The deficiency assessment, although not yet final, created
a doubt as to and constitutes a challenge against the truth and In this case, the P5,185,676.77 Gross Philippine Billings tax paid by
accuracy of the facts stated in said return which, by itself and petitioner was computed at the rate of 1 ½% of its gross revenues
without unquestionable evidence, cannot be the basis for the amounting to P345,711,806.08149 from the third quarter of 2000 to
grant of the refund. the second quarter of 2002. It is quite apparent that the tax
imposable under Section 28(A)(l) of the 1997 National Internal
Section 82, Chapter IX of the National Internal Revenue Code of Revenue Code [32% of t.axable income, that is, gross income less
1977, which was the applicable law when the claim of Citytrust deductions] will exceed the maximum ceiling of 1 ½% of gross
was filed, provides that "(w)hen an assessment is made in case of revenues as decreed in Article VIII of the Republic of the
any list, statement, or return, which in the opinion of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
Commissioner of Internal Revenue was false or fraudulent or
contained any understatement or undervaluation, no tax collected WHEREFORE, the Petition is DENIED. The Decision dated August
under such assessment shall be recovered by any suits unless it is 26, 2005 and Resolution dated April 8, 2005 of the Court of Tax
proved that the said list, statement, or return was not false nor Appeals En Banc are AFFIRMED.
fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or SO ORDERED.
returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
MARVIC M.V.F. LEONEN
Associate Justice
Moreover, to grant the refund without determination of the
proper assessment and the tax due would inevitably result in
multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced to
institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the
prescriptive period of ten years after discovery of the falsity, fraud
or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on
the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-
needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or

expenses, it is both logically necessary and legally appropriate
that the issue of the deficiency tax assessment against Citytrust be
resolved jointly with its claim for tax refund, to determine once
and for all in a single proceeding the true and correct amount of
tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded,

it would be only just and fair that the taxpayer and the
Government alike be given equal opportunities to avail of
remedies under the law to defeat each other’s claim and to
determine all matters of dispute between them in one single case.
It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would
[be] necessary to determine how much the Government is
entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res
judicata on both parties as to all the matters subject thereof or
necessarily involved therein.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI
of the 1997 NIRC. The above pronouncements are, therefore, still
applicable today.

Here, petitioner's similar tax refund claim assumes that the tax
return that it filed was correct. Given, however, the finding of the
CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of
the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot
grant the prayer for a refund.146 (Emphasis supplied, citation
omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of

Internal Revenue, 147 this court upheld the denial of the claim for
refund based on the Court of Tax Appeals' finding that the
taxpayer had, through erroneous deductions on its gross income,
underpaid its Gross Philippine Billing tax on cargo revenues for
1999, and the amount of underpayment was even greater than
the refund sought for erroneously paid Gross Philippine Billings
tax on passenger revenues for the same taxable period. 148
FIRST DIVISION "On January 30, 1996, [the Court of Tax Appeals] rendered a decision
G.R. No. 148191 November 25, 2003 in CTA Case No. 4720 entitled Asian Bank Corporation vs.
COMMISSIONER OF INTERNAL REVENUE, petitioner, Commissioner of Internal Revenue[,] wherein it was held that the 20%
vs. final withholding tax on [a] bank’s interest income should not form
SOLIDBANK CORPORATION, respondent. part of its taxable gross receipts for purposes of computing the gross
DECISION receipts tax.
PANGANIBAN, J.: "On June 19, 1997, on the strength of the aforementioned decision,
Under the Tax Code, the earnings of banks from "passive" [respondent] filed with the Bureau of Internal Revenue [BIR] a letter-
income are subject to a twenty percent final withholding tax (20% request for the refund or issuance of [a] tax credit certificate in the
FWT). This tax is withheld at source and is thus not actually and aggregate amount of ₱3,508,078.75, representing allegedly overpaid
physically received by the banks, because it is paid directly to the gross receipts tax for the year 1995, computed as follows:
government by the entities from which the banks derived the income.
Gross Receipts
Apart from the 20% FWT, banks are also subject to a five percent
Subjected to the Final
gross receipts tax (5% GRT) which is imposed by the Tax Code on their
Tax
gross receipts, including the "passive" income.
Derived from Passive ₱
Since the 20% FWT is constructively received by the banks and forms [Income] 350,807,875.15
part of their gross receipts or earnings, it follows that it is subject to
the 5% GRT. After all, the amount withheld is paid to the government Multiply by Final Tax
20%
on their behalf, in satisfaction of their withholding taxes. That they do rate
not actually receive the amount does not alter the fact that it is
remitted for their benefit in satisfaction of their tax obligations. 20% Final Tax Withheld
₱ 70,161,575.03
at Source
Stated otherwise, the fact is that if there were no withholding tax Multiply by [Gross
system in place in this country, this 20 percent portion of the 5%
Receipts Tax] rate
"passive" income of banks would actually be paid to the banks and
then remitted by them to the government in payment of their income Overpaid [Gross
₱ 3,508,078.75
tax. The institution of the withholding tax system does not alter the Receipts Tax]
fact that the 20 percent portion of their "passive" income constitutes
"Without waiting for an action from the [petitioner], [respondent] on
part of their actual earnings, except that it is paid directly to the
the same day filed [a] petition for review [with the Court of Tax
government on their behalf in satisfaction of the 20 percent final
Appeals] in order to toll the running of the two-year prescriptive
income tax due on their "passive" incomes.
period to judicially claim for the refund of [any] overpaid internal
The Case
revenue tax[,] pursuant to Section 230 [now 229] of the Tax Code
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
[also ‘National Internal Revenue Code’] x x x.
seeking to annul the July 18, 2000 Decision2and the May 8, 2001
xxx xxx xxx
Resolution3 of the Court of Appeals4 (CA) in CA-GR SP No. 54599. The
"After trial on the merits, the [Court of Tax Appeals], on August 6,
decretal portion of the assailed Decision reads as follows:
1999, rendered its decision ordering x x x petitioner to refund in favor
of x x x respondent the reduced amount of ₱1,555,749.65 as overpaid
"WHEREFORE, we AFFIRM in toto the assailed decision and resolution [gross receipts tax] for the year 1995. The legal issue x x x was
of the Court of Tax Appeals."5 resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga
dissenting, on the strength of its earlier pronouncement in x x x Asian
The challenged Resolution denied petitioner’s Motion for Bank Corporation vs. Commissioner of Internal Revenue x x x,
Reconsideration. wherein it was held that the 20% [final withholding tax] on [a] bank’s
The Facts interest income should not form part of its taxable gross receipts for
Quoting petitioner, the CA6 summarized the facts of this case as purposes of computing the [gross receipts tax]."7
follows:
"For the calendar year 1995, [respondent] seasonably filed its Ruling of the CA
Quarterly Percentage Tax Returns reflecting gross receipts (pertaining
to 5% [Gross Receipts Tax] rate) in the total amount of
The CA held that the 20% FWT on a bank’s interest income did not
₱1,474,691,693.44 with corresponding gross receipts tax payments in
form part of the taxable gross receipts in computing the 5% GRT,
the sum of ₱73,734,584.60, broken down as follows:
because the FWT was not actually received by the bank but was
Period Gross Receipts directly remitted to the government. The appellate court curtly said
Gross Receipts
Covered Tax that while the Tax Code "does not specifically state any exemption, x
x x the statute must receive a sensible construction such as will give
January to effect to the legislative intention, and so as to avoid an unjust or
₱ 188,406,061.95 ₱ 9,420,303.10
March 1994 absurd conclusion."8
Hence, this appeal.9
April to June Issue
370,913,832.70 18,545,691.63
1994 Petitioner raises this lone issue for our consideration:
"Whether or not the 20% final withholding tax on [a] bank’s interest
July to
income forms part of the taxable gross receipts in computing the 5%
September 481,501,838.98 24,075,091.95
gross receipts tax."10
1994
The Court’s Ruling
October to The Petition is meritorious.
December 433,869,959.81 21,693,497.98 Sole Issue:
1994
Whether the 20% FWT Forms Part
₱ ₱ of the Taxable Gross Receipts
Total
1,474,691,693.44 73,734,584.60
Petitioner claims that although the 20% FWT on respondent’s interest
"[Respondent] alleges that the total gross receipts in the amount of income was not actually received by respondent because it was
₱1,474,691,693.44 included the sum of ₱350,807,875.15 representing remitted directly to the government, the fact that the amount
gross receipts from passive income which was already subjected to redounded to the bank’s benefit makes it part of the taxable gross
20% final withholding tax. receipts in computing the 5% GRT. Respondent, on the other hand,
maintains that the CA correctly ruled otherwise.
We agree with petitioner. In fact, the same issue has been raised
recently in China Banking Corporation v. CA,11where this Court held
that the amount of interest income withheld in payment of the 20%
FWT forms part of gross receipts in computing for the GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 11912 of the Tax Code,13 which
provides:
"SEC. 119. Tax on banks and non-bank financial intermediaries. –
There shall be collected a tax on gross receipts derived from sources
within the Philippines by all banks and non-bank financial
intermediaries in accordance with the following schedule:
"(a) On interest, commissions and discounts from lending activities as
well as income from financial leasing, on the basis of remaining
maturities of instruments from which such receipts are derived.
Short-term maturity not in excess of two (2) years……………………5%
Medium-term maturity – over two (2) years
but not exceeding four (4) years………………………………….…...3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years……………………………………………1%
(ii) Over seven (7) years………………………………….….0%
"(b) On dividends……………………………….……..0%
"(c) On royalties, rentals of property, real or personal, profits from
exchange and all other items treated as gross income under Section
2814 of this Code………....................................................................5%
Provided, however, That in case the maturity period referred to in
paragraph (a) is shortened thru pretermination, then the maturity
period shall be reckoned to end as of the date of pretermination for
purposes of classifying the transaction as short, medium or long term
and the correct rate of tax shall be applied accordingly.
"Nothing in this Code shall preclude the Commissioner from imposing
the same tax herein provided on persons performing similar banking
activities."
The 5% GRT15 is included under "Title V. Other Percentage Taxes" of
the Tax Code and is not subject to withholding. The banks and non-
bank financial intermediaries liable therefor shall, under Section
125(a)(1),16 file quarterly returns on the amount of gross receipts and
pay the taxes due thereon within twenty (20)17 days after the end of
each taxable quarter.
The 20% FWT,18 on the other hand, falls under Section 24(e)(1)19 of
"Title II. Tax on Income." It is a tax on passive income, deducted and
withheld at source by the payor-corporation and/or person as
withholding agent pursuant to Section 50,20 and paid in the same
manner and subject to the same conditions as provided for in Section
51.21
A perusal of these provisions clearly shows that two types of taxes are
involved in the present controversy: (1) the GRT, which is a
percentage tax; and (2) the FWT, which is an income tax. As a bank,
petitioner is covered by both taxes.
A percentage tax is a national tax measured by a certain percentage
of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by
any person engaged in the sale of services.22 It is not subject to
withholding.
An income tax, on the other hand, is a national tax imposed on the
net or the gross income realized in a taxable year.23 It is subject to
withholding.
In a withholding tax system, the payee is the taxpayer, the person on
whom the tax is imposed; the payor, a separate entity, acts as no
more than an agent of the government for the collection of the tax in
order to ensure its payment. Obviously, this amount that is used to
settle the tax liability is deemed sourced from the proceeds
constitutive of the tax base.24 These proceeds are either actual or
constructive. Both parties herein agree that there is no actual receipt
by the bank of the amount withheld. What needs to be determined is
if there is constructive receipt thereof. Since the payee -- not the
payor -- is the real taxpayer, the rule on constructive receipt can be
easily rationalized, if not made clearly manifest.25
Constructive Receipt
Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR) No. 17-84,26 petitioner
contends that there is constructive receipt of the interest on deposits
and yield on deposit substitutes.27 Respondent, however, claims that
even if there is, it is Section 4(e) of RR 12-8028 that nevertheless
governs the situation.
Section 7 of RR 17-84 states:
"SEC. 7. Nature and Treatment of Interest on Deposits and Yield on
Deposit Substitutes. –
‘(a) The interest earned on Philippine Currency bank deposits and
yield from deposit substitutes subjected to the withholding taxes in
accordance with these regulations need not be included in the gross
income in computing the depositor’s/investor’s income tax liability in
accordance with the provision of Section 29(b),29(c)30 and (d) of the
National Internal Revenue Code, as amended.
‘(b) Only interest paid or accrued on bank deposits, or yield from
deposit substitutes declared for purposes of imposing the withholding
taxes in accordance with these regulations shall be allowed as interest
expense deductible for purposes of computing taxable net income of
the payor.
‘(c) If the recipient of the above-mentioned items of income are
financial institutions, the same shall be included as part of the tax
base upon which the gross receipt[s] tax is imposed.’"
Section 4(e) of RR 12-80, on the other hand, states that the tax rates
to be imposed on the gross receipts of banks, non-bank financial
intermediaries, financing companies, and other non-bank financial
intermediaries not performing quasi-banking activities shall be based
on all items of income actually received. This provision reads:
"SEC. 4. x x x x x x x x x
"(e) Gross receipts tax on banks, non-bank financial intermediaries,
financing companies, and other non-bank financial intermediaries not
performing quasi-banking activities. – The rates of tax to be imposed
on the gross receipts of such financial institutions shall be based on all
items of income actually received. Mere accrual shall not be
considered, but once payment is received on such accrual or in cases
of prepayment, then the amount actually received shall be included in
the tax base of such financial institutions, as provided hereunder x x
x."
Respondent argues that the above-quoted provision is plain and clear:
since there is no actual receipt, the FWT is not to be included in the
tax base for computing the GRT. There is supposedly no pecuniary
benefit or advantage accruing to the bank from the FWT, because the
income is subjected to a tax burden immediately upon receipt
through the withholding process. Moreover, the earlier RR 12-80
covered matters not falling under the later RR 17-84.31
We are not persuaded.
By analogy, we apply to the receipt of income the rules on actual and
constructive possession provided in Articles 531 and 532 of our Civil
Code.
Under Article 531:32
"Possession is acquired by the material occupation of a thing or the
exercise of a right, or by the fact that it is subject to the action of our
will, or by the proper acts and legal formalities established for
acquiring such right."
Article 532 states:
"Possession may be acquired by the same person who is to enjoy it,
by his legal representative, by his agent, or by any person without any
power whatever; but in the last case, the possession shall not be
considered as acquired until the person in whose name the act of
possession was executed has ratified the same, without prejudice to
the juridical consequences of negotiorum gestio in a proper case."33
The last means of acquiring possession under Article 531 refers to
juridical acts -- the acquisition of possession by sufficient title – to
which the law gives the force of acts of possession.34 Respondent
argues that only items of income actually received should be included
in its gross receipts. It claims that since the amount had already been
withheld at source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the
acquisition of the right of possession is through the proper acts and
legal formalities established therefor. The withholding process is one
such act. There may not be actual receipt of the income withheld;
however, as provided for in Article 532, possession by any person
without any power whatsoever shall be considered as acquired when
ratified by the person in whose name the act of possession is
executed.
In our withholding tax system, possession is acquired by the payor as
the withholding agent of the government, because the taxpayer
ratifies the very act of possession for the government. There is thus
constructive receipt. The processes of bookkeeping and accounting
for interest on deposits and yield on deposit substitutes that are
subjected to FWT are indeed -- for legal purposes -- tantamount to
delivery, receipt or remittance.35 Besides, respondent itself admits
that its income is subjected to a tax burden immediately upon
"receipt," although it claims that it derives no pecuniary benefit or
advantage through the withholding process. There being constructive
receipt of such income -- part of which is withheld -- RR 17-84 applies,
and that income is included as part of the tax base upon which the
GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue regulations on interest
income constructively received.
In general, rules and regulations issued by administrative or executive
officers pursuant to the procedure or authority conferred by law upon
the administrative agency have the force and effect, or partake of the
nature, of a statute.36The reason is that statutes express the policies,
purposes, objectives, remedies and sanctions intended by the
legislature in general terms. The details and manner of carrying them
out are oftentimes left to the administrative agency entrusted with
their enforcement.
In the present case, it is the finance secretary who promulgates the
revenue regulations, upon recommendation of the BIR commissioner.
These regulations are the consequences of a delegated power to issue
legal provisions that have the effect of law.37
A revenue regulation is binding on the courts as long as the procedure
fixed for its promulgation is followed. Even if the courts may not be in
agreement with its stated policy or innate wisdom, it is nonetheless
valid, provided that its scope is within the statutory authority or
standard granted by the legislature.38 Specifically, the regulation must
(1) be germane to the object and purpose of the law;39 (2) not
contradict, but conform to, the standards the law prescribes;40 and (3)
be issued for the sole purpose of carrying into effect the general
provisions of our tax laws.41
In the present case, there is no question about the regularity in the
performance of official duty. What needs to be determined is
whether RR 12-80 has been repealed by RR 17-84.
A repeal may be express or implied. It is express when there is a
declaration in a regulation -- usually in its repealing clause -- that
another regulation, identified by its number or title, is repealed. All
others are implied repeals.42 An example of the latter is a general
provision that predicates the intended repeal on a substantial conflict
between the existing and the prior regulations.43
As stated in Section 11 of RR 17-84, all regulations, rules, orders or
portions thereof that are inconsistent with the provisions of the said
RR are thereby repealed. This declaration proceeds on the premise
that RR 17-84 clearly reveals such an intention on the part of the
Department of Finance. Otherwise, later RRs are to be construed as a
continuation of, and not a substitute for, earlier RRs; and will
continue to speak, so far as the subject matter is the same, from the
time of the first promulgation.44
There are two well-settled categories of implied repeals: (1) in case
the provisions are in irreconcilable conflict, the later regulation, to the
extent of the conflict, constitutes an implied repeal of an earlier one;
and (2) if the later regulation covers the whole subject of an earlier
one and is clearly intended as a substitute, it will similarly operate as
a repeal of the earlier one.45 There is no implied repeal of an earlier
RR by the mere fact that its subject matter is related to a later RR,
which may simply be a cumulation or continuation of the earlier
one.46
Where a part of an earlier regulation embracing the same subject as a
later one may not be enforced without nullifying the pertinent
provision of the latter, the earlier regulation is deemed impliedly
amended or modified to the extent of the repugnancy.47 The
unaffected provisions or portions of the earlier regulation remain in
force, while its omitted portions are deemed repealed.48 An exception
therein that is amended by its subsequent elimination shall now
cease to be so and instead be included within the scope of the general
rule.49
Section 4(e) of the earlier RR 12-80 provides that only items of income
actually received shall be included in the tax base for computing the
GRT, but Section 7(c) of the later RR 17-84 makes no such distinction
and provides that all interests earned shall be included. The exception
having been eliminated, the clear intent is that the later RR 17-84
includes the exception within the scope of the general rule.
Repeals by implication are not favored and will not be indulged,
unless it is manifest that the administrative agency intended them. As
a regulation is presumed to have been made with deliberation and
full knowledge of all existing rules on the subject, it may reasonably
be concluded that its promulgation was not intended to interfere with
or abrogate any earlier rule relating to the same subject, unless it is
either repugnant to or fully inclusive of the subject matter of an
earlier one, or unless the reason for the earlier one is "beyond
peradventure removed."50 Every effort must be exerted to make all
regulations stand -- and a later rule will not operate as a repeal of an
earlier one, if by any reasonable construction, the two can be
reconciled.51
RR 12-80 imposes the GRT only on all items of income actually
received, as opposed to their mere accrual, while RR 17-84 includes all
interest income in computing the GRT. RR 12-80 is superseded by the
later rule, because Section 4(e) thereof is not restated in RR 17-84.
Clearly therefore, as petitioner correctly states, this particular
provision was impliedly repealed when the later regulations took
effect.52
Reconciling the Two Regulations
Granting that the two regulations can be reconciled, respondent’s
reliance on Section 4(e) of RR 12-80 is misplaced and deceptive. The
"accrual" referred to therein should not be equated with the
determination of the amount to be used as tax base in computing the
GRT. Such accrual merely refers to an accounting method that
recognizes income as earned although not received, and expenses as
incurred although not yet paid.
Accrual should not be confused with the concept of constructive
possession or receipt as earlier discussed. Petitioner correctly points
out that income that is merely accrued -- earned, but not yet received
-- does not form part of the taxable gross receipts; income that has
been received, albeit constructively, does.53
The word "actually," used confusingly in Section 4(e), will be clearer if
removed entirely. Besides, if actually is that important, accrual should
have been eliminated for being a mere surplusage. The inclusion of
accrual stresses the fact that Section 4(e) does not distinguish
between actual and constructive receipt. It merely focuses on the
method of accounting known as the accrual system.
Under this system, income is accrued or earned in the year in which
the taxpayer’s right thereto becomes fixed and definite, even though
it may not be actually received until a later year; while a deduction for
a liability is to be accrued or incurred and taken when the liability
becomes fixed and certain, even though it may not be actually paid
until later.54
Under any system of accounting, no duty or liability to pay an income
tax upon a transaction arises until the taxable year in which the event
constituting the condition precedent occurs.55 The liability to pay a tax
may thus arise at a certain time and the tax paid within another given
time.56
In reconciling these two regulations, the earlier one includes in the
tax base for GRT all income, whether actually or constructively
received, while the later one includes specifically interest income. In
computing the income tax liability, the only exception cited in the
later regulations is the exclusion from gross income of interest
income, which is already subjected to withholding. This exception,
however, refers to a different tax altogether. To extend mischievously
such exception to the GRT will certainly lead to results not
contemplated by the legislators and the administrative body
promulgating the regulations.
Manila Jockey Club
Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey Club,57 we held
that the term "gross receipts" shall not include money which,
although delivered, has been especially earmarked by law or
regulation for some person other than the taxpayer.58
To begin, we have to nuance the definition of gross receipts59 to
determine what it is exactly. In this regard, we note that US cases
have persuasive effect in our jurisdiction, because Philippine income
tax law is patterned after its US counterpart.60
"‘[G]ross receipts’ with respect to any period means the sum of: (a)
The total amount received or accrued during such period from the
sale, exchange, or other disposition of x x x other property of a kind
which would properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of its
trade or business, and (b) The gross income, attributable to a trade or
business, regularly carried on by the taxpayer, received or accrued
during such period x x x."61
"x x x [B]y gross earnings from operations x x x was intended all
operations xxx including incidental, subordinate, and subsidiary
operations, as well as principal operations."62
"When we speak of the ‘gross earnings’ of a person or corporation,
we mean the entire earnings or receipts of such person or corporation
from the business or operations to which we refer."63
From these cases, "gross receipts"64 refer to the total, as opposed to
the net, income.65 These are therefore the total receipts before any
deduction66 for the expenses of management.67 Webster’s New
International Dictionary, in fact, defines gross as "whole or entire."
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions.68 Tax thereon
is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or
violates the requirement as to uniformity of taxation.69
Moreover, we have emphasized that the BIR has consistently ruled
that "gross receipts" does not admit of any deduction.70 Following the
principle of legislative approval by reenactment,71 this interpretation
has been adopted by the legislature throughout the various
reenactments of then Section 119 of the Tax Code.72
Given that a tax is imposed upon total receipts and not upon net
earnings,73 shall the income withheld be included in the tax base upon
which such tax is imposed? In other words, shall interest income
constructively received still be included in the tax base for computing
the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the
same as withholding. Amounts earmarked do not form part of gross
receipts, because, although delivered or received, these are by law or
regulation reserved for some person other than the taxpayer. On the
contrary, amounts withheld form part of gross receipts, because these
are in constructive possession and not subject to any reservation, the
withholding agent being merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse
owners and jockeys amounts that never became the property of the
race track.74 Unlike these amounts, the interest income that had been
withheld for the government became property of the financial
institutions upon constructive possession thereof. Possession was
indeed acquired, since it was ratified by the financial institutions in
whose name the act of possession had been executed. The money
indeed belonged to the taxpayers; merely holding it in trust was not
enough.75
The government subsequently becomes the owner of the money
when the financial institutions pay the FWT to extinguish their
obligation to the government. As this Court has held before, this is the
consideration for the transfer of ownership of the FWT from these
institutions to the government.76 It is ownership that determines
whether interest income forms part of taxable gross receipts.77 Being
originally owned by these financial institutions as part of their
interest income, the FWT should form part of their taxable gross
receipts.
Besides, these amounts withheld are in payment of an income tax
liability, which is different from a percentage tax liability.
Commissioner of Internal Revenue v. Tours Specialists, Inc. aptly held
thus:78
"x x x [G]ross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which do not
belong to them and do not redound to the taxpayer’s benefit; and it is
not necessary that there must be a law or regulation which would
exempt such monies and receipts within the meaning of gross receipts
under the Tax Code."79
In the construction and interpretation of tax statutes and of statutes
in general, the primary consideration is to ascertain and give effect to
the intention of the legislature.80 We ought to impute to the
lawmaking body the intent to obey the constitutional mandate, as
long as its enactments fairly admit of such construction. 81 In fact, "x x
x no tax can be levied without express authority of law, but the
statutes are to receive a reasonable construction with a view to
carrying out their purpose and intent."82
Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find
that the first imposes an income tax; the second, a percentage tax.
The legislature clearly intended two different taxes. The FWT is a tax
on passive income, while the GRT is on business.83 The withholding of
one is not equivalent to the payment of the other.
Non-Exemption of FWT from GRT:
Neither Unjust nor Absurd
Taxing the people and their property is essential to the very existence
of government. Certainly, one of the highest attributes of sovereignty
is the power of taxation,84 which may legitimately be exercised on the
objects to which it is applicable to the utmost extent as the
government may choose.85 Being an incident of sovereignty, such
power is coextensive with that to which it is an incident.86 The
interest on deposits and yield on deposit substitutes of financial
institutions, on the one hand, and their business as such, on the
other, are the two objects over which the State has chosen to extend
its sovereign power. Those not so chosen are, upon the soundest
principles, exempt from taxation.87
While courts will not enlarge by construction the government’s power
of taxation,88 neither will they place upon tax laws so loose a
construction as to permit evasions, merely on the basis of fanciful and
insubstantial distinctions.89When the legislature imposes a tax on
income and another on business, the imposition must be respected.
The Tax Code should be so construed, if need be, as to avoid empty
declarations or possibilities of crafty tax evasion schemes. We have
consistently ruled thus:
"x x x [I]t is upon taxation that the [g]overnment chiefly relies to
obtain the means to carry on its operations, and it is of the utmost
importance that the modes adopted to enforce the collection of the
taxes levied should be summary and interfered with as little as
possible. x x x."90
"Any delay in the proceedings of the officers, upon whom the duty is
devolved of collecting the taxes, may derange the operations of
government, and thereby cause serious detriment to the public."91
"No government could exist if all litigants were permitted to delay the
collection of its taxes."92
A taxing act will be construed, and the intent and meaning of the
legislature ascertained, from its language.93 Its clarity and implied
intent must exist to uphold the taxes as against a taxpayer in whose
favor doubts will be resolved.94 No such doubts exist with respect to
the Tax Code, because the income and percentage taxes we have
cited earlier have been imposed in clear and express language for that
purpose.95
This Court has steadfastly adhered to the doctrine that its first and
fundamental duty is the application of the law according to its express
terms -- construction and interpretation being called for only when
such literal application is impossible or inadequate without them.96 In
Quijano v. Development Bank of the Philippines,97 we stressed as
follows:
"No process of interpretation or construction need be resorted to
where a provision of law peremptorily calls for application." 98
A literal application of any part of a statute is to be rejected if it will
operate unjustly, lead to absurd results, or contradict the evident
meaning of the statute taken as a whole.99 Unlike the CA, we find that
the literal application of the aforesaid sections of the Tax Code and its
implementing regulations does not operate unjustly or contradict the
evident meaning of the statute taken as a whole. Neither does it lead
to absurd results. Indeed, our courts are not to give words meanings
that would lead to absurd or unreasonable consequences.100 We have
repeatedly held thus:
"x x x [S]tatutes should receive a sensible construction, such as will
give effect to the legislative intention and so as to avoid an unjust or
an absurd conclusion."101
"While it is true that the contemporaneous construction placed upon
a statute by executive officers whose duty is to enforce it should be
given great weight by the courts, still if such construction is so
erroneous, x x x the same must be declared as null and void."102
It does not even matter that the CTA, like in China Banking
Corporation,103 relied erroneously on Manila Jockey Club. Under our
tax system, the CTA acts as a highly specialized body specifically
created for the purpose of reviewing tax cases.104 Because of its
recognized expertise, its findings of fact will ordinarily not be
reviewed, absent any showing of gross error or abuse on its
part.105 Such findings are binding on the Court and, absent strong
reasons for us to delve into facts, only questions of law are open for
determination.106
Respondent claims that it is entitled to a refund on the basis of excess
GRT payments. We disagree.
Tax refunds are in the nature of tax exemptions.107 Such exemptions
are strictly construed against the taxpayer, being highly
disfavored108 and almost said "to be odious to the law." Hence, those
who claim to be exempt from the payment of a particular tax must do
so under clear and unmistakable terms found in the statute. They
must be able to point to some positive provision, not merely a vague
implication,109 of the law creating that right.110
The right of taxation will not be surrendered, except in words too
plain to be mistaken.1âwphi1 The reason is that the State cannot strip
itself of this highest attribute of sovereignty -- its most essential
power of taxation -- by vague or ambiguous language. Since tax
refunds are in the nature of tax exemptions, these are deemed to be
"in derogation of sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption."111
No less than our 1987 Constitution provides for the mechanism for
granting tax exemptions.112 They certainly cannot be granted by
implication or mere administrative regulation. Thus, when an
exemption is claimed, it must indubitably be shown to exist, for every
presumption is against it,113 and a well-founded doubt is fatal to the
claim.114 In the instant case, respondent has not been able to
satisfactorily show that its FWT on interest income is exempt from the
GRT. Like China Banking Corporation, its argument creates a tax
exemption where none exists.115
No exemptions are normally allowed when a GRT is imposed. It is
precisely designed to maintain simplicity in the tax collection effort of
the government and to assure its steady source of revenue even
during an economic slump.116
No Double Taxation
We have repeatedly said that the two taxes, subject of this litigation,
are different from each other. The basis of their imposition may be
the same, but their natures are different, thus leading us to a final
point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it
should be taxed only once; that is, "x x x taxing the same person twice
by the same jurisdiction for the same thing."117 It is obnoxious when
the taxpayer is taxed twice, when it should be but once.118 Otherwise
described as "direct duplicate taxation,"119 the two taxes must be
imposed on the same subject matter, for the same purpose, by the
same taxing authority, within the same jurisdiction, during the same
taxing period; and they must be of the same kind or character.120
First, the taxes herein are imposed on two different subject matters.
The subject matter of the FWT is the passive income generated in the
form of interest on deposits and yield on deposit substitutes, while
the subject matter of the GRT is the privilege of engaging in the
business of banking.
A tax based on receipts is a tax on business rather than on the
property; hence, it is an excise121 rather than a property tax.122 It is not
an income tax, unlike the FWT. In fact, we have already held that one
can be taxed for engaging in business and further taxed differently for
the income derived therefrom.123 Akin to our ruling in Velilla v.
Posadas,124 these two taxes are entirely distinct and are assessed
under different provisions.
Second, although both taxes are national in scope because they are
imposed by the same taxing authority -- the national government
under the Tax Code -- and operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the taxing
periods they affect are different. The FWT is deducted and withheld
as soon as the income is earned, and is paid after every calendar
quarter in which it is earned. On the other hand, the GRT is neither
deducted nor withheld, but is paid only after every taxable quarter in
which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is
an income tax subject to withholding, while the GRT is a percentage
tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice,
by the same taxing authority, within the same jurisdiction, for the
same purpose, in different taxing periods, some of the property in the
territory.125 Subjecting interest income to a 20% FWT and including it
in the computation of the 5% GRT is clearly not double taxation.
WHEREFORE, the Petition is GRANTED. The assailed Decision and
Resolution of the Court of Appeals are hereby REVERSED and SET
ASIDE. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 180651 July 30, 2014
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR
APPLIANCE CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.; and
HARDWARE WORKSHOP, INC., Petitioners,
vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF
MANILA; and THE CITY OF MANILA,Respondents.
DECISION
BERSAMIN, J.:
The issue here concerns double taxation. There is double taxation
when the same taxpayer is taxed twice when he should be taxed
only once for the same purpose by the same taxing authority
within the same jurisdiction during the same taxing period, and
the taxes are of the same kind or character. Double taxation is
obnoxious.
The Case
Under review are the resolution promulgated in CA-G.R. SP No.
72191 on June 18, 2007,1 whereby the Court of Appeals (CA)
denied petitioners' appeal for lack of jurisdiction; and the
resolution promulgated on November 14, 2007,2 whereby the CA
denied their motion for reconsideration for its lack of merit.
Antecedents
The City of Manila assessed and collected taxes from the
individual petitioners pursuant to Section 15 (Tax on Wholesalers,
Distributors, or Dealers) and Section 17 (Tax on Retailers) of the
Revenue Code of Manila.3 At the same time, the City of Manila
imposed additional taxes upon the petitioners pursuant to Section
21 ofthe Revenue Code of Manila,4 as amended, as a condition for
the renewal of their respective business licenses for the year
1999. Section 21 of the Revenue Code of Manila stated:
Section 21. Tax on Business Subject to the Excise, Value-Added or
Percentage Taxes under the NIRC - On any of the following
businesses and articles of commerce subject to the excise, value-
added or percentage taxes under the National Internal Revenue
Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY
PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross
sales or receipts of the preceding calendar year is hereby
imposed:
A) On person who sells goods and services in the course of trade
or businesses; x x x PROVIDED, that all registered businesses in
the City of Manila already paying the aforementioned tax shall be
exempted from payment thereof.
To comply with the City of Manila’s assessmentof taxes under
Section 21, supra, the petitioners paid under protest the following
amounts corresponding to the first quarter of 1999,5 to wit:
(a) Nursery Care Corporation ₱595,190.25
(b) Shoemart Incorporated ₱3,283,520.14
(c) Star Appliance Center ₱236,084.03
(d) H & B, Inc. ₱1,271,118.74
(e) Supplies Station, Inc. ₱239,501.25
(f) Hardware Work Shop, Inc. ₱609,953.24
By letter dated March 1, 1999, the petitioners formally requested
the Office of the City Treasurer for the tax credit or refund of the
local business taxes paid under protest.6 However, then City
Treasurer Anthony Acevedo (Acevedo) denied the request
through his letter of March 10, 1999.7
On April 8, 1999, the petitioners, through their representative,
Cecilia R. Patricio, sought the reconsideration of the denial of their
request.8 Still, the City Treasurer did not reconsider.9 In the
meanwhile, Liberty Toledo succeeded Acevedo as the City
Treasurer of Manila.10
On April 29, 1999, the petitioners filed their respective petitions
for certiorariin the Regional Trial Court (RTC) in Manila. The
petitions, docketed as Civil Cases Nos. 99-93668 to 99-
93673,11 were initially raffled to different branches, but were soon
consolidated in Branch 34.12 After the presiding judge of Branch 34
voluntarily inhibited himself, the consolidated cases were
transferred to Branch 23,13 but were again re-raffled to Branch 19
upon the designation of Branch 23 as a special drugs court.14
The parties agreed on and jointly submitted the following issues
for the consideration and resolution of the RTC, namely:
(a) Whether or not the collection of taxes under Section 21 of
Ordinance No. 7794, as amended, constitutes double taxation.
(b) Whether or not the failure of the petitioners to avail of the
statutorily provided remedy for their tax protest on the ground of
unconstitutionality, illegality and oppressiveness under Section
187 of the Local Government Code renders the present action
dismissible for non-exhaustion of administrative remedy.15
Decision of the RTC
On April 26, 2002, the RTC rendered its decision, holding
thusly: The Court perceives of no instance of the constitutionally
proscribed double taxation, in the strict, narrow or obnoxious
sense, imposed upon the petitioners under Section 15 and 17, on
the one hand, and under Section 21, on the other, of the
questioned Ordinance. The tax imposed under Section 15 and 17,
as against that imposed under Section 21, are levied against
different tax objects or subject matter. The tax under Section 15 is
imposed upon wholesalers, distributors or dealers, while that
under Section 17 is imposedupon retailers. In short, taxes
imposed under Section 15 and 17 is a tax on the business of
wholesalers, distributors, dealers and retailers. On the other
hand, the tax imposed upon herein petitioners under Section 21 is
not a tax against the business of the petitioners (as wholesalers,
distributors, dealers or retailers)but is rather a tax against
consumers or end-users of the articles sold by petitioners. This is
plain from a reading of the modifying paragraph of Section 21
which says:
"The tax shall be payable by the person paying for the services
rendered and shall be paid to the person rendering the services
who is required to collect and pay the tax within twenty (20) days
after the end of each quarter." (Underscoring supplied)
In effect, the petitioners only act as the collection or withholding
agent of the City while the ones actually paying the tax are the
consumers or end-users of the articles being sold by petitioners.
The taxes imposed under Sec. 21 represent additional amounts
added by the business establishment to the basic prices of its
goods and services which are paid by the end-users to the
businesses. It is actually not taxes on the business of petitioners
but on the consumers. Hence, there is no double taxation in the
narrow, strict or obnoxious sense,involved in the imposition of
taxes by the City of Manila under Sections 15, 17 and 21 of the
questioned Ordinance. This in effect resolves infavor of the
constitutionality of the assailed sections of Ordinance No. 7807 of
the City of Manila.
Petitioners, likewise, pray the Court to direct respondents to
cease and desist from implementing Section 21 of the questioned
Ordinance. That the Court cannot do, without doing away with
the mandatory provisions of Section 187 of the Local Government
Code which distinctly commands that an appeal questioning the
constitutionality or legality of a tax ordinance shall not have the
effectof suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee or charge levied therein. This
is so because an ordinance carries with it the presumption of
validity.
xxx
With the foregoing findings, petitioners’ prayer for the refund of
the amounts paid by them under protest must, likewise, fail.
Wherefore, the petitions are dismissed. Without pronouncement
as to costs.
SO ORDERED.16
The petitioners appealed to the CA.17
Ruling of the CA
On June 18, 2007, the CA deniedthe petitioners’ appeal, ruling as
follows: The six (6) cases were consolidated on a common
question of fact and law, that is, whether the act ofthe City
Treasurer of Manila of assessing and collecting business taxes
under Section 21of Ordinance 7807, on top of other business taxes
alsoassessed and collected under the previous sections of the
same ordinance is a violation of the provisions of Section 143 of
the Local Government Code.
Clearly, the disposition of the present appeal in these
consolidated cases does not necessitate the calibration of the
whole evidence as there is no question or doubt as to the truth or
the falsehood of the facts obtaining herein, as both parties agree
thereon. The present case involves a question of law that would
not lend itself to an examination or evaluation by this Court of the
probative value of the evidence presented.
Thus the Court is constrained todismiss the instant petition for
lack of jurisdiction under Section 2,Rule 50 of the 1997 Rules on
Civil Procedure which states:
"Sec. 2. Dismissal of improper appeal to the Court of Appeals. –
An appeal under Rule 41 taken from the Regional Trial Court to
the Court of Appeals raising only questions of law shall be
dismissed, issues purely of law not being reviewable by said court.
similarly, an appeal by notice of appeal instead of by petition for
review from the appellate judgment of a Regional Trial Court shall
be dismissed.
An appeal erroneously taken tothe Court of Appeals shall not be
transferred to the appropriate court but shall be dismissed
outright.
WHEREFORE, the foregoing considered, the appeal is DISMISSED.
SO ORDERED.18
The petitioners moved for reconsideration, but the CA denied
their motion through the resolution promulgated on November
14, 2007.19
Issues
The petitioners now appeal, raising the following grounds, to wit:
A.
THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE
PETITIONERS AND DENYING THEIR MOTION FOR
RECONSIDERATION, ERRED INRULING THAT THE ISSUE INVOLVED
IS A PURELY LEGAL QUESTION.
B.
THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION
OF BRANCH 19 OF THE REGIONAL TRIAL COURT OF MANILA
DATED 26 APRIL 2002 DENYING PETITIONERS’ PRAYER FOR
REFUND OF THE AMOUNTS PAID BY THEM UNDER PROTEST AND
DISMISSING THE PETITION FOR CERTIORARI FILED BY THE
PETITIONERS.
C.
THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF
THE CITY TREASURER OF MANILA IN IMPOSING, ASSESSING AND
COLLECTING THE ADDITIONAL BUSINESS TAX UNDER SECTION 21
OFORDINANCE NO. 7794, AS AMENDED BY ORDINANCE NO. 7807,
ALSO KNOWN AS THE REVENUE CODE OF THE CITY OFMANILA, IS
CONSTITUTIVE OF DOUBLE TAXATION AND VIOLATIVE OF THE
LOCAL GOVERNMENT CODE OF 1991.20
The main issues for resolution are, therefore, (1) whether or not
the CA properly denied due course to the appeal for raising pure
questions of law; and (2) whether or not the petitioners were
entitled to the tax credit or tax refund for the taxes paid under
Section 21, supra.
Ruling
The appeal is meritorious.
1.
The CA did not err in dismissing the appeal;
but the rules should be liberally applied
for the sake of justice and equity
The Rules of Courtprovides three modes of appeal from the
decisions and final orders of the RTC, namely: (1) ordinary appeal
or appeal by writ of error under Rule 41, where the decisionsand
final orders were rendered in civil or criminal actions by the RTC in
the exercise of original jurisdiction; (2) petition for review under
Rule 42, where the decisions and final orders were rendered by
the RTC in the exerciseof appellate jurisdiction; and (3) petition
for review on certiorarito the Supreme Court under Rule 45.21 The
first mode of appeal is taken to the CA on questions of fact, or
mixed questions of fact and law. The second mode of appeal is
brought to the CA on questions of fact, of law, or mixed questions
of fact and law.22 The third mode of appeal is elevated to the
Supreme Court only on questions of law.23
The distinction between a question oflaw and a question of fact is
well established. On the one hand, a question of law ariseswhen
there is doubt as to what the law is on a certain state of facts; on
the other, there is a question of fact when the doubt arises asto
the truth or falsity of the alleged facts.24 According to Leoncio v.
De Vera:25
x x x For a question to beone of law, the same must not involve an
examination of the probative value ofthe evidence presented by
the litigants or any of them. The resolution of the issue must
restsolely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of
the evidence presented, the question posed is one of fact. Thus,
the test of whether a question isone of law or offact is not the
appellation given to such question by the party raising the same;
rather, it is whether the appellate court can determine the issue
raised without reviewing or evaluating the evidence, in which
case, it is a question oflaw; otherwise it is a question of fact.26
The nature of the issues to be raised on appeal can be gleaned
from the appellant’s notice of appeal filed in the trial court, and
from the appellant’s brief submitted to the appellate court.27 In
this case, the petitioners filed a notice of appeal in which they
contended that the April 26, 2002 decision and the order of July
17, 2002 issued by the RTC denying their consolidated motion for
reconsideration were contrary to the facts and law obtaining in
the consolidated cases.28 In their consolidated memorandum filed
in the CA, they essentially assailed the RTC’s ruling that the taxes
imposed on and collected from the petitioners under Section 21 of
the Revenue Code of Manila constituted double taxation in the
strict, narrow or obnoxious sense. Considered together, therefore,
the notice of appeal and consolidated memorandum evidently did
notraise issues that required the reevaluation of evidence or the
relevance of surrounding circumstances.
The CA rightly concluded that the petitioners thereby raised only a
question of law. The dismissal of their appeal was proper, strictly
speaking, because Section 2, Rule 50 of the Rules of Court
provides that an appeal from the RTC to the CA raising only
questions of law shall be dismissed; and that an appeal
erroneously taken to the CA shall be outrightly dismissed.
2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double taxation
The foregoing notwithstanding, the Court, given the
circumstances obtaining herein and in light of jurisprudence
promulgated subsequent to the filing of the petition, deems it
fitting and proper to adopt a liberal approach in order to render a
justand speedy disposition of the substantive issue at hand.
Hence, we resolve, bearing inmind the following pronouncement
in Go v. Chaves:30
Our rules of procedure are designed to facilitate the orderly
disposition of cases and permit the prompt disposition of
unmeritorious cases which clog the court dockets and do little
more than waste the courts’ time. These technical and procedural
rules, however, are intended to ensure, rather than suppress,
substantial justice. A deviation from their rigid enforcement may
thus be allowed, as petitioners should be given the fullest
opportunity to establish the merits of their case, rather than lose
their property on mere technicalities. We held in Ong Lim Sing, Jr.
v. FEB Leasing and Finance Corporation that:
Courts have the prerogative to relax procedural rules of even the
most mandatory character, mindful of the duty to reconcile both
the need to speedily put an end to litigation and the parties' right
to due process.In numerous cases, this Court has allowed liberal
construction of the rules when to do so would serve the demands
of substantial justice and equity.
The petitioners point out that although Section 21 of the Revenue
Code of Manila was not itself unconstitutional or invalid, its
enforcement against the petitioners constituted double taxation
because the local business taxes under Section 15 and Section 17
of the Revenue Code of Manila were already being paid by
them.31 They contend that the proviso in Section 21 exempted all
registered businesses in the City of Manila from paying the tax
imposed under Section 21;32 and that the exemption was more in
accord with Section 143 of the Local Government Code,33 the law
that vested in the municipal and city governments the power to
impose business taxes.
The respondents counter, however, that double taxation did not
occur from the imposition and collection of the tax pursuant to
Section 21 of the Revenue Code of Manila;34 that the taxes
imposed pursuant to Section 21 were in the concept of indirect
taxes upon the consumers of the goods and services sold by a
business establishment;35 and that the petitioners did not exhaust
their administrative remedies by first appealing to the Secretary
of Justice to challenge the constitutionalityor legality of the tax
ordinance.36
In resolving the issue of double taxation involving Section 21 of
the Revenue Code of Manila, the Court is mindful of the ruling in
City of Manila v. Coca-Cola Bottlers Philippines, Inc.,37 which has
been reiterated in Swedish Match Philippines, Inc. v. The
Treasurer of the City of Manila.38 In the latter, the Court has held:
x x x [T]he issue of double taxation is not novel, as it has already
been settled by this Court in The City of Manila v. Coca-Cola
Bottlers Philippines, Inc.,in this wise:
Petitioners obstinately ignore the exempting proviso in Section 21
of Tax Ordinance No. 7794, to their own detriment.1âwphi1 Said
exempting proviso was precisely included in said section so as to
avoid double taxation.
Double taxation means taxingthe same property twice when it
should be taxed only once; that is, "taxing the same person twice
by the same jurisdictionfor the same thing." It is obnoxious when
the taxpayer is taxed twice, when it should be but once.
Otherwise described as "direct duplicate taxation," the two taxes
must be imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the taxes must be
of the same kind or character.
Using the aforementioned test, the Court finds that there is
indeed double taxation if respondent is subjected to the taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794, since
these are being imposed: (1) on the same subject matter – the
privilege of doing business in the City of Manila; (2) for the same
purpose – to make persons conducting business within the City of
Manila contribute tocity revenues; (3) by the same taxing
authority – petitioner Cityof Manila; (4) within the same taxing
jurisdiction – within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods – per calendar year; and
(6) of the same kind or character – a local business tax imposed on
gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes
under Sections 14 and 21 of Tax Ordinance No. 7794 is specious.
The Court revisits Section 143 of the LGC, the very source of the
power of municipalities and cities to impose a local business tax,
and to which any local business tax imposed by petitioner City of
Manila must conform. It is apparent from a perusal thereof that
when a municipality or city has already imposed a business tax on
manufacturers, etc.of liquors, distilled spirits, wines, and any
other article of commerce, pursuant to Section 143(a) of the LGC,
said municipality or city may no longer subject the same
manufacturers, etc.to a business tax under Section 143(h) of the
same Code. Section 143(h) may be imposed only on businesses
that are subject to excise tax, VAT, or percentagetax under the
NIRC, and that are "not otherwise specified in preceding
paragraphs." In the same way, businesses such as respondent’s,
already subject to a local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on Section 143(a) of the LGC],
can no longer be made liable for local business tax under Section
21 of the same Tax Ordinance [which is based on Section 143(h) of
the LGC].
Based on the foregoing reasons, petitioner should not have been
subjected to taxes under Section 21 of the ManilaRevenue Code
for the fourth quarter of 2001, considering thatit had already been
paying local business tax under Section 14 of the same ordinance.
xxxx
Accordingly, respondent’s assessment under both Sections 14 and
21 had no basis. Petitioner is indeed liable to pay business taxes
to the City of Manila; nevertheless, considering that the former
has already paid these taxes under Section 14 of the Manila
Revenue Code, it is exempt from the same payments under
Section 21 of the same code. Hence, payments made under
Section 21 must be refunded in favor of petitioner.
It is undisputed thatpetitioner paid business taxes based on
Sections 14 and 21 for the fourth quarter of 2001 in the total
amount of ₱470,932.21. Therefore, it is entitled to a refund of
₱164,552.04 corresponding to the payment under Section 21 of
the Manila Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc.
and Swedish Match Philippines, Inc., the Court now holds that all
the elements of double taxation concurred upon the Cityof
Manila’s assessment on and collection from the petitioners of
taxes for the first quarter of 1999 pursuant to Section 21 of the
Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila
imposed the tax on a person who sold goods and services in the
course of trade or business based on a certain percentage ofhis
gross sales or receipts in the preceding calendar year, while
Section 15 and Section 17 likewise imposed the tax on a person
who sold goods and services in the course of trade or business but
only identified such person with particularity, namely, the
wholesaler, distributor or dealer (Section 15), and the retailer
(Section 17), all the taxes – being imposed on the privilege of
doing business in the City of Manila in order to make the
taxpayers contributeto the city’s revenues – were imposed on the
same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority
(the City of Manila) and within the same jurisdiction in the same
taxing period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines, Inc. and
Swedish Match Philippines, Inc. involved Section 21 vis-à-vis
Section 14 (Tax on Manufacturers, Assemblers and Other
Processors)39 of the Revenue Code of Manila, the legal
principlesenunciated therein should similarly apply because
Section 15 (Tax on Wholesalers, Distributors, or Dealers)and
Section 17 (Tax on Retailers) of the Revenue Code of Manila
imposed the same nature of tax as that imposed under Section 14,
i.e., local business tax, albeit on a different subject matter or
group of taxpayers.
In fine, the imposition of the tax under Section 21 of the Revenue
Code of Manila constituted double taxation, and the taxes
collected pursuant thereto must be refunded.
WHEREFORE, the Court GRANTS the petition for review on
certiorari; REVERSES and SETS ASIDE the resolutions promulgated
on June 18, 2007 and November 14, 2007 in CA-G.R. SP No. 72191;
and DIRECTS the City of Manila to refund the payments made by
the petitioners of the taxes assessed and collected for the first
quarter of 1999 pursuant to Section 21 of the Revenue Code of
Manila.
No pronouncement on costs of suit.
SO ORDERED.LUCAS P. BERSAMIN
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila
Branch (petitioner) under Rule 45 of the 1997 Rules of Civil
Procedure assailing the Court of Tax Appeals En Banc (CTA En
Banc) Decision2 dated 29 May 2009 and Resolution3 dated 1 July
2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal
Revenue Code (NIRC) of 1997, petitioner withheld and remitted to
respondent on 21 October 2003 the amount of PHP 67,688,553.51,
which represented the fifteen percent (15%) branch profit
remittance tax (BPRT) on its regular banking unit (RBU) net
income remitted to Deutsche Bank Germany (DB Germany) for
2002 and prior taxable years.5
Believing that it made an overpayment of the BPRT, petitioner
filed with the BIR Large Taxpayers Assessment and Investigation
Division on 4 October 2005 an administrative claim for refund or
issuance of its tax credit certificate in the total amount of PHP
22,562,851.17. On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the RP-
Germany Tax Treaty.6
Alleging the inaction of the BIR on its administrative claim,
petitioner filed a Petition for Review7 with the CTA on 18 October
2005. Petitioner reiterated its claim for the refund or issuance of
its tax credit certificate for the amount of PHP 22,562,851.17
representing the alleged excess BPRT paid on branch profits
remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second Division found that
petitioner indeed paid the total amount of PHP 67,688,553.51
representing the 15% BPRT on its RBU profits amounting to PHP
451,257,023.29 for 2002 and prior taxable years. Records also
disclose that for the year 2003, petitioner remitted to DB
Germany the amount of EURO 5,174,847.38 (or PHP
330,175,961.88 at the exchange rate of PHP 63.804:1 EURO),
which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the
ground that the application for a tax treaty relief was not filed
with ITAD prior to the payment by the former of its BPRT and
actual remittance of its branch profits to DB Germany, or prior to
its availment of the preferential rate of ten percent (10%) under
the RP-Germany Tax Treaty provision. The court a quo held that
petitioner violated the fifteen (15) day period mandated under
Section III paragraph (2) of Revenue Memorandum Order (RMO)
No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines)
Operations Corporation (formerly Southern Energy Asia-Pacific
Operations [Phils.], Inc.) v. Commissioner of Internal
Revenue9 (Mirant) where the CTA En Banc ruled that before the
benefits of the tax treaty may be extended to a foreign
corporation wishing to avail itself thereof, the latter should first
invoke the provisions of the tax treaty and prove that they indeed
apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Division’s Decision
dated 29 August 2008 and Resolution dated 14 January 2009.
Citing Mirant, the CTA En Banc held that a ruling from the ITAD of
the BIR must be secured prior to the availment of a preferential
tax rate under a tax treaty. Applying the principle of stare decisis
et non quieta movere, the CTA En Banc took into consideration
that this Court had denied the Petition in G.R. No. 168531 filed by
Mirant for failure to sufficiently show any reversible error in the
assailed judgment.11 The CTA En Banc ruled that once a case has
been decided in one way, any other case involving exactly the
same point at issue should be decided in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief
application under RMO No. 1-2000 cannot be relaxed for
petitioner, unlike in CBK Power Company Limited v. Commissioner
of Internal Revenue.12 In that case, the rule was relaxed and the
claim for refund of excess final withholding taxes was partially
granted. While it issued a ruling to CBK Power Company Limited
after the payment of withholding taxes, the ITAD did not issue any
ruling to petitioner even if it filed a request for confirmation on 4
October 2005 that the remittance of branch profits to DB
Germany is subject to a preferential tax rate of 10% pursuant to
Article 10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure
to strictly comply with RMO No. 1-2000 will deprive persons or
corporations of the benefit of a tax treaty.
THE COURT’S RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head
office shall be subject to a tax of 15% based on the total profits
applied for or earmarked for remittance without any deduction of
the tax component. However, petitioner invokes paragraph 6,
Article 10 of the RP-Germany Tax Treaty, which provides that
where a resident of the Federal Republic of Germany has a branch
in the Republic of the Philippines, this branch may be subjected to
the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the
gross amount of the profits remitted by that branch to the head
office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend
to a branch in the Philippines, remitting to its head office in
Germany, the benefit of a preferential rate equivalent to 10%
BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which
requires that any availment of the tax treaty relief must be
preceded by an application with ITAD at least 15 days before the
transaction. The Order was issued to streamline the processing of
the application of tax treaty relief in order to improve efficiency
and service to the taxpayers. Further, it also aims to prevent the
consequences of an erroneous interpretation and/or application
of the treaty provisions (i.e., filing a claim for a tax refund/credit
for the overpayment of taxes or for deficiency tax liabilities for
underpayment).13
The crux of the controversy lies in the implementation of RMO
No. 1-2000.
Petitioner argues that, considering that it has met all the
conditions under Article 10 of the RP-Germany Tax Treaty, the CTA
erred in denying its claim solely on the basis of RMO No. 1-2000.
The filing of a tax treaty relief application is not a condition
precedent to the availment of a preferential tax rate. Further,
petitioner posits that, contrary to the ruling of the CTA, Mirant is
not a binding judicial precedent to deny a claim for refund solely
on the basis of noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application
under RMO No. 1-2000 is mandatory in character. RMO No. 1-
2000 was issued pursuant to the unquestioned authority of the
Secretary of Finance to promulgate rules and regulations for the
effective implementation of the NIRC. Thus, courts cannot ignore
administrative issuances which partakes the nature of a statute
and have in their favor a presumption of legality.
The CTA ruled that prior application for a tax treaty relief is
mandatory, and noncompliance with this prerequisite is fatal to
the taxpayer’s availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on Mirant is not a
binding precedent. The Court has clarified this matter in Philippine
Health Care Providers, Inc. v. Commissioner of Internal
Revenue14 as follows:
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed the
CA ruling being questioned. As a result, our ruling in that case has
already become final. When a minute resolution denies or
dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed sustained.
But what is its effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata. However,
if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not
binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted
that a previous case, CIR v. Baier-Nickel involving the same parties
and the same issues, was previously disposed of by the Court thru
a minute resolution dated February 17, 2003 sustaining the ruling
of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases
involved different subject matters as they were concerned with
the taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of
the Constitution that the facts and the law on which the judgment
is based must be expressed clearly and distinctly applies only to
decisions, not to minute resolutions. A minute resolution is signed
only by the clerk of court by authority of the justices, unlike a
decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published
in the Philippine Reports. Finally, the proviso of Section 4(3) of
Article VIII speaks of a decision. Indeed, as a rule, this Court lays
down doctrines or principles of law which constitute binding
precedent in a decision duly signed by the members of the Court
and certified by the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down
in that Decision cannot bind this Court in cases of a similar nature.
There are differences in parties, taxes, taxable periods, and
treaties involved; more importantly, the disposition of that case
was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles
of international law as part of the law of the land.15The time-
honored international principle of pacta sunt servanda demands
the performance in good faith of treaty obligations on the part of
the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must
be performed by them in good faith.16 More importantly, treaties
have the force and effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies
that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter
and for identical periods. The apparent rationale for doing away
with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate
and the protection against double taxation is crucial in creating
such a climate."19
Simply put, tax treaties are entered into to minimize, if not
eliminate the harshness of international juridical double taxation,
which is why they are also known as double tax treaty or double
tax agreements.
"A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may be
necessary to ensure the fulfillment of the obligations
undertaken."20 Thus, laws and issuances must ensure that the
reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional
requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the
RP-Germany Tax Treaty does not provide for any pre-requisite for
the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-
2000 which would indicate a deprivation of entitlement to a tax
treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO No.
1-2000, but the CTA’s outright denial of a tax treaty relief for
failure to strictly comply with the prescribed period is not in
harmony with the objectives of the contracting state to ensure
that the benefits granted under tax treaties are enjoyed by duly
entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of
application for the availment of tax treaty relief as required by
RMO No. 1-2000 should not operate to divest entitlement to the
relief as it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence
over the objective of RMO No. 1-2000.1âwphi1 Logically,
noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign investors.
While the consequences sought to be prevented by RMO No. 1-
2000 involve an administrative procedure, these may be remedied
through other system management processes, e.g., the imposition
of a fine or penalty. But we cannot totally deprive those who are
entitled to the benefit of a treaty for failure to strictly comply with
an administrative issuance requiring prior application for tax
treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any
erroneous interpretation and/or application of the treaty
provisions. The objective of the BIR is to forestall assessments
against corporations who erroneously availed themselves of the
benefits of the tax treaty but are not legally entitled thereto, as
well as to save such investors from the tedious process of claims
for a refund due to an inaccurate application of the tax treaty
provisions. However, as earlier discussed, noncompliance with the
15-day period for prior application should not operate to
automatically divest entitlement to the tax treaty relief especially
in claims for refund.
The underlying principle of prior application with the BIR becomes
moot in refund cases, such as the present case, where the very
basis of the claim is erroneous or there is excessive payment
arising from non-availment of a tax treaty relief at the first
instance. In this case, petitioner should not be faulted for not
complying with RMO No. 1-2000 prior to the transaction. It could
not have applied for a tax treaty relief within the period
prescribed, or 15 days prior to the payment of its BPRT, precisely
because it erroneously paid the BPRT not on the basis of the
preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed
by the NIRC. Hence, the prior application requirement becomes
illogical. Therefore, the fact that petitioner invoked the provisions
of the RP-Germany Tax Treaty when it requested for a
confirmation from the ITAD before filing an administrative claim
for a refund should be deemed substantial compliance with RMO
No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer
a remedy for tax recovery when there has been an erroneous
payment of tax.1âwphi1 The outright denial of petitioner’s claim
for a refund, on the sole ground of failure to apply for a tax treaty
relief prior to the payment of the BPRT, would defeat the purpose
of Section 229.
Petitioner is liable to pay only the amount of PHP 45,125,702.34
on its RBU net income amounting to PHP 451,257,023.29 for 2002
and prior taxable years, applying the 10% BPRT. Thus, it is proper
to grant petitioner a refund ofthe difference between the PHP
67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a
total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is
GRANTED. Accordingly, the Court of Tax Appeals En Banc Decision
dated 29 May 2009 and Resolution dated 1 July 2009 are
REVERSED and SET ASIDE. A new one is hereby entered ordering
respondent Commissioner of Internal Revenue to refund or issue a
tax credit certificate in favor of petitioner Deutsche Bank AG
Manila Branch the amount of TWENTY TWO MILLION FIVE
HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE
PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17),
Philippine currency, representing the erroneously paid BPRT for
2002 and prior taxable years.
SO ORDERED.
MARIA LOURDES P. A. SERENO
Chief Justice, Chairperson

Petitioner is entitled to a refund

It is significant to emphasize that petitioner applied – though

belatedly – for a tax treaty relief, in substantial compliance with
RMO No. 1-2000. A ruling by the BIR would have confirmed
whether petitioner was entitled to the lower rate of 10% BPRT
pursuant to the RP-Germany Tax Treaty.

Nevertheless, even without the BIR ruling, the CTA Second

Division found as follows:

Based on the evidence presented, both documentary and

testimonial, petitioner was able to establish the following facts:

a. That petitioner is a branch office in the Philippines of Deutsche

Bank AG, a corporation organized and existing under the laws of
the Federal Republic of Germany;

b. That on October 21, 2003, it filed its Monthly Remittance

Return of Final Income Taxes Withheld under BIR Form No. 1601-F
and remitted the amount of ₱67,688,553.51 as branch profits
remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas

having issued a clearance, petitioner remitted to Frankfurt Head
Office the amount of EUR5,174,847.38 (or ₱330,175,961.88 at
63.804 Peso/Euro) representing its 2002 profits remittance. 22

The amount of PHP 67,688,553.51 paid by petitioner represented

the 15% BPRT on its RBU net income, due for remittance to DB
Germany amounting to PHP 451,257,023.29 for 2002 and prior
taxable years.23

Likewise, both the administrative and the judicial actions were

filed within the two-year prescriptive period pursuant to Section
229 of the NIRC.24

Clearly, there is no reason to deprive petitioner of the benefit of a

preferential tax rate of 10% BPRT in accordance with the RP-
Germany Tax Treaty.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 193383-84 January 14, 2015
CBK POWER COMPANY LIMITED, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. Nos. 193407-08
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
CBK POWER COMPANY LIMITED, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in these consolidated petitions for review on
certiorari1 are the Decision2 dated March 29, 2010 and the
Resolution3 dated August 16, 2010 of the Court ofTax Appeals
(CTA) En Bancin C.T.A. E.B. Nos. 469 and 494, which affirmed the
Decision4 dated August 28, 2008, the Amended Decision5 dated
February 12, 2009, and the Resolution6 dated May 7, 2009 of the
CTA First Division in CTA Case Nos. 6699, 6884,and 7166 granting
CBK Power Company Limited (CBK Power) a refund of its excess
final withholding tax for the taxable years 2001 to 2003.
The Facts
CBK Power is a limited partnership duly organized and existing
under the laws of the Philippines, and primarily engaged in the
development and operation of the Caliraya, Botocan, and
Kalayaan hydro electric power generating plants in Laguna (CBK
Project). It is registered with the Board of Investments (BOI) as
engaged in a preferred pioneer area of investment under the
Omnibus Investment Code of 1987.7
To finance the CBK Project, CBK Power obtained in August 2000 a
syndicated loan from several foreign banks,8 i.e., BNP Paribas, Dai-
ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited, and
Societe General (original lenders), acting through an Inter-Creditor
Agent, Dai-ichi Kangyo Bank, a Japanesebank that subsequently
merged with the Industrial Bank of Japan, Limited (Industrial Bank
of Japan) and the Fuji Bank, Limited (Fuji Bank), with the
mergedentity being named as Mizuho Corporate Bank (Mizuho
Bank). One of the merged banks, Fuji Bank, had a branch in the
Philippines, which became a branch of Mizuho Bank as a result of
the merger. The Industrial Bank of Japan and Mizuho Bank are
residents of Japan for purposes of income taxation, and
recognized as such under the relevant provisions of the income
tax treaties between the Philippines and Japan. 9
Certain portions of the loan were subsequently assigned by the
original lenders to various other banks, including Fortis Bank
(Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank
Osterreich AG (Raiffesen Bank). Fortis-Netherlands, in turn,
assigned its portion of the loan to Fortis Bank S.A./N.V. (Fortis-
Belgium), a resident of Belgium. Fortis Netherlands and Raiffesen
Bank, on the other hand, are residents of Netherlands and Austria,
respectively.10
In February 2001, CBK Power borrowed money from Industrial
Bank of Japan, Fortis-Netherlands, Raiffesen Bank, Fortis-Belgium,
and Mizuho Bank for which it remitted interest payments from
May 2001 to May 2003.11 It allegedly withheld final taxes from
said payments based on the following rates, and paid the same to
the Revenue District Office No. 55 of the Bureau of Internal
Revenue (BIR): (a) fifteen percent (15%) for Fortis-Belgium, Fortis-
Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for
Industrial Bank of Japan and Mizuho Bank.12
However, according to CBK Power, under the relevant tax treaties
between the Philippines and the respective countries in which
each of the banks is a resident, the interest income derived by the
aforementioned banks are subject only to a preferential tax rate
of 10%, viz.:13
1âwphi1
COUNTRY PREFERENTIAL RATE
BANK OF UNDER THE RELEVANT TAX
RESIDENCE TREATY
Fortis Bank Belgium 10% (Article 11[1], RP-Belgium
S.A./N.V. Tax Treaty)
Industrial Bank of Japan 10% (Article 11[3], RP-Japan
Japan Tax Treaty)
Raiffesen Zentral Austria 10% (Article 11[3], RP-Austria
Bank Tax Treaty)
Osterreich AG
Mizuho Corporate Japan 10% (Article 11[3], RP-Japan
Bank Tax Treaty)
Accordingly, on April 14, 2003, CBK Power filed a claim for refund
of its excess final withholding taxes allegedly erroneously
withheld and collected for the years 2001 and 2002 with the BIR
Revenue Region No. 9. The claim for refund of excess final
withholding taxes in 2003 was subsequently filed on March 4,
2005.14
The Commissioner of Internal Revenue’s (Commissioner) inaction
on said claims prompted CBK Power to file petitions for review
before the CTA, viz.:15
(1) CTA Case No. 6699 was filed by CBK Power on June 6,
2003 seeking the refund of excess final withholding tax in the total
amount of ₱6,393,267.20 covering the year 2001 with respect to
interest income derived by [Fortis-Belgium], Industrial Bank of
Japan, and [Raiffesen Bank]. An Answer was filed by the
Commissioner on July 25, 2003.
(2) CTA Case No. 6884was filed by CBK Power on March
5, 2004 seeking for the refund of the amount of 8,136,174.31
covering [the] year 2002 with respect to interest income derived
by [Fortis- Belgium], Industrial Bank of Japan, [Mizuho Bank], and
[Raiffesen Bank]. The Commissioner filed his Answer on May 7,
2004.
xxxx
(3) CTA Case No. 7166was filed by CBK [Power] on March 9, 2005
seeking for the refund of [the amount of] ₱1,143,517.21covering
[the] year 2003 with respect to interest income derived by [Fortis
Belgium], and [Raiffesen Bank]. The Commissioner filed his
Answer on May 9, 2005. (Emphases supplied)
CTA Case Nos. 6699 and 6884 were consolidated first on June 18,
2004. Subsequently, however, all three cases – CTA Case Nos.
6699, 6884, and 7166 – were consolidated in a Resolution dated
August 3, 2005.16
The CTA First Division Rulings
In a Decision17 dated August 28, 2008, the CTA First Division
granted the petitions and ordered the refund of the amount of
15,672,958.42 upon a finding that the relevant tax treaties were
applicable to the case.18 It cited DA-ITAD Ruling No. 099-
0319 dated July 16, 2003, issued by the BIR, confirming CBK
Power’s claim that the interest payments it made to Industrial
Bank of Japan and Raiffesen Bank were subject to a final
withholding tax rate of only 10%of the gross amount of interest,
pursuant to Article 11 of the Republic of the Philippines (RP)-
Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling No.
126-0320 dated August 18, 2003, also issued by the BIR, interest
payments to Fortis-Belgium were likewise subjected to the same
rate pursuant to the Protocol Amending the RP-Belgium Tax
Treaty, the provisions of which apply on income derived or which
accrued beginning January 1, 2000. With respect to interest
payments made to Fortis-Netherlands before it assigned its
portion of the loan to Fortis-Belgium, the CTA First Division
likewise granted the preferential rate.21
The CTA First Division categorically declared in the August 28,
2008 Decision that the required International Tax Affairs Division
(ITAD) ruling was not a condition sine qua non for the entitlement
of the tax relief sought by CBK Power,22 however, upon motion for
reconsideration23 filed by the Commissioner, the CTA First Division
amendedits earlier decision by reducing the amount of the refund
from ₱15,672,958.42 to ₱14,835,720.39 on the ground that CBK
Power failed to obtain an ITAD ruling with respect to its
transactions with Fortis-Netherlands.24 In its Amended
Decision25 dated February 12, 2009, the CTA First Division
adopted26 the ruling in the case of Mirant (Philippines) Operations
Corporation (formerly: Southern Energy Asia-Pacific Operations
[Phils.], Inc.) v. Commissioner of Internal Revenue (Mirant),27 cited
by the Commissioner in his motion for reconsideration, where the
Court categorically pronounced in its Resolution dated February
18, 2008 that an ITAD ruling must be obtained prior to availing a
preferential tax rate.
CBK Power moved for the reconsideration28 of the Amended
Decision dated February 12, 2009, arguing in the main that the
Mirantcase, which was resolved in a minute resolution, did not
establish a legal precedent. The motion was denied, however, in a
Resolution29 dated May 7, 2009 for lack of merit.
Undaunted, CBK Power elevated the matter to the CTA En Bancon
petition for review,30 docketed as C.T.A E.B. No. 494. The
Commissioner likewise filed his own petition for review, 31 which
was docketed as C.T.A. E.B. No. 469. Said petitions were
subsequently consolidated.32
CBK Power raised the lone issue of whether or not an ITAD ruling
is required before it can avail of the preferential tax rate. On the
other hand, the Commissioner claimed that CBK Power failed to
exhaust administrative remedies when it filed its petitions before
the CTA First Division, and that said petitions were not filed within
the two-year prescriptive period for initiating judicial claims for
refund.33
The CTA En Banc Ruling
In a Decision34 dated March 29, 2010, the CTA En Banc affirmed
the ruling of the CTA First Division that a prior application with the
ITAD is indeed required by Revenue Memorandum Order (RMO)
1-2000,35 which administrative issuance has the force and effect of
law and is just as binding as a tax treaty. The CTA En Banc
declared the Mirant case as without any binding effect on CBK
Power, having been resolved by this Court merely through minute
resolutions, and relied instead on the mandatory wording of RMO
1-2000, as follows:36
III. Policies:
xxxx
2. Any availment of the tax treaty relief shall be preceded by an
application by filing BIR Form No. 0901 (Application for Relief
from Double Taxation) with ITAD at least 15 days before the
transaction i.e. payment of dividends, royalties, etc., accompanied
by supporting documents justifying the relief. x x x.
The CTA En Banc further held that CBK Power’s petitions for
review were filed within the two-year prescriptive period
provided under Section 22937 of the National Internal Revenue
Code of 199738 (NIRC), and that it was proper for CBK Power to
have filed said petitions without awaiting the final resolution of
its administrative claims for refund before the BIR; otherwise, it
would have completely lost its right to seek judicial recourse if the
two-year prescriptive period lapsed with no judicial claim filed.
CBK Power’s motion for partial reconsideration and the
Commissioner’s motion for reconsideration of the foregoing
Decision were both deniedin a Resolution39 dated August 16, 2010
for lack of merit; hence, the present consolidated petitions.
The Issues Before the Court
In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of
whether the BIR may add a requirement– prior application for an
ITAD ruling – that is not found in the income tax treaties signed by
the Philippines before a taxpayer can avail of preferential tax
rates under said treaties.40
On the other hand, in G.R. Nos. 193407-08, the Commissioner
maintains that CBK Power is not entitled to a refund in the
amount of ₱1,143,517.21 for the period covering taxable year
2003 as it allegedly failed to exhaust administrative remedies
before seeking judicial redress.41
The Court’s Ruling
The Court resolves the foregoing in seriatim.
A. G.R. Nos. 193383-84
The Philippine Constitution provides for adherence to the general
principles of international law as part of the law of the land. The
time honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on
the part of the states that enter into the agreement. In this
jurisdiction, treaties have the force and effect of law.42 The issue
of whether the failure to strictly comply with RMO No. 1-2000 will
deprive persons or corporations of the benefit of a tax treaty was
squarely addressed in the recent case of Deutsche Bank AG Manila
Branch v. Commissioner of Internal Revenue43 (Deutsche Bank),
where the Court emphasized that the obligation to comply with a
tax treaty must take precedence over the objective of RMO No. 1-
2000, viz.:
We recognize the clear intention of the BIR in implementing RMO
No. 1-2000, but the CTA’s outright denial of a tax treaty relief for
failure to strictly comply with the prescribed period is not in
harmony with the objectives of the contracting state to ensure
that the benefits granted under tax treaties are enjoyed by duly
entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of
application for the availment of tax treaty relief as required by
RMO No. 1-2000 should not operate to divestentitlement to the
reliefas it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence
over the objective of RMO No. 1-2000. Logically, noncompliance
with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve
an administrative procedure, these may be remedied through
other system management processes, e.g., the imposition of a fine
or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an
administrative issuance requiring prior application for tax treaty
relief.44 (Emphases and underscoring supplied)
The objective of RMO No. 1-2000 inrequiring the application for
treaty relief with the ITAD before a party’s availment of the
preferential rate under a tax treaty is to avert the consequences
of any erroneous interpretation and/or application of treaty
provisions, such as claims for refund/credit for overpayment of
taxes, or deficiency tax liabilities for underpayment.45 However, as
pointed out in Deutsche Bank, the underlying principle of prior
application with the BIR becomes moot in refund cases– as in the
present case – where the very basis of the claim is erroneous or
there is excessive payment arising from the non-availment of a tax
treaty relief at the first instance.Just as Deutsche Bank was not
faulted by the Court for not complying with RMO No. 1-2000 prior
to the transaction,46 so should CBK Power. In parallel, CBK Power
could not have applied for a tax treaty relief 15 days prior to its
payment of the final withholding tax on the interest paid to its
lenders precisely because it erroneously paid said tax on the basis
of the regular rate as prescribed by the NIRC, and not on the
preferential tax rate provided under the different treaties. As
stressed by the Court, the prior application requirement under
RMO No. 1-2000 then becomes illogical.47
Not only is the requirement illogical, butit is also an imposition
that is not found at all in the applicable tax treaties. In Deutsche
Bank, the Court categorically held that the BIR should not impose
additional requirements that would negate the availment of the
reliefs provided for under international agreements, especially
since said tax treaties do not provide for any prerequisite at all for
the availment of the benefits under said agreements.48
It bears reiterating that the application for a tax treaty relief from
the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief.49 Since CBK Power had requested for
confirmation from the ITAD on June 8, 2001 and October 28,
200250 before it filed on April 14, 2003 its administrative claim for
refund of its excess final withholding taxes, the same should be
deemed substantial compliance with RMO No. 1-2000, as in
Deutsche Bank. To rule otherwise would defeat the purpose of
Section 229 of the NIRC in providing the taxpayer a remedy for
erroneously paid tax solely on the ground of failure to make prior
application for tax treaty relief.51 As the Court exhorted in
Republic v. GST Philippines, Inc.,52 while the taxpayer has an
obligation to honestly pay the right taxes, the government has a
corollary duty to implement tax laws in good faith; to discharge its
duty to collect what is due to it; and to justly return what has
been erroneously and excessively given to it. 53
In view of the foregoing, the Court holds that the CTA En Banc
committed reversible error in affirming the reduction of the
amount of refund to CBK Power from 15,672,958.42 to
₱14,835,720.39 to exclude its transactions with Fortis-Netherlands
for which no ITAD ruling was obtained.54 CBK Power’s petition in
G.R. Nos. 193383-84 is therefore granted.
The opposite conclusion is, however, reached with respect to the
Commissioner’s petition in G.R. Nos. 193407-08.
B. G.R. Nos. 193407-08
The Commissioner laments55 that he was deprived of the
opportunity to act on the administrative claim for refund of excess
final withholding taxes covering taxable year 2003 which CBK
Power filed on March 4, 2005, a Friday, then the following
Wednesday, March 9, 2005, the latter hastily elevated the case on
petition for review before the CTA. He argues56 that the failure on
the part of CBK Power to give him a reasonable timeto act on said
claim is violative of the doctrines of exhaustion of administrative
remedies and of primary jurisdiction.
For its part, CBK Power maintains57 that it would be
prejudicial to wait for the Commissioner’s ruling beforeit files its
judicial claim since it only has 2 years from the payment of the tax
within which to file both its administrative and judicial claims.
The Court rules for CBK Power.
Sections 204 and 229 of the NIRC pertain to the refund of
erroneously or illegally collected taxes. Section 204 applies to
administrative claims for refund, while Section 229 to judicial
claims for refund. In both instances, the taxpayer’s claim must be
filed within two (2) years from the date of payment of the tax or
penalty. However, Section 229 of the NIRC further states the
condition that a judicial claim for refund may not be maintained
until a claim for refund or credit has been duly filed with the
Commissioner. These provisions respectively read:
SEC. 204. Authority of the Commissioner to Compromise, Abate
and Refund or Credit Taxes. – The Commissioner may -
xxxx
(C) Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty: Provided, however, That
a return filed showing an overpayment shall be considered as a
written claim for credit or refund.
xxxx
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No
suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, of any
sum alleged to have been excessively or in any manner wrongfully
collected without authority, or of any sum alleged to have been
excessively orin any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment: x x x. (Emphases and underscoring supplied)
Indubitably, CBK Power’s administrative and judicial claims for
refund of its excess final withholding taxes covering taxable year
2003 were filed within the two-year prescriptive period, as shown
by the table below:58
WHEN WHEN LAST DAY WHEN WHEN
FINAL REMITTANC OF ADMINISTRATI PETITIO
INCOME E THE 2-YEAR VE N
TAXES RETURN PRESCRIPTI CLAIM WAS FOR
WERE FILED VE FILED REVIEW
WITHHEL PERIOD WAS
D FILED
February 03/10/03 03/10/05 March 4, 2005 03/09/0
2003 5
May 06/10/03 06/10/05 March 4, 2005 03/09/0
2003 5
With respect to the remittance filed on March 10, 2003, the Court
agrees with the ratiocination of the CTA En Banc in debunking the
alleged failure to exhaust administrative remedies. Had CBK
Power awaited the action of the Commissioner on its claim for
refund prior to taking court action knowing fully well that the
prescriptive period was about to end, it would have lost not only
its right to seek judicial recourse but its right to recover the final
withholding taxes it erroneously paid to the government thereby
suffering irreparable damage.59
Also, while it may be argued that, for the remittance filed on June
10, 2003 that was to prescribe on June 10,2005, CBK Power could
have waited for, at the most, three (3) months from the filing of
the administrative claim on March 4, 2005 until the last day of the
two-year prescriptive period ending June 10, 2005, that is, if only
togive the BIR at the administrative level an opportunity to act on
said claim, the Court cannot, on that basis alone, deny a
legitimate claim that was, for all intents and purposes, timely filed
in accordance with Section 229 of the NIRC. There was no
violation of Section 229 since the law, as worded, only requires
that an administrative claim be priorly filed.
In the foregoing instances, attention must be drawn to the Court’s
ruling in P.J. Kiener Co., Ltd. v. David60 (Kiener), wherein it was
held that in no wise does the law, i.e., Section 306 of the old Tax
Code (now, Section 229 of the NIRC), imply that the Collector of
Internal Revenue first act upon the taxpayer’s claim, and that the
taxpayer shall not go to court before he is notified of the
Collector’s action. In Kiener, the Court went on to say that the
claim with the Collector of Internal Revenue was intended
primarily as a notice of warning that unless the tax or penalty
alleged to have been collected erroneously or illegally is refunded,
court action will follow, viz.: The controversy centers on the
construction of the aforementioned section of the Tax Code which
reads:
SEC. 306. Recovery of tax erroneously or illegally collected. — No
suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been
duly filed with the Collector of Internal Revenue; but such suit or
proceeding may be maintained, whether or not such tax, penalty,
or sum has been paid under protest or duress. In any case, no such
suit or proceeding shall be begun after the expiration of two years
from the date of payment of the tax or penalty. The preceding
provisions seem at first blush conflicting. It will be noticed that,
whereas the first sentence requires a claim to be filed with the
Collector of Internal Revenue before any suit is commenced, the
last makes imperative the bringing of such suit within two years
from the date of collection. But the conflict is only apparent and
the two provisions easily yield to reconciliation, which it is the
office of statutory construction to effectuate, where possible, to
give effect to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed

to have understood the language it used and to have acted with
full idea of what it wanted to accomplish, it is fair and reasonable
to say without doing violence to the context or either of the two
provisions, that by the first is meant simply that the Collector of
Internal Revenue shall be given an opportunity to consider his
mistake, if mistake has been committed, before he is sued, but
not, as the appellant contends that pending consideration of the
claim, the period of two years provided in the last clause shall be
deemed interrupted. Nowhere and in no wise does the law imply
that the Collector of Internal Revenue must act upon the claim, or
that the taxpayer shall not go to court before he is notified of the
Collector’s action. x x x. We understand the filing of the claim with
the Collector of Internal Revenue to be intended primarily as a
notice of warning that unless the tax or penalty alleged to have
been collected erroneously or illegally is refunded, court action
will follow. x x x.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should
all be granted, and, the petition of the Commissioner in G.R. Nos.
193407-08 be denied for lack of merit.

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The

Decision dated March 29, 2010 and the Resolution dated August
16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B.
Nos. 469 and 494 are hereby REVERSED and SET ASIDE and a new
one entered REINSTATING the Decision of the CTA First Division
dated August 28, 2008 ordering the refund in favor of CBK Power
Company Limited the amount of PlS,672,958.42 representing its
excess final withholding taxes for the taxable years 2001 to 2003.
On the other hand, the petition in G.R. Nos. 193407-08 is DENIED
for lack of merit.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 165109 December 14, 2009
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N.
FAUSTO, Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN,
ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P.
FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA
MAEVE T. LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS
CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN
INSURANCE CO., and LAND BANK OF THE PHILIPPINES, Respondents.
DECISION
DEL CASTILLO, J.:
The decision to entertain a taxpayer’s suit is discretionary
upon the Court. It can choose to strictly apply the rule or take a liberal
stance depending on the controversy involved. Advocates for a strict
application of the rule believe that leniency would open floodgates to
numerous suits, which could hamper the government from
performing its job. Such possibility, however, is not only remote but
also negligible compared to what is at stake - "the lifeblood of the
State". For this reason, when the issue hinges on the illegal
disbursement of public funds, a liberal approach should be preferred
as it is more in keeping with truth and justice.
This Petition for Review on Certiorari with prayer for a
Temporary Restraining Order/Writ of Preliminary Injunction, under
Rule 45 of the Rules of Court, seeks to set aside the April 27, 2004
Order 1 of the Regional Trial Court (RTC), Branch 5, Tuguegarao City,
dismissing the Petition for Annulment of Contracts and Injunction
with prayer for the issuance of a Temporary Restraining Order/Writ of
Preliminary Injunction, 2 docketed as Civil Case No. 6283. Likewise
assailed in this Petition is the August 20, 2004 Resolution 3 of RTC,
Branch 1, Tuguegarao City denying the Motion for Reconsideration of
the dismissal.
Factual Antecedents
On November 5, 2001, the Sangguniang Panlalawigan of
Cagayan passed Resolution No. 2001-272 4 authorizing Governor
Edgar R. Lara (Gov. Lara) to engage the services of and appoint
Preferred Ventures Corporation as financial advisor or consultant for
the issuance and flotation of bonds to fund the priority projects of the
governor without cost and commitment.
On November 19, 2001, the Sangguniang Panlalawigan, through
Resolution No. 290-2001, 5 ratified the Memorandum of Agreement
(MOA) 6 entered into by Gov. Lara and Preferred Ventures
Corporation. The MOA provided that the provincial government of
Cagayan shall pay Preferred Ventures Corporation a one-time fee of
3% of the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan approved
Resolution No. 2002-061-A 7 authorizing Gov. Lara to negotiate, sign
and execute contracts or agreements pertinent to the flotation of the
bonds of the provincial government in an amount not to exceed ₱500
million for the construction and improvement of priority projects to
be approved by the Sangguniang Panlalawigan.
On May 20, 2002, the majority of the members of the Sangguniang
Panlalawigan of Cagayan approved Ordinance No. 19-
2002, 8 authorizing the bond flotation of the provincial government in
an amount not to exceed ₱500 million to fund the construction and
development of the new Cagayan Town Center. The Resolution
likewise granted authority to Gov. Lara to negotiate, sign and execute
contracts and agreements necessary and related to the bond flotation
subject to the approval and ratification by the Sangguniang
Panlalawigan.
On October 20, 2003, the Sangguniang Panlalawigan approved
Resolution No. 350-2003 9 ratifying the Cagayan Provincial Bond
Agreements entered into by the provincial government, represented
by Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking
Corporation (RCBC) – Trust and Investment Division and
Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC and
the Land Bank of the Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC –
Trust and Investment Division.
d. Guarantee Agreement with the RCBC – Trust and
Investment Division and MICO.
e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved
Resolution No. 351-2003, 10 ratifying the Agreement for the Planning,
Design, Construction, and Site Development of the New Cagayan
Town Center 11 entered into by the provincial government,
represented by Gov. Lara and Asset Builders Corporation, represented
by its President, Mr. Rogelio P. Centeno.
On May 20, 2003, Gov. Lara issued the Notice of Award to
Asset Builders Corporation, giving to the latter the planning, design,
construction and site development of the town center project for a
fee of ₱213,795,732.39. 12
Proceedings before the Regional Trial Court
On December 12, 2003, petitioners Manuel N. Mamba, Raymund P.
Guzman and Leonides N. Fausto filed a Petition for Annulment of
Contracts and Injunction with prayer for a Temporary Restraining
Order/Writ of Preliminary Injunction 13 against Edgar R. Lara,
Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr.,
Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A.
Calagui, Cecilia Maeve T. Layos, Preferred Ventures Corporation,
Asset Builders Corporation, RCBC, MICO and LBP.1avvphi1
At the time of the filing of the petition, Manuel N. Mamba was the
Representative of the 3rd Congressional District of the province of
Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were
members of the Sangguniang Panlalawigan of Cagayan. 15
Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while
Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr.,
Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A.
Calagui and Cecilia Maeve T. Layos were sued as members of
the Sangguniang Panlalawigan of Cagayan. 17 Respondents Preferred
Ventures Corporation, Asset Builders Corporation, RCBC, MICO and
LBP were all impleaded as indispensable or necessary parties.
Respondent Preferred Ventures Corporation is the financial advisor of
the province of Cagayan regarding the bond flotation undertaken by
the province. 18 Respondent Asset Builders Corporation was awarded
the right to plan, design, construct and develop the proposed town
center. 19 Respondent RCBC, through its Trust and Investment
Division, is the trustee of the seven-year bond flotation undertaken
by the province for the construction of the town center, 20 while
respondent MICO is the guarantor. 21 Lastly, respondent LBP is the
official depositary bank of the province. 22
In response to the petition, public respondents filed an Answer with
Motion to Dismiss, 23 raising the following defenses: a) petitioners are
not the proper parties or they lack locus standi in court; b) the action
is barred by the rule on state immunity from suit and c) the issues
raised are not justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed a
Motion to Dismiss 24 on the following grounds: a) petitioners have no
cause of action for injunction; b) failure to join an indispensable party;
c) lack of personality to sue and d) lack of locus standi. Respondent
MICO likewise filed a Motion to Dismiss 25 raising the grounds of lack
of cause of action and legal standing. Respondent RCBC similarly
argued in its Motion to Dismiss 26 that: a) petitioners are not the real
parties-in-interest or have no legal standing to institute the petition;
b) petitioners have no cause of action as the flotation of the bonds
are within the right and power of both respondent RCBC and the
province of Cagayan and c) the viability of the construction of a town
center is not a justiciable question but a political question.
Respondent Asset Builders Corporation, on the other hand, filed an
Answer 27 interposing special and affirmative defenses of lack of legal
standing and cause of action. Respondent LBP also filed an
Answer 28 alleging in the main that petitioners have no cause of action
against it as it is not an indispensable party or a necessary party to the
case.
Two days after the filing of respondents’ respective memoranda on
the issues raised during the hearing of the special and/or affirmative
defenses, petitioners filed a Motion to Admit Amended
Petition 29 attaching thereto the amended petition. 30 Public
respondents opposed the motion for the following reasons: 1) the
motion was belatedly filed; 2) the Amended Petition is not sufficient
in form and in substance; 3) the motion is patently dilatory and 4) the
Amended Petition was filed to cure the defect in the original
petition. 31
Petitioners also filed a Consolidated Opposition to the Motion to
Dismiss 32 followed by supplemental pleadings 33in support of their
prayer for a writ of preliminary injunction.
On April 27, 2004, the RTC issued the assailed Order denying the
Motion to Admit Amended Petition and dismissing the petition for
lack of cause of action. It ruled that:
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil
Procedure dealing on the filing of an amended pleading is quite clear.
As such, the Court rules that the motion was belatedly filed. The
granting of leave to file amended pleadings is a matter peculiarly
within the sound discretion of the trial court. But the rule allowing
amendments to pleadings is subject to the general but inflexible
limitation that the cause of action or defense shall not be
substantially changed or the theory of the case altered to the
prejudice of the other party (Avecilla vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable issues
which this Court may take cognizance of, petitioners in the present
case who presumably presented legitimate interests in the
controversy are not parties to the questioned contract. Contracts
produce effect as between the parties who execute them. Only a
party to the contract can maintain an action to enforce the
obligations arising under said contract (Young vs. CA, 169 SCRA 213).
Since a contract is binding only upon the parties thereto, a third
person cannot ask for its rescission if it is in fraud of his rights. One
who is not a party to a contract has no rights under such contract and
even if the contrary may be voidable, its nullity can be asserted only
by one who is a party thereto; a third person would have absolutely
no personality to ask for the annulment (Wolfson vs. Estate of
Martinez, 20 Phil. 340; Ibañez vs. Hongkong & Shanghai Bank, 22 Phil.
572; Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party obliged
principally or subsidiarily in a contract may exercise an action for
nullity of the contract if he is prejudiced in his rights with respect to
one of the contracting parties and can show the detriment which
would positively result to him from the contract in which he had no
intervention (Bañez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA
110, 112-113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar,
petitioners failed to show that they were prejudiced in their rights [or
that a] detriment x x x would positively result to them. Hence, they
lack locus standi in court.
xxxx
To the mind of the Court, procedural matters in the present
controversy may be dispensed with, stressing that the instant case is a
political question, a question which the court cannot, in any manner,
take judicial cognizance. Courts will not interfere with purely political
questions because of the principle of separation of powers (Tañada
vs. Cuenco, 103 Phil. 1051). Political questions are those questions
which, under the Constitution, are to be decided by the people in
their sovereign capacity or in regard to which full discretionary
authority has been delegated to the legislative or [to the] executive
branch of the government (Nuclear Free Phils. Coalition vs. NPC, 141
SCRA 307 (1986); Torres vs. Gonzales, 152 SCRA 272; Citizen’s Alliance
for Consumer Protection vs. Energy Regulatory Board, G.R. No. 78888-
90, June 23, 1988).
The citation made by the provincial government[, to] which this Court
is inclined to agree, is that the matter falls under the discretion of
another department, hence the decision reached is in the category of
a political question and consequently may not be the subject of
judicial jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is correct.
It is [a] well-recognized principle that purely administrative and
discretionary functions may not be interfered with by the courts
(Adm. Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).
The case therefore calls for the doctrine of ripeness for judicial
review. This determines the point at which courts may review
administrative action. The basic principle of ripeness is that the
judicial machinery should be conserved for problems which are real
and present or imminent and should not be squandered on problems
which are future, imaginary or remote. This case is not ripe for judicial
determination since there is no imminently x x x substantial injury to
the petitioners.
In other words, the putting up of the New Cagayan Town Center by
the province over the land fully owned by it and the concomitant
contracts entered into by the same is within the bounds of its
corporate power, an undertaking which falls within the ambit of its
discretion and therefore a purely political issue which is beyond the
province of the court x x x. [Consequently, the court cannot,] in any
manner, take judicial cognizance over it. The act of the provincial
government was in pursuance of the mandate of the Local
Government Code of 1991.
xxxx
Indeed, adjudication of the procedural issues presented for resolution
by the present action would be a futile exercise in exegesis.
What defeats the plea of the petitioners for the issuance of a writ of
preliminary injunction is the fact that their averments are merely
speculative and founded on conjectures. An injunction is not intended
to protect contingent or future rights nor is it a remedy to enforce an
abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225
SCRA 637). An injunction, whether preliminary or final, will not issue
to protect a right not in in esse and which may never arise, or to
restrain an act which does not give rise to a cause of action. The
complainant’s right on title, moreover, must be clear and
unquestioned [since] equity, as a rule, will not take cognizance of
suits to establish title and will not lend its preventive aid by injunction
where the complainant’s title or right is doubtful or disputed. The
possibility of irreparable damage, without proof of violation of an
actual existing right, is no ground for injunction being a
mere damnum, absque injuria (Talisay-Silay Milling Company, Inc. vs.
CFI of Negros Occidental, et. al. 42 SCRA 577, 582).
xxxx
For lack of cause of action, the case should be dismissed.
The facts and allegations [necessarily] suggest also that this court may
dismiss the case for want of jurisdiction.
The rule has to be so because it can motu propio dismiss it
as its only jurisdiction is to dismiss it if it has no jurisdiction. This is in
line with the ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No.
104033, Dec. 27, 1993 where the court may dismiss a complaint even
without a motion to dismiss or answer.
Upon the foregoing considerations, the case is hereby
dismissed without costs.
SO ORDERED. 34
Petitioners filed a Motion for Reconsideration 35 to which
respondents filed their respective Oppositions. 36Petitioners then filed
a Motion to Inhibit, which the court granted. Accordingly, the case
was re-raffled to Branch 1 of the RTC of Tuguegarao City. 37
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a
Resolution denying petitioners’ plea for reconsideration. The court
found the motion to be a mere scrap of paper as the notice of hearing
was addressed only to the Clerk of Court in violation of Section 5, Rule
15 of the Rules of Court. As to the merits, the court sustained the
findings of Branch 5 that petitioners lack legal standing to sue and
that the issue involved is political.
Issues
Hence, the present recourse where petitioners argue that:
A. The lower court decided a question of substance in a way
not in accord with law and with the applicable decision of
the Supreme Court, and
B. The lower court has so far departed from the accepted
and usual course of judicial proceedings as to call for an
exercise of the power of supervision in that:
I. It denied locus standi to petitioners;
II. [It] determined that the matter of contract entered into by the
provincial government is in the nature of a political question;
III. [It] denied the admission of Amended Petition; and
IV. [It] found a defect of substance in the petitioners’ Motion for
Reconsideration. 38
Our Ruling
The petition is partially meritorious.
Petitioners have legal standing to sue as taxpayers
A taxpayer is allowed to sue where there is a claim that public funds
are illegally disbursed, or that the public money is being deflected to
any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law. 39 A
person suing as a taxpayer, however, must show that the act
complained of directly involves the illegal disbursement of public
funds derived from taxation. 40 He must also prove that he has
sufficient interest in preventing the illegal expenditure of money
raised by taxation and that he will sustain a direct injury because of
the enforcement of the questioned statute or contract. 41 In other
words, for a taxpayer’s suit to prosper, two requisites must be met:
(1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed and (2) the petitioner is directly
affected by the alleged act. 42
In light of the foregoing, it is apparent that contrary to the view of the
RTC,
a taxpayer need not be a party to the contract to challenge its
validity. 43 As long as taxes are involved, people have a right to
question contracts entered into by the government.
In this case, although the construction of the town center would be
primarily sourced from the proceeds of the bonds, which respondents
insist are not taxpayer’s money, a government support in the amount
of ₱187 million would still be spent for paying the interest of the
bonds. 44 In fact, a Deed of Assignment 45 was executed by the
governor in favor of respondent RCBC over the Internal Revenue
Allotment (IRA) and other revenues of the provincial government as
payment and/or security for the obligations of the provincial
government under the Trust Indenture Agreement dated September
17, 2003. Records also show that on March 4, 2004, the governor
requested the Sangguniang Panlalawigan to appropriate an amount
of ₱25 million for the interest of the bond. 46 Clearly, the first
requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the
stringent "direct injury test" bearing in mind that locus standi is a
procedural technicality. 47 By invoking "transcendental importance",
"paramount public interest", or "far-reaching implications", ordinary
citizens and taxpayers were allowed to sue even if they failed to show
direct injury. 48 In cases where serious legal issues were raised or
where public expenditures of millions of pesos were involved, the
court did not hesitate to give standing to taxpayers. 49
We find no reason to deviate from the jurisprudential trend.
To begin with, the amount involved in this case is substantial. Under
the various agreements entered into by the governor, which were
ratified by the Sangguniang Panlalawigan, the provincial government
of Cagayan would incur the following costs: 50
Compensation to Preferred
₱ 6,150,000.00
Ventures -
(3% of P205M) 51 Resolution
No. 290-2001
Management and
3,075,000.00
Underwriting Fees -
(1.5% of P205M) 52
Documentary Tax - 1,537,500.00
(0.75% of P205M) 53
Guarantee Fee 54 - 7,350,000.00
Construction and Design of
213,795,732.39
town center 55 -
Total Cost - ₱231,908,232.39
What is more, the provincial government would be shelling out a total
amount of ₱187 million for the period of seven years by way of
subsidy for the interest of the bonds. Without a doubt, the resolution
of the present petition is of paramount importance to the people of
Cagayan who at the end of the day would bear the brunt of these
agreements.
Another point to consider is that local government units now possess
more powers, authority and resources at their disposal, 56 which in
the hands of unscrupulous officials may be abused and misused to the
detriment of the public. To protect the interest of the people and to
prevent taxes from being squandered or wasted under the guise of
government projects, a liberal approach must therefore be adopted in
determining locus standi in public suits.
In view of the foregoing, we are convinced that petitioners have
sufficient standing to file the present suit. Accordingly, they should be
given the opportunity to present their case before the RTC.
Having resolved the core issue, we shall now proceed to the
remaining issues.
The controversy involved is justiciable
A political question is a question of policy, which is to be decided by
the people in their sovereign capacity or by the legislative or the
executive branch of the government to which full discretionary
authority has been delegated.
In filing the instant case before the RTC, petitioners seek to restrain
public respondents from implementing the bond flotation and to
declare null and void all contracts related to the bond flotation and
construction of the town center. In the petition before the RTC, they
alleged grave abuse of discretion and clear violations of law by public
respondents. They put in issue the overpriced construction of the
town center; the grossly disadvantageous bond flotation; the
irrevocable assignment of the provincial government’s annual regular
income, including the IRA, to respondent RCBC to cover and secure
the payment of the bonds floated; and the lack of consultation and
discussion with the community regarding the proposed project, as
well as a proper and legitimate bidding for the construction of the
town center.
Obviously, the issues raised in the petition do not refer to the wisdom
but to the legality of the acts complained of. Thus, we find the instant
controversy within the ambit of judicial review. Besides, even if the
issues were political in nature, it would still come within our powers
of review under the expanded jurisdiction conferred upon us by
Section 1, Article VIII of the Constitution, which includes the authority
to determine whether grave abuse of discretion amounting to excess
or lack of jurisdiction has been committed by any branch or
instrumentality of the government.
The Motion to Admit Amended Petition was properly denied
However, as to the denial of petitioners’ Motion to Admit Amended
Petition, we find no reason to reverse the same. The inclusion of the
province of Cagayan as a petitioner would not only change the theory
of the case but would also result in an absurd situation. The provincial
government, if included as a petitioner, would in effect be suing itself
considering that public respondents are being sued in their official
capacity.
In any case, there is no need to amend the petition because
petitioners, as we have said, have legal standing to sue as taxpayers.
Section 5, Rule 15 of the Rules of Court was substantially
complied with
This brings us to the fourth and final issue.
A perusal of the Motion for Reconsideration filed by petitioners
would show that the notice of hearing was addressed only to the
Clerk of Court in violation of Section 5, Rule 15 of the Rules of Court,
which requires the notice of hearing to be addressed to all parties
concerned. This defect, however, did not make the motion a mere
scrap of paper. The rule is not a ritual to be followed blindly. 59 The
purpose of a notice of hearing is simply to afford the adverse parties a
chance to be heard before a motion is resolved by the court. 60 In this
case, respondents were furnished copies of the motion, and
consequently, notified of the scheduled hearing. Counsel for public
respondents in fact moved for the postponement of the hearing,
which the court granted. 61 Moreover, respondents were afforded
procedural due process as they were given sufficient time to file their
respective comments or oppositions to the motion. From the
foregoing, it is clear that the rule requiring notice to all parties was
substantially complied with. 62 In effect, the defect in the Motion for
Reconsideration was cured.

We cannot overemphasize that procedural rules are mere tools to aid

the courts in the speedy, just and inexpensive resolution of
cases. 63 Procedural defects or lapses, if negligible, should be excused
in the higher interest of justice as technicalities should not override
the merits of the case. Dismissal of cases due to technicalities should
also be avoided to afford the parties the opportunity to present their
case. Courts must be reminded that the swift unclogging of the
dockets although a laudable objective must not be done at the
expense of substantial justice. 64

WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April

27, 2004 Order of Branch 5 and the August 20, 2004 Resolution of
Branch 1 of the Regional Trial Court of Tuguegarao City are
hereby REVERSED and SET ASIDE insofar as the dismissal of the
petition is concerned. Accordingly, the case is hereby REMANDED to
the court a quo for further proceedings.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 191667 April 17, 2013
LAND BANK OF THE PHILIPPINES, Petitioner,
vs.
EDUARDO M. CACAYURAN, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari1 is the
March 26, 2010 Decision2 of the Court of Appeals (CA) in CA-G.R. CV.
No. 89732 which affirmed with modification the April 10, 2007
Decision3 of the Regional Trial Court (RTC) of Agoo, La Union, Branch
31, declaring inter alia the nullity of the loan agreements entered into
by petitioner Land Bank of the Philippines (Land Bank) and the
Municipality of Agoo, La Union (Municipality).
The Facts
From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed
certain resolutions to implement a multi-phased plan
(Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo
Plaza) where the Imelda Garden and Jose Rizal Monument were
situated.
To finance phase 1 of the said plan, the SB initially passed Resolution
No. 68-20054 on April 19, 2005, authorizing then Mayor Eufranio
Eriguel (Mayor Eriguel) to obtain a loan from Land Bank and incidental
thereto, mortgage a 2,323.75 square meter lot situated at the
southeastern portion of the Agoo Plaza (Plaza Lot) as collateral. To
serve as additional security, it further authorized the assignment of a
portion of its internal revenue allotment (IRA) and the monthly
income from the proposed project in favor of Land Bank.5 The
foregoing terms were confirmed, approved and ratified on October 4,
2005 through Resolution No. 139-2005.6 Consequently, on November
21, 2005, Land Bank extended a ₱4,000,000.00 loan in favor of the
Municipality (First Loan),7 the proceeds of which were used to
construct ten (10) kiosks at the northern and southern portions of the
Imelda Garden. After completion, these kiosks were rented out.8
On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving
the construction of a commercial center on the Plaza Lot as part of
phase II of the Redevelopment Plan. To finance the project, Mayor
Eriguel was again authorized to obtain a loan from Land Bank, posting
as well the same securities as that of the First Loan. All previous
representations and warranties of Mayor Eriguel related to the
negotiation and obtention of the new loan10were ratified on
September 5, 2006 through Resolution No. 128-2006.11 In
consequence, Land Bank granted a second loan in favor of the
Municipality on October 20, 2006 in the principal amount of
₱28,000,000.00 (Second Loan).12
Unlike phase 1 of the Redevelopment Plan, the construction of the
commercial center at the Agoo Plaza was vehemently objected to by
some residents of the Municipality. Led by respondent Eduardo
Cacayuran (Cacayuran), these residents claimed that the conversion
of the Agoo Plaza into a commercial center, as funded by the
proceeds from the First and Second Loans (Subject Loans), were
"highly irregular, violative of the law, and detrimental to public
interests, and will result to wanton desecration of the said historical
and public park."13 The foregoing was embodied in a
Manifesto,14 launched through a signature campaign conducted by
the residents and Cacayuran.
In addition, Cacayuran wrote a letter15 dated December 8, 2006
addressed to Mayor Eriguel, Vice Mayor Antonio Eslao (Vice Mayor
Eslao), and the members of the SB namely, Violeta Laroya-Balbin,
Jaime Boado, Jr., Rogelio De Vera, James Dy, Crisogono Colubong,
Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo
Villanueva, and Gerard Mamuyac (Implicated Officers), expressing the
growing public clamor against the conversion of the Agoo Plaza into a
commercial center. He then requested the foregoing officers to
furnish him certified copies of various documents related to the
aforementioned conversion including, among others, the resolutions
approving the Redevelopment Plan as well as the loan agreements for
the sake of public information and transparency.
Unable to get any response, Cacayuran, invoking his right as a
taxpayer, filed a Complaint16 against the Implicated Officers and Land
Bank, assailing, among others, the validity of the Subject Loans on the
ground that the Plaza Lot used as collateral thereof is property of
public dominion and therefore, beyond the commerce of man.17
Upon denial of the Motion to Dismiss dated December 27, 2006,18 the
Implicated Officers and Land Bank filed their respective Answers.
For its part, Land Bank claimed that it is not privy to the Implicated
Officers’ acts of destroying the Agoo Plaza. It further asserted that
Cacayuran did not have a cause of action against it since he was not
privy to any of the Subject Loans.19
During the pendency of the proceedings, the construction of the
commercial center was completed and the said structure later
became known as the Agoo’s People Center (APC).
On May 8, 2007, the SB passed Municipal Ordinance No. 02-
2007,20 declaring the area where the APC stood as patrimonial
property of the Municipality.
The Ruling of the RTC
In its Decision dated April 10, 2007,21 the RTC ruled in favor of
Cacayuran, declaring the nullity of the Subject Loans.22 It found that
the resolutions approving the said loans were passed in a highly
irregular manner and thus, ultra vires; as such, the Municipality is not
bound by the same.23 Moreover, it found that the Plaza Lot is
proscribed from collateralization given its nature as property for
public use.24
Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007.25 On
the other hand, the Implicated Officers’ appeal was deemed
abandoned and dismissed for their failure to file an appellants’ brief
despite due notice.26 In this regard, only Land Bank’s appeal was given
due course by the CA.
Ruling of the CA
In its Decision dated March 26, 2010,27 the CA affirmed with
modification the RTC’s ruling, excluding Vice Mayor Eslao from any
personal liability arising from the Subject Loans.28
It held, among others, that: (1) Cacayuran had locus standi to file his
complaint, considering that (a) he was born, raised and a bona fide
resident of the Municipality; and (b) the issue at hand involved public
interest of transcendental importance;29 (2) Resolution Nos. 68-2005,
139-2005, 58-2006, 128-2006 and all other related resolutions
(Subject Resolutions) were invalidly passed due to the SB’s non-
compliance with certain sections of Republic Act No. 7160, otherwise
known as the "Local Government Code of 1991" (LGC); (3) the Plaza
Lot, which served as collateral for the Subject Loans, is property of
public dominion and thus, cannot be appropriated either by the State
or by private persons;30 and (4) the Subject Loans are ultra vires
because they were transacted without proper authority and their
collateralization constituted improper disbursement of public funds.
Dissatisfied, Land Bank filed the instant petition.
Issues Before the Court
The following issues have been raised for the Court’s resolution: (1)
whether Cacayuran has standing to sue; (2) whether the Subject
Resolutions were validly passed; and (3) whether the Subject Loans
are ultra vires.
The Court’s Ruling
The petition lacks merit.
A. Cacayuran’s standing to sue
Land Bank claims that Cacayuran did not have any standing to contest
the construction of the APC as it was funded through the proceeds
coming from the Subject Loans and not from public funds. Besides,
Cacayuran was not even a party to any of the Subject Loans and is
thus, precluded from questioning the same.
The argument is untenable.
It is hornbook principle that a taxpayer is allowed to sue where there
is a claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer, however, must
show that the act complained of directly involves the illegal
disbursement of public funds derived from taxation. In other words,
for a taxpayer’s suit to prosper, two requisites must be met namely,
(1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed; and (2) the petitioner is directly
affected by the alleged act.31
Records reveal that the foregoing requisites are present in the instant
case.
First, although the construction of the APC would be primarily
sourced from the proceeds of the Subject Loans, which Land Bank
insists are not taxpayer’s money, there is no denying that public funds
derived from taxation are bound to be expended as the Municipality
assigned a portion of its IRA as a security for the foregoing loans.
Needless to state, the Municipality’s IRA, which serves as the local
government unit’s just share in the national taxes,32 is in the nature of
public funds derived from taxation. The Court believes, however, that
although these funds may be posted as a security, its collateralization
should only be deemed effective during the incumbency of the public
officers who approved the same, else those who succeed them be
effectively deprived of its use.
In any event, it is observed that the proceeds from the Subject Loans
had already been converted into public funds by the Municipality’s
receipt thereof. Funds coming from private sources become
impressed with the characteristics of public funds when they are
under official custody.33
Accordingly, the first requisite has been clearly met.
Second, as a resident-taxpayer of the Municipality, Cacayuran is
directly affected by the conversion of the Agoo Plaza which was
funded by the proceeds of the Subject Loans. It is well-settled that
public plazas are properties for public use34 and therefore, belongs to
the public dominion.35 As such, it can be used by anybody and no one
can exercise over it the rights of a private owner.36 In this light,
Cacayuran had a direct interest in ensuring that the Agoo Plaza would
not be exploited for commercial purposes through the APC’s
construction. Moreover, Cacayuran need not be privy to the Subject
Loans in order to proffer his objections thereto. In Mamba v. Lara, it
has been held that a taxpayer need not be a party to the contract to
challenge its validity; as long as taxes are involved, people have a
right to question contracts entered into by the government.37
Therefore, as the above-stated requisites obtain in this case,
Cacayuran has standing to file the instant suit.
B. Validity of the Subject Resolutions
Land Bank avers that the Subject Resolutions provided ample
authority for Mayor Eriguel to contract the Subject Loans. It posits
that Section 444(b)(1)(vi) of the LGC merely requires that the
municipal mayor be authorized by the SB concerned and that such
authorization need not be embodied in an ordinance.38
A careful perusal of Section 444(b)(1)(vi) of the LGC shows
that while the authorization of the municipal mayor need not be in
the form of an ordinance, the obligation which the said local
executive is authorized to enter into must be made pursuant to a law
or ordinance, viz:
Sec. 444. The Chief Executive: Powers, Duties, Functions and
Compensation. -
xxxx
(b) For efficient, effective and economical governance the
purpose of which is the general welfare of the municipality and its
inhabitants pursuant to Section 16 of this Code, the municipal mayor
shall:
xxxx
(vi) Upon authorization by the sangguniang bayan, represent the
municipality in all its business transactions and sign on its behalf all
bonds, contracts, and obligations, and such other documents made
pursuant to law or ordinance; (Emphasis and underscoring supplied)
In the present case, while Mayor Eriguel’s authorization to contract
the Subject Loans was not contained – as it need not be contained – in
the form of an ordinance, the said loans and even the Redevelopment
Plan itself were not approved pursuant to any law or ordinance but
through mere resolutions. The distinction between ordinances and
resolutions is well-perceived. While ordinances are laws and possess a
general and permanent character, resolutions are merely declarations
of the sentiment or opinion of a lawmaking body on a specific matter
and are temporary in nature.39 As opposed to ordinances, "no rights
can be conferred by and be inferred from a resolution."40 In this
accord, it cannot be denied that the SB violated Section 444(b)(1)(vi)
of the LGC altogether.
Noticeably, the passage of the Subject Resolutions was also tainted
with other irregularities, such as (1) the SB’s failure to submit the
Subject Resolutions to the Sangguniang Panlalawigan of La Union for
its review contrary to Section 56 of the LGC;41 and (2) the lack of
publication and posting in contravention of Section 59 of the LGC.42
In fine, Land Bank cannot rely on the Subject Resolutions as basis to
validate the Subject Loans.
C. Ultra vires nature of the Subject
Loans
Neither can Land Bank claim that the Subject Loans do not constitute
ultra vires acts of the officers who approved the same.
Generally, an ultra vires act is one committed outside the object for
which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by
law.43 There are two (2) types of ultra vires acts. As held in
Middletown Policemen's Benevolent Association v. Township of
Middletown:44
There is a distinction between an act utterly beyond the jurisdiction
of a municipal corporation and the irregular exercise of a basic power
under the legislative grant in matters not in themselves jurisdictional.
The former are ultra vires in the primary sense and void; the latter,
ultra vires only in a secondary sense which does not preclude
ratification or the application of the doctrine of estoppel in the
interest of equity and essential justice. (Emphasis and underscoring
supplied)
In other words, an act which is outside of the municipality’s
jurisdiction is considered as a void ultra vires act, while an act
attended only by an irregularity but remains within the municipality’s
power is considered as an ultra vires act subject to ratification and/or
validation. To the former belongs municipal contracts which (a) are
entered into beyond the express, implied or inherent powers of the
local government unit; and (b) do not comply with the substantive
requirements of law e.g., when expenditure of public funds is to be
made, there must be an actual appropriation and certificate of
availability of funds; while to the latter belongs those which (a) are
entered into by the improper department, board, officer of agent; and
(b)do not comply with the formal requirements of a written contract
e.g., the Statute of Frauds.45
Applying these principles to the case at bar, it is clear that the Subject
Loans belong to the first class of ultra vires acts deemed as void.
Records disclose that the said loans were executed by the
Municipality for the purpose of funding the conversion of the Agoo
Plaza into a commercial center pursuant to the Redevelopment Plan.
However, the conversion of the said plaza is beyond the
Municipality’s jurisdiction considering the property’s nature as one
for public use and thereby, forming part of the public dominion.
Accordingly, it cannot be the object of appropriation either by the
State or by private persons.46 Nor can it be the subject of lease or any
other contractual undertaking.47 In Villanueva v. Castañeda,
Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court
pronounced that:

x x x Town plazas are properties of public dominion, to be devoted to

public use and to be made available to the public in general. They are
outside the commerce of man and cannot be disposed of or even
leased by the municipality to private parties.1âwphi1

In this relation, Article 1409(1) of the Civil Code provides that a

contract whose purpose is contrary to law, morals, good customs,
public order or public policy is considered void50 and as such, creates
no rights or obligations or any juridical relations. 51 Consequently,
given the unlawful purpose behind the Subject Loans which is to fund
the commercialization of the Agoo Plaza pursuant to the
Redevelopment Plan, they are considered as ultra vires in the primary
sense thus, rendering them void and in effect, non-binding on the
Municipality.

At this juncture, it is equally observed that the land on which the

Agoo Plaza is situated cannot be converted into patrimonial property
– as the SB tried to when it passed Municipal Ordinance No. 02-
200752 – absent any express grant by the national government.53 As
public land used for public use, the foregoing lot rightfully belongs to
and is subject to the administration and control of the Republic of the
Philippines.54 Hence, without the said grant, the Municipality has no
right to claim it as patrimonial property.

Nevertheless, while the Subject Loans cannot bind the Municipality

for being ultra vires, the officers who authorized the passage of the
Subject Resolutions are personally liable. Case law states that public
officials can be held personally accountable for acts claimed to have
been performed in connection with official duties where they have
acted ultra vires,55 as in this case.

WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010

Decision of the Court of Appeals in CA-G.R. CV. No. 89732 is hereby
AFFIRMED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
 Second DIVISION (2) If the net retail price (excluding the
April 17, 2017 excise tax and the value-added tax) is
G.R. No. 210251 more than Eleven pesos and fifty
SECRETARY OF FINANCE CESAR V. PURISIMA and COMMISSIONER OF centavos (₱211.50) per pack, the tax
INTERNAL REVENUE KIM S. JACINTO-HENARES, Petitioners shall be Twenty-nine pesos (₱229.00) per
vs. pack.
PHILIPPINE TOBACCO INSTITUTE, INC., Respondent
DECISION Effective on January 1, 2017, the tax on all cigarettes packed by
CARPIO,, J.: machine shall be Thirty pesos (₱230.00) per pack.
This is a petition for review on certiorari 1 assailing the
Decision2 dated 7 October 2013 of the Regional Trial Court (RTC) of
The rates of tax imposed under this subsection shall be increased by
Las Piñas City, Branch 253 in SCA Case No. 13-0003. The RTC declared
four percent (4%) every year thereafter effective on January 1, 2018,
null and void certain portions of Revenue Regulations No. 17-
through revenue regulations issued by the Secretary of Finance.
20123 (RR 17-2012) and Revenue Memorandum Circular No. 90-
20124 (RMC 90-2012) and ordered petitioners to cease and desist
from implementing Section 11 of RR 17-2012 and RMC 90-2012 which Duly registered cigarettes packed by machine shall only be packed in
refer to cigarettes packed by-machine. twenties and other packaging combinations of not more than twenty.
The Facts xxxx
On 20 December 2012, President Benigno S. Aquino III signed
Republic Act No. 103515 (RA 10351), otherwise known as the Sin Tax BRAND NAMES Content/Unit Net Retail Applicable
Reform Law. RA 10351 restructured the excise tax on alcohol and (pack) Price Excise Tax
tobacco products by amending pertinent provisions of Republic Act (Based on Rates
No. 8424, 6 known as the Tax Reform Act of 1997 or the National 2010 BIR Effective
Internal Revenue Code of 1997 (NIRC). Price Jan 1, 2013
Survey) under R.A.
No. 1035l
Section 5 of RA 10351, which amended Section 145(C) of the NIRC,
increased the excise tax rate of cigars and cigarettes and allowed A. Cigarettes Packed by Machine
cigarettes packed by machine to be packed in other packaging
combinations of not more than 20. The relevant portions state: A. I. Net Retail Price (NRP) is Php 11.50 per Pack and below

20
SEC. 5. Section 145 of the National Internal Revenue Code of 1997, as 1. Astro Filter King 10.92 12.00
sticks/pack
amended by Republic Act No. 9334, is hereby further amended to
read as follows: xxxx
SEC. 145. Cigars and Cigarettes. –
22. Fortune Int'l Extra Filter 20
xxxx 10.84 12.00
King sticks/pack
(C) Cigarettes Packed by Machine.- There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates 23. Fortune Int'l Extra Filter
prescribed below: King 10
6.58 12.00
sticks/pack
Effective on January 1, 2013 (10*s)

xxxx
(1) If the net retail price (excluding the excise tax and the value-added
tax) is Eleven pesos and fifty centavos (₱11.50) and below per pack, 44. Marlboro Filter (2x10's) 10
8.27 12.00
the tax shall be Twelve pesos (₱12.00) per pack; and Flip Top* sticks/pack

5
(2) If the net retail price (excluding the excise tax and the value-added 45. Marlboro Filter KS (5's)* 4.11 12.00
sticks/pouch
tax) is more than Eleven pesos and fifty centavos (₱11.50) per pack,
the tax shall be Twenty-five pesos (₱25.00) per pack. xxxx

20
Effective on January l, 2014 61. Miller Filter Silver KS SP 10.27 12.00
sticks/pack

(1) If the net retail price (excluding the excise tax and the value-added xxxx
tax) is Eleven pesos and fifty centavos (₱11.50) and below per pack,
63. Miller Filter Silver –(5’s) 5
the tax shall be Seventeen pesos (₱17.00) per pack; and KS Pouch* sticks/pouch
2.88 12.00

(2) If the net retail price (excluding the excise tax and the value-added xxxx
tax) is more than Eleven pesos and fifty centavos (₱11.50) per pack,
76. Philip Morris Menthol KS 10
the tax shall be Twenty-seven pesos (₱27.00) per pack. 6.25 12.00
FTB-(10's)* sticks/pack

Effective on January 1, 2015 77. Philip Morris Menthol- 5

3.84 12.00
(5's) 100's 10's Pouch* sticks/pouch

(1) If the net retail price (excluding the excise tax and the value-added
tax) is Eleven pesos and fifty centavos (₱11.50) and below per pack,
the tax shall be Twenty-one pesos (₱2 l .00) per pack; and
(2) If the net retail price (excluding the excise tax and the value-added
tax) is more than Eleven pesos and fifty centavos (₱211.50) per pack,
the tax shall be Twenty-eight pesos (₱228.00) per pack.
Effective on January 1, 2016
(1) If the net retail price (excluding the excise tax and the value-added
tax) is Ele1·rn pesos and fifty centavos (₱211.50) and below pet pack,
the tax shall be Twenty-five pesos (₱225.00) per pack; and
xxxx
On 21 December 2012, the Secretary of Finance, upon the
recommendation of the Commissioner of Internal Revenue (CIR),
issued RR 17-2012. Section 11 of RR 17-2012 imposes an excise tax on
individual cigarette pouches of 5's and l0's even if they are bundled or
packed in packaging combinations not exceeding 20 cigarettes. The
provision states:
SEC. 11. Revised Provisions for the Manner of Packaging of Cigarettes.
- All Cigarettes whether packed by hand or packed by machine shall
only be packed in twenties (20s ), and through other packaging
combinations which shall result to not more than twenty sticks of
cigarettes: Provided, That, in case of cigarettes packed in not more
than twenty sticks, whether in S sticks, 10 sticks and other packaging
combinations below 20 sticks, the net retail price of each individual
package of 5s, 10s, etc. shall be the basis of imposing the tax rate
prescribed under the Act.
Pursuant to Section 11ofRR17-2012, the CIR issued RMC 90-2012
dated 27 December 2012. Annex "D-1" of RMC 90-2012 provides for
the initial classifications in tabular form, effective 1 January 2013, of
locally manufactured cigarette brands packed by machine according
to the tax rates prescribed under RA 10351 based on the (1) 2010
Bureau of Internal Revenue (BIR) price survey of these products, and
(2) suggested net retail price declared in the latest sworn statement
filed by the local manufacturer or importer. Some relevant portions
provide:
Annex "D-1"
LIST OF LOCALLY MANUFACTURED CIGARETTE BRANDS
AS OF DECEMBER 2012
1. List of brands Based on 2010 BIR Price Survey
* NRP is converted into individual package of 5s or 1 Os
pursuant to Section 11 of RR No. 17-2012
PMFTC, Inc., a member of respondent Philippine Tobacco Institute,
Inc. (PTI), paid the excise taxes required under RA 10351, RR 17-2012,
and RMC 90-2012 in order to withdraw cigarettes from its
manufacturing facilities. However, on 16 January 2012, PMFTC wrote
the CIR prior to the payment of the excise taxes stating that payment
was being made under protest and without prejudice to its right to
question said issuances through remedies available under the law.
As a consequence, on 26 February 2013, PTI filed a petition7 for
declaratory relief with an application for writ of preliminary
injunction with the RTC. PTI sought to have RR 17-2012 and RMC 90-
2012 declared null and void for allegedly violating the Constitution
and imposing tax rates not authorized by RA 103 51. PTI stated that
the excise tax rate of either ₱12 or ₱25 under RA 10351 should be
imposed only on cigarettes packed by machine in packs of 20's or
packaging combinations of 20's and should not be imposed on
cigarette pouches of 5's and 10's.
In a Decision dated 7 October 2013, the RTC granted the petition for
declaratory relief. The dispositive portion of the Decision states:
WHEREFORE, premised on the foregoing, the Petition for Declaratory
Relief is GRANTED. The assailed portions of Revenue Regulation 17-
2012 and Revenue Memorandum Circular 90-2012 are declared NULL
AND VOID and OF NO FORCE AND EFFECT. Respondents are to
immediately cease and desist from implementing Sec. 11 of Revenue
Regulation 17-2012 and Revenue Memorandum Circular 90-2012
insofar as the cigarettes packed by machine are concerned.
The tax rates imposed by RA No. 10351 should be imposed on the
whole packaging combination of 20's, regardless of whether they are
packed by pouches of 2xl0's or 4x5's, etc.
SO ORDERED.8
Hence, the instant petition filed by the Secretary of Finance and the
CIR through the Office of the Solicitor General.
Meanwhile, in a Resolution dated 9 June 2014, this Court issued a
temporary restraining order against PTI and the RTC. The dispositive
portion states:
NOW, THEREFORE, effective immediately and continuing until further
orders from this Court, You, the respondent, the RTC, Br. 253, Las
Piñas City, their representatives, agents or other persons acting on
their behalf are hereby RESTRAINED from enforcing the assailed
Decision dated 7 October 2013 of the RTC, Br. 253, Las Piñas City in
SCA Case No. 13-0003.
x x x x9
The Issue
Whether or not the RTC erred in nullifying Section 11of RR17-2012
andAnnex"D-1"of RMC 90-2012 in imposing excise tax to packaging
combinations of 5's, l0's, etc. not exceeding 20 cigarette sticks packed
by machine.
The Court's Ruling
The petition lacks merit.
Petitioners contend that RA10351 imposes the excise tax per pack,"
regardless of the content or number of cigarette stick so each pack.
Thus, the RTC erred in ruling that RR17-2012 and RMC 90-2012 have
gone beyond the plain meaning of RAl0351. Petitioners assert that
the two regulations merely clarify the tax rates set out in RA10351
but have neither amended nor added any new taxes. Petitioners
maintain that the excise tax rates imposed by RA10351 on cigarettes
packed by machine are based on the net retail price per pack. The
pack, therefore, is the unit on which the tax rates are imposed and is
understood to be the packaging unit that reaches the ultimate
consumer. Each pack of 5, 10, or 20 cigarettes is meant to be sold at
retail individually. On the other bind, bundles of smaller packs
resulting in 20 cigarettes are meant to be sold whole sale. Thus,
petitioners insist that the excise tax imposable on a bundle of 20 is
computed on the net retail price of each individual pack or pouch of
the bundle and not on the bundle as one unit.
PTI, on the otherhand, contends that RA10351 allows a cigarette
manufacturer to adopt packaging combinations, such as the bundling
of four pouches with five sticks per pack (4x5's),or two pouches of ten
sticks per pack (2x10’s),provided that such packaging combination
does not exceed 20 sticks. Thus, individual cigarette pouches of 5's
and 10's bundled together in to a single packaging of not more than
20 sticks are considered as one pack and should be subjected to excise
tax only once. Otherwise, a cigarette pouch of 5's,for example, will be
subjected to an excise tax of ₱48.00 since the BIR Will Impose An
Individual excise tax of ₱12.00 upon each and every pouch of 5's.
While the same brand in a pack of 20's will only be subjected to an
excise tax rate of ₱12.00.Thus, PTI maintainsthatSection11ofRR17-
2012andAnnex"D-1"pertaining to Cigarettes Packed by Machine of
RMC90-2012 disregarded the clear provision of RA10351 and imposed
excise tax on each cigarette pouches of 5's and 10's regard less of
whether they are packed together into 20 sticks per pack. As a result,
the affected cigarette brands that
Should have been taxed only either ₱12.00 or ₱25.00 per pack are
subjected to a different and higher excise tax rate not provided in
RA10351. Further, PTI asserts that petitioners did not publish or
circulate notices of the then proposed RR17 2012 or conduct a hearing
to afford interested parties the opportunity to submit their views
prior to the issuance of RR17-2012 which deprived it of its due
process rights.
The pertinent portions of Section145(C) of the NIRC, as amended by
Section 5 of RA10351, state:
SEC. 5 Section 145 of the National Internal Revenue Code of 1997,as
amended by Republic Act No.9334, is hereby further amended to read
as follows:
SEC. 145. Cigars and Cigarettes.–
xxxx
(C)Cigarettes Packed by Machine.-There shall believed, assessed and
collected on cigarettes packed by machine a tax at the rates
prescribed below:
Effective on January 1, 2013
(1)If the net retail price (excluding the excise tax and the value-added
tax) is Eleven pesos and fifty centavos (₱11.50) and below per pack,
the tax shall be Twelve pesos (₱112.00) per pack; and
(2)If the net retail price (excluding the excise tax and the value-added
tax) is more than Eleven pesos and fifty centavos (₱11.50) per pack,
the tax shall be Twenty-five pesos (₱125.00) per pack.
xxxx
Duly registered cigarettes packed by machine shall only be packed in
twenties and other packaging combinations of not more than twenty.
x x x x (Emphasis supplied)
Section 145(C) of the NIRC is clear that the excise tax on cigarettes
packed by machine is imposed per pack."Per pack"was not given a
clear definition by the NIRC. However, a "pack" would normally refer
to a number of individual components packaged as a unit. 10 Under the
same provision, cigarette manufacturers are permitted to bundle
cigarettes packed by machine in the maximum number of 20 sticks
and aside from 20's, the law also allows packaging combinations of
not more than 20's-it can be 4 pouches of 5cigarette sticks in a pack
(4x5's), 2 pouches of 10 cigarette sticks in a pack (2x10's),etc.
Based on this maximum packaging and allowable combinations, the
BIR, with RA10351 as basis, issued RR17-2012. Section11of RR17-
2012, which provides for the manner of packaging cigarettes, states:
SEC. 11. Revised Provisions for the Manner of Packaging of
Cigarettes.-All Cigarettes whether packed by hand or packed by
machine shall only be packed in twenties (20s), and through other
packaging combinations which shall result to not more than twenty
sticks of cigarettes: Provided, That, in case of cigarettes packed in not
more than twenty sticks,whether in 5 sticks, 10 sticks and other
packaging combinations below 20 sticks, the net retail price of each
individual package of 5s,10s, etc. shall be the basis of imposing the tax
rate prescribed under the Act.(Emphasis supplied)
The BIR also released RMC90-2012, specifically Annex "D-1" on
Cigarettes Packed by Machine, in accordance with RA10351 and RR17-
2012, showing in tabular form the different brands of locally-
manufactured cigarettes packed by machine with the brand names,
content/unit (pack), net retail price,and the applicable excise tax rates
effective1January 2013.The net retail price of some brand names was
converted in to individual packages of 5's or10's pursuant to Section
11 of RR17-2012.
The RTC, in its Decision dated 7October 2013, ruled in favor of PTI and
declared that RA10351intends to tax the packs of 20's as awhole,
regardless of
Whether They Are further repacked by10'sor5's, as long as they total
20sticks in all.Thus, the tax rate tobe imposed shall only be either for
a net retail price of(1)less than ₱11.50,or(2) morethan
P11.50,applying the two excise tax rates from 2013 until 2016 as
mentioned under RA10351.
The RTC added" that the fact the law allows' packaging combinations,'
as long as they will not exceed a total of 20 sticks, is indicative of the
law makers' foresight that these combinations shall be sold at retail
individually.Yet,the law makers did not specify in the law that the tax
rate shall be imposed on each packaging combination."Thus, the RTC
concluded that the interpretation made by the Secretary of Finance
and the CIR has no basis in the law.
We agree.
In the laws preceding RA10351-RA8240 11 and RA9334,12 both
amendments to the excise tax rates provisions of the NIRC dealing
with cigarettes packed by machine, which took effect in 1997 and
2005, respectively, provided that all" duly registered or existing
brands of cigarettes or new brands there of packed by machine shall
only be packed in twenties."
The confusion set in when RA 10351 amended the NIRC once again in
2012 and introduced packaging combinations to cigarettes packed by
machine, providing that" duly registered cigarettes packed by
machine shall only be packed in twenties and other packaging
combinations of not more than twenty."
Thereafter, RR17 2012 followed, where the BIR, in Section 11,
reiterated the provision in the NIRC that cigarettes shall only be
packed in 20's and in other packaging combinations which shall not
exceed 20 sticks. However, the BIR added" xxx That, in case of
cigarettes packed in not more than twenty sticks, whether in 5 sticks,
10 sticks and other packaging combinations below 20 sticks, the net
retail price of each individual package of 5s,10s,etc. shall be the basis
of imposing the tax rate xxx."
The basis of RR17 2012 is RA 10351. RA 10351, in amending Section
145 (C) of the NIRC provided that "duly registered cigarettes packed
by machine shall only be packed in twenties and other packaging
combinations of not more than twenty.' However, now here is it
mentioned that the other packaging combinations of not more than
20 will be imposed individual tax rates based on its different packages
of 5's, 10's,etc. In such a case, a cigarette pack of 20's will only be
subjected to an excise tax rate of P 12.00 per pack as opposed to
packaging combinations of 5's or 10's which will be subjected to a
higher excise tax rate of ₱24.00 for10's and ₱48.00 for 5's.
During the Bicameral Conference Committee on the Disagreeing
Provisions of Senate Bill No.3299 and House Bill No.5727 dealing with
the Sin Tax bills of the l5th Congress, before these bills were enacted
into RA10351, our law makers and Kim S.Jacinto-Henares, the CIR at
the time, deliberated on the packaging of cigarettes.
Therelevantexcerptsstate:
Rep. Villafuerte: Just appoint of clarification. The Senate says,'
twenties.' Okay, that's very reasonable. But can twopacks put
together in tens, is that prohibited? Because in rural areas, they don't
necessarily have to sell.
The Chairman (Sen.Drilon): Can we ask our resource person,
Congressman?
Ms. Jacinto-Henares: No, sir, as long as they take the two ten packs
together or four, five packs together, that is consideredtwenty.
Rep. Villafuerte: Okay. As long as the twenty packs is paid even if they
are separable in packaging for retail purposes, that's allowed. Because
I got the impression from some people that that is being prohibited
that's why I sought to clarify.
The Chairman (Sen. Drilon): On record, yes.
xxxx
Sen. Recto: But you could have five, five, five, five and put a tape.
Ms. Jacinto-Henares: Yeah. But it should be taped together.
Sen. Recto: Okay.
Sen. P. Cayetano:Can I ask a question about that? When you say that
you can have numbers divisible, I guess, by five, so you have five, 10,
15, 20, right? So you can have two or four packaged together for tax
purposes.And then for retail purposes, you can divide that up. Is that
what we're saying?
xxxx
Ms.Jacinto-Henares:Yes.
xxxx
Sen.A. Cayetano: Mr. Chair. Mr. Chair. The point is, we're taxing by
pack. If they sell less than 20, that's advantageous to the government.
So, if they want to pack it by 10 but not combine it, we will tax them
twice. So, it's good for the government. But if you allow combinations
without limiting it to20, they will pack three of 10’s together and you
will be taxing 30’s and the government will be getting less. So it's an
irony that our problem now with the sin tax is our sin tax.
So, can I propose this wording, In twenties and other packaging
combinations not more
than20ornotmorethan20ornotmorethan20sticks.
Ms.Jacinto-Henares:Yes,Sir.13
From the above discussion, it can be gleaned that the lawmakers
intended to impose the excise tax on every pack of cigarettes that
come in 20 sticks. Individual pouches or packaging combinations of
5'sand l0's for retail purposes are allowed and will be subjected to the
same excise tax rate as long as they are bundled together by not more
than 20 sticks. Thus, by issuing Section11of RR17-2012 andAnnex"D-
1"on Cigarettes Packed by Machine of RMC90-2012, the BIR went
beyond the express provisions of RA10351.

It is an elementary rule in administrative law that administrative rules

and regulations enacted by administrative bodies to implement the
law which they are entrusted to enforce have the force of law and are
entitled to great weight and respect. However, these
implementations of the law must not override, supplant,or modify
the law but must remain consistent with the law they intend to
implement. It is only Congress which has the power to repeal or
amend the law.

In this case, Section 11 of RR17-2012 and Annex"D-1" on Cigarettes

Packed by Machine of RMC90-2012 clearly contravened the provisions
of RA10351.1âwphi1 It is a well-settled principle that are venue
regulation cannot amend the law it seeks to implement. In
Commissioner of Internal Revenue v. Seagate Technology
(Philippines), 14 we held that a mere administrative issuance, like a
BIR regulation, cannot amend the law; the former cannot purport to
do any more than implement the latter. The courts will not
countenance an administrative regulation that overrides the statute it
seeks to implement.

In the present case, area ding of Section 11 of RR17-2012 and

Annex"D-1" on Cigarettes Packed by Machine of RMC 90-2012 reveals
that they are not simply regulations to implement RA10351. They are
amendatory provisions which require cigarette manufacturers to be
liable to pay for more tax than the law, RA10351, allows. The BIR, in
issuing these revenue regulations, created an additional tax liability
for packaging combinations smaller than 20 cigarette sticks. In so
doing, the BIR amended the law, an act beyond the power of the BIR
to do.

In sum, we agree with the ruling of the RTC that Section 11 of RR17-
2012 and Annex"D-1" on Cigarettes Packed by Machine of RMC 90-
2012 are null and void. Excise tax on cigarettes packed by machine
shall be imposed on the packaging combination of 20 cigarette sticks
as a whole and not to individual packaging combinations or pouches
of 5's, 10's,etc.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 7

October 2013 of the Regional Trial Court of Las Piñas City, Branch253
in SCA Case No.13-0003.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor
of Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A.
Torres for appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court
of First Instance of Rizal, dismissing the above entitled case and
dissolving the writ of preliminary injunction therein issued, without
costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial
Governor of Rizal, instituted this action for declaratory relief, with
injunction, upon the ground that Republic Act No. 920, entitled "An
Act Appropriating Funds for Public Works", approved on June 20,
1953, contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00 "for the construction, reconstruction, repair, extension
and improvement" of Pasig feeder road terminals (Gen. Roxas — Gen.
Araneta — Gen. Lucban — Gen. Capinpin — Gen. Segundo — Gen.
Delgado — Gen. Malvar — Gen. Lim)"; that, at the time of the passage
and approval of said Act, the aforementioned feeder roads were
"nothing but projected and planned subdivision roads, not yet
constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, not far away from the
intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any
important premises to the main highway"; that the aforementioned
Antonio Subdivision (as well as the lands on which said feeder roads
were to be construed) were private properties of respondent Jose C.
Zulueta, who, at the time of the passage and approval of said Act, was
a member of the Senate of the Philippines; that on May, 1953,
respondent Zulueta, addressed a letter to the Municipal Council of
Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was
accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the names
of two of them"; that no deed of donation in favor of the municipality
of Pasig was, however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention to the
approval of Republic Act. No. 920, and the sum of P85,000.00
appropriated therein for the construction of the projected feeder
roads in question; that the municipal council of Pasig endorsed said
letter of respondent Zulueta to the District Engineer of Rizal, who, up
to the present "has not made any endorsement thereon" that
inasmuch as the projected feeder roads in question were private
property at the time of the passage and approval of Republic Act No.
920, the appropriation of P85,000.00 therein made, for the
construction, reconstruction, repair, extension and improvement of
said projected feeder roads, was illegal and, therefore, void ab initio";
that said appropriation of P85,000.00 was made by Congress because
its members were made to believe that the projected feeder roads in
question were "public roads and not private streets of a private
subdivision"'; that, "in order to give a semblance of legality, when
there is absolutely none, to the aforementioned appropriation",
respondents Zulueta executed on December 12, 1953, while he was a
member of the Senate of the Philippines, an alleged deed of donation
— copy of which is annexed to the petition — of the four (4) parcels
of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed
of donation was, on the same date, accepted by the then Executive
Secretary; that being subject to an onerous condition, said donation
partook of the nature of a contract; that, such, said donation violated
the provision of our fundamental law prohibiting members of
Congress from being directly or indirectly financially interested in any
contract with the Government, and, hence, is unconstitutional, as
well as null and void ab initio, for the construction of the projected
feeder roads in question with public funds would greatly enhance or
increase the value of the aforementioned subdivision of respondent
Zulueta, "aside from relieving him from the burden of constructing his
subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that, unless
restrained by the court, the respondents would continue to execute,
comply with, follow and implement the aforementioned illegal
provision of law, "to the irreparable damage, detriment and prejudice
not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act
No. 920 be declared null and void; that the alleged deed of donation
of the feeder roads in question be "declared unconstitutional and,
therefor, illegal"; that a writ of injunction be issued enjoining the
Secretary of Public Works and Communications, the Director of the
Bureau of Public Works and Highways and Jose C. Zulueta from
ordering or allowing the continuance of the above-mentioned feeder
roads project, and from making and securing any new and further
releases on the aforementioned item of Republic Act No. 920, and the
disbursing officers of the Department of Public Works and Highways
from making any further payments out of said funds provided for in
Republic Act No. 920; and that pending final hearing on the merits, a
writ of preliminary injunction be issued enjoining the aforementioned
parties respondent from making and securing any new and further
releases on the aforesaid item of Republic Act No. 920 and from
making any further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that
petitioner had "no legal capacity to sue", and that the petition did
"not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province of Rizal, pursuant to section
1683 of the Revised Administrative Code; that said respondent is "
not aware of any law which makes illegal the appropriation of public
funds for the improvements of . . . private property"; and that, the
constitutional provision invoked by petitioner is inapplicable to the
donation in question, the same being a pure act of liberality, not a
contract. The other respondents, in turn, maintained that petitioner
could not assail the appropriation in question because "there is no
actual bona fide case . . . in which the validity of Republic Act No. 920
is necessarily involved" and petitioner "has not shown that he has a
personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the
aforementioned decision, dated October 29, 1953, holding that, since
public interest is involved in this case, the Provincial Governor of Rizal
and the provincial fiscal thereof who represents him therein, "have
the requisite personalities" to question the constitutionality of the
disputed item of Republic Act No. 920; that "the legislature is without
power appropriate public revenues for anything but a public
purpose", that the instructions and improvement of the feeder roads
in question, if such roads where private property, would not be a
public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that
the Government of the Republic of the Philippines will use
the parcels of land hereby donated for street purposes only
and for no other purposes whatsoever; it being expressly
understood that should the Government of the Republic of
the Philippines violate the condition hereby imposed upon
it, the title to the land hereby donated shall, upon such
violation, ipso facto revert to the DONOR, JOSE C. ZULUETA.
(Emphasis supplied.)
which is onerous, the donation in question is a contract; that said
donation or contract is "absolutely forbidden by the Constitution"
and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning
contracts "whose cause, objector purpose is contrary to law, morals . .
. or public policy"; that the legality of said donation may not be
contested, however, by petitioner herein, because his "interest are
not directly affected" thereby; and that, accordingly, the
appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a
decision granting the aforementioned motions to dismiss, which as
much, are deemed to have admitted hypothetically the allegations of
fact made in the petition of appellant herein. According to said
petition, respondent Zulueta is the owner of several parcels of
residential land situated in Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the
projected feeder roads aforementioned, which, admittedly, were
private property of said respondent when Republic Act No. 920,
appropriating P85,000.00 for the "construction, reconstruction,
repair, extension and improvement" of said roads, was passed by
Congress, as well as when it was approved by the President on June
20, 1953. The petition further alleges that the construction of said
roads, to be undertaken with the aforementioned appropriation of
P85,000.00, would have the effect of relieving respondent Zulueta of
the burden of constructing his subdivision streets or roads at his own
expenses, 1and would "greatly enhance or increase the value of the
subdivision" of said respondent. The lower court held that under
these circumstances, the appropriation in question was "clearly for a
private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is
self-evident. 2However, respondent Zulueta contended, in his motion
to dismiss that:
A law passed by Congress and approved by the President
can never be illegal because Congress is the source of all
laws . . . Aside from the fact that movant is not aware of any
law which makes illegal the appropriation of public funds for
the improvement of what we, in the meantime, may assume
as private property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being
inconsistent with the nature of the Government established under
the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is
refuted by the decisions of this Court invalidating legislative
enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a
public purpose, the principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public
purpose. . . . It is the essential character of the direct object
of the expenditure which must determine its validity as
justifying a tax, and not the magnitude of the interest to be
affected nor the degree to which the general advantage of
the community, and thus the public welfare, may be
ultimately benefited by their promotion. Incidental to the
public or to the state, which results from the promotion of
private interest and the prosperity of private enterprises or
business, does not justify their aid by the use public money.
(25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following
language:
In accordance with the rule that the taxing power must be
exercised for public purposes only, discussed suprasec. 14,
money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals.
(85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum
states:
Generally, under the express or implied provisions of the
constitution, public funds may be used only for public
purpose. The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the
devotion thereof to another purpose, no appropriation of
state funds can be made for other than for a public purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the
use of public funds is whether the statute is designed to
promote the public interest, as opposed to the furtherance
of the advantage of individuals, although each advantage to
individuals might incidentally serve the public. (81 C.J.S. pp.
1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views
which, apart from being patently sound, are a necessary corollary to
our democratic system of government, which, as such, exists primarily
for the promotion of the general welfare. Besides, reflecting as they
do, the established jurisprudence in the United States, after whose
constitutional system ours has been patterned, said views and
jurisprudence are, likewise, part and parcel of our own constitutional
law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the
appropriation in question, upon the ground that petitioner may not
contest the legality of the donation above referred to because the
same does not affect him directly. This conclusion is, presumably,
based upon the following premises, namely: (1) that, if valid, said
donation cured the constitutional infirmity of the aforementioned
appropriation; (2) that the latter may not be annulled without a
previous declaration of unconstitutionality of the said donation; and
(3) that the rule set forth in Article 1421 of the Civil Code is absolute,
and admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the
time of its passage or approval, not upon events occurring, or acts
performed, subsequently thereto, unless the latter consists of an
amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said statute.
Referring to the P85,000.00 appropriation for the projected feeder
roads in question, the legality thereof depended upon whether said
roads were public or private property when the bill, which, latter on,
became Republic Act 920, was passed by Congress, or, when said bill
was approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said Act).
Inasmuch as the land on which the projected feeder roads were to be
constructed belonged then to respondent Zulueta, the result is that
said appropriation sought a private purpose, and hence, was null and
void. 4 The donation to the Government, over five (5) months after
the approval and effectivity of said Act, made, according to the
petition, for the purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not cure its
aforementioned basic defect. Consequently, a judicial nullification of
said donation need not precede the declaration of unconstitutionality
of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory
enactments, is subject to exceptions. For instance, the creditors of a
party to an illegal contract may, under the conditions set forth in
Article 1177 of said Code, exercise the rights and actions of the latter,
except only those which are inherent in his person, including
therefore, his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in the
manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested
only by one who will sustain a direct injury in consequence of its
enforcement. Yet, there are many decisions nullifying, at the instance
of taxpayers, laws providing for the disbursement of public
funds, 5upon the theory that "the expenditure of public funds by an
officer of the State for the purpose of administering
an unconstitutional act constitutes a misapplication of such funds,"
which may be enjoined at the request of a taxpayer. 6Although there
are some decisions to the contrary, 7the prevailing view in the United
States is stated in the American Jurisprudence as follows:
In the determination of the degree of interest essential to
give the requisite standing to attack the constitutionality of
a statute, the general rule is that not only persons
individually affected, but also taxpayers, have sufficient
interest in preventing the illegal expenditure of moneys
 raised by taxation and may therefore question the Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L.,
constitutionality of statutes requiring expenditure of public Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur.
moneys. (11 Am. Jur. 761; emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S.
in Frothingham vs. Mellon (262 U.S. 447), insofar as federal laws are
concerned, upon the ground that the relationship of a taxpayer of the
U.S. to its Federal Government is different from that of a taxpayer of
a municipal corporation to its government. Indeed, under
the composite system of government existing in the U.S., the states of
the Union are integral part of the Federation from
an international viewpoint, but, each state enjoys internally a
substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by
representatives of each state of the Union, not of the people of the
U.S., except insofar as the former represented the people of the
respective States, and the people of each State has, independently of
that of the others, ratified said Constitution. In other words, the
Federal Constitution and the Federal statutes have become binding
upon the people of the U.S. in consequence of an act of, and, in this
sense, through the respective states of the Union of which they are
citizens. The peculiar nature of the relation between said people and
the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by
electors chosen by each State, in such manner as the legislature
thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers,
on the other hand, and the Republic of the Philippines, on the other,
is not identical to that obtaining between the people and taxpayers of
the U.S. and its Federal Government. It is closer, from a domestic
viewpoint, to that existing between the people and taxpayers of each
state and the government thereof, except that the authority of the
Republic of the Philippines over the people of the Philippines is more
fully direct than that of the states of the Union, insofar as
the simple and unitary type of our national government is not subject
to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal
Government in the interest of the Union. For this reason, the rule
recognizing the right of taxpayers to assail the constitutionality of a
legislation appropriating local or state public funds — which has been
upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101
U.S. 601) — has greater application in the Philippines than that
adopted with respect to acts of Congress of the United States
appropriating federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving
the expropriation of a land by the Province of Tayabas, two (2)
taxpayers thereof were allowed to intervene for the purpose of
contesting the price being paid to the owner thereof, as unduly
exorbitant. It is true that in Custodio vs. President of the Senate (42
Off. Gaz., 1243), a taxpayer and employee of the Government was not
permitted to question the constitutionality of an appropriation for
backpay of members of Congress. However, in Rodriguez vs. Treasurer
of the Philippines and Barredo vs.Commission on Elections (84 Phil.,
368; 45 Off. Gaz., 4411), we entertained the action of taxpayers
impugning the validity of certain appropriations of public funds, and
invalidated the same. Moreover, the reason that impelled this Court
to take such position in said two (2) cases — the importance of the
issues therein raised — is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is
not merely a taxpayer. The Province of Rizal, which he represents
officially as its Provincial Governor, is our most populated political
subdivision, 8and, the taxpayers therein bear a substantial portion of
the burden of taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances

surrounding this case sufficiently justify petitioners action in
contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and that
the writ of preliminary injunction should have been maintained.

Wherefore, the decision appealed from is hereby reversed, and the

records are remanded to the lower court for further proceedings not
inconsistent with this decision, with the costs of this instance against
respondent Jose C. Zulueta. It is so ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-
appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal
Bonifacio R Matol and Assistant Solicitor General Conrado T. Limcaoco
& Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of
Leyte in its Civil Case No. 3294, which was certified to Us by the Court
of Appeals on October 6, 1969, as involving only pure questions of
law, challenging the power of taxation delegated to municipalities
under the Local Autonomy Act (Republic Act No. 2264, as amended,
June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. 1 otherwise
known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos.
23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null
and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the
material portions of which state that, first, both Ordinances Nos. 23
and 27 embrace or cover the same subject matter and the production
tax rates imposed therein are practically the same, and second, that
on January 17, 1963, the acting Municipal Treasurer of Tanauan,
Leyte, as per his letter addressed to the Manager of the Pepsi-Cola
Bottling Plant in said municipality, sought to enforce compliance by
the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved
on September 25, 1962, levies and collects "from soft drinks
producers and manufacturers a tai of one-sixteenth (1/16) of a
centavo for every bottle of soft drink corked." 2 For the purpose of
computing the taxes due, the person, firm, company or corporation
producing soft drinks shall submit to the Municipal Treasurer a
monthly report, of the total number of bottles produced and corked
during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved
on October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a
tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing
soft drinks shall submit to the Municipal Treasurer a monthly report
of the total number of gallons produced or manufactured during the
month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
"municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the
constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the
plaintiff to pay the taxes due under the oft the said Ordinances; and
to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company
appealed to the Court of Appeals, which, in turn, elevated the case to
Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of
power, confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and
impose percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers
may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary
implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer
on such local governmental agencies the power to tax. 9 Under the
New Constitution, local governments are granted the autonomous
authority to create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local government unit shall have
the power to create its sources of revenue and to levy taxes, subject
to such limitations as may be provided by law." Withal, it cannot be
said that Section 2 of Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and vest in local
governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to
plaintiff-appellant's pretense, would not suffice to invalidate the said
law as confiscatory and oppressive. In delegating the authority, the
State is not limited 6 the exact measure of that which is exercised by
itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated
such measure of power to impose and collect taxes as the legislature
may deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not deemed
wise to tax for more general purposes. 10 This is not to say though
that the constitutional injunction against deprivation of property
without due process of law may be passed over under the guise of the
taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public
purpose; (2) the rule on uniformity of taxation is observed; (3) either
the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection
of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is
for a private as distinguished from a public purpose; a tax is imposed
on property outside the State, i.e., extraterritorial taxation; and
arbitrary or oppressive methods are used in assessing and collecting
taxes. But, a tax does not violate the due process clause, as applied to
a particular taxpayer, although the purpose of the tax will result in an
injury rather than a benefit to such taxpayer. Due process does not
require that the property subject to the tax or the amount of tax to be
raised should be determined by judicial inquiry, and a notice and
hearing as to the amount of the tax and the manner in which it shall
be apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can
be declared unconstitutional on the theory of double taxation. It must
be observed that the delegating authority specifies the limitations
and enumerates the taxes over which local taxation may not be
exercised. 13 The reason is that the State has exclusively reserved the
same for its own prerogative. Moreover, double taxation, in general,
is not forbidden by our fundamental law, since We have not adopted
as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the
Union.14 Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental
entity 15 or by the same jurisdiction for the same purpose, 16 but not
in a case where one tax is imposed by the State and the other by the
city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover the
same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid
and legally enforceable. This is not so. As earlier quoted, Ordinance
No. 23, which was approved on September 25, 1962, levies or collects
from soft drinks producers or manufacturers a tax of one-sixteen
(1/16) of a centavo for .every bottle corked, irrespective of the
volume contents of the bottle used. When it was discovered that the
producer or manufacturer could increase the volume contents of the
bottle and still pay the same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October 28, 1962, imposing a
tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The difference between the two ordinances clearly
lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it
was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it
is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The intention of the Municipal Council of Tanauan in
enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal of
the latter, even without words to that effect. 18 Plaintiff-appellant in
its brief admitted that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even the stipulation of facts
confirms the fact that the Acting Municipal Treasurer of Tanauan,
Leyte sought t6 compel compliance by the plaintiff-appellant of the
provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27, series
of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his brief
"that Section 7 of Ordinance No. 27, series of 1962 clearly repeals
Ordinance No. 23 as the provisions of the latter are inconsistent with
the provisions of the former."
matters of local taxation, an aspect that is given expression in the
Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if the
purpose of the law to further strengthen local autonomy were to be
realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine
with five but not more than ten crowners or P2,000.00 with ten but
not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters
under Ordinance No. 54, series of 1964, as amended by Ordinance No.
41, series of 1968, of defendant Municipality, 29 appears not to affect
the resolution of the validity of Ordinance No. 27. Municipalities are
empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No.
2264, otherwise known as the Local Autonomy Act, as amended, is
hereby upheld and Municipal Ordinance No. 27 of the Municipality of
Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No.
23, same series, is hereby declared of valid and legal effect. Costs
against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz
Palma, Aquino and Concepcion, Jr., JJ., concur.

That brings Us to the question of whether the remaining Ordinance

No. 27 imposes a percentage or a specific tax. Undoubtedly, the
taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost
"everything, accepting those which are mentioned therein." As long
as the text levied under the authority of a city or municipal ordinance
is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules
of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition
against municipalities and municipal districts to impose "any
percentage tax or other taxes in any form based thereon nor impose
taxes on articles subject to specific tax except gasoline, under the
provisions of the National Internal Revenue Code." For purposes of
this particular limitation, a municipal ordinance which prescribes a set
ratio between the amount of the tax and the volume of sale of the
taxpayer imposes a sales tax and is null and void for being outside the
power of the municipality to enact. 20 But, the imposition of "a tax of
one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity" on all soft drinks produced or manufactured under
Ordinance No. 27 does not partake of the nature of a percentage tax
on sales, or other taxes in any form based thereon. The tax is levied
on the produce (whether sold or not) and not on the sales. The
volume capacity of the taxpayer's production of soft drinks is
considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and
the amount of the tax.21

Nor can the tax levied be treated as a specific tax. Specific taxes are
those imposed on specified articles, such as distilled spirits, wines,
fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing
cards, saccharine, opium and other habit-forming drugs. 22 Soft drink
is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or an
equivalent of 1-½ centavos per case, 23 cannot be considered unjust
and unfair. 24 an increase in the tax alone would not support the
claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates of
imposable taxes. 25 This is in line with the constutional policy of
according the widest possible autonomy to local governments in
ii. Delegation to the President
1. Sec. 28(2) Article VI of the Constitution - SECTION 28 (2) The
Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may
impose, tariff rates, import and export quotas, tonnage and wharfage
dues, and other duties or imposts within the framework of the
national development program of the Government.
2. Flexible Tariff Clause – Sec. 1608 of the Customs Modernization and
Tariff Act.

Sec. 1608. Flexible Clause

Flexible Clause. – (a) In the interest of general welfare and national

security, and subject to the limitations prescribed under this Act, the
President, upon the recommendation of the NEDA, is hereby
empowered to:

(1) Increase, reduce, or remove existing rates of import duty including

any necessary change in classification. The existing rates may be
increased or decreased to any level, in one or several stages, but in no
case shall the increased rate of import duty be higher than a
maximum of one hundred percent (100%) ad valorem;

(2) Establish import quotas or ban imports of any commodity, as may

be necessary; and

(3) Impose an additional duty on all imports not exceeding ten

percent (10%) ad valorem whenever necessary: Provided, That upon
periodic investigations by the Commission and recommendation of
the NEDA, the President may cause a gradual reduction of rates of
import duty granted in Section 1611 of this Act, including those
subsequently granted pursuant to this section.

(b) Before any recommendation is submitted to the President by the

NEDA pursuant to the provisions of this section, except in the
imposition of an additional duty not exceeding ten percent (10%) ad
valorem, the Commission shall conduct an investigation and shall hold
public hearings wherein interested parties shall be afforded
reasonable opportunity to be present, to produce evidence and to be
heard. The Commission shall also hear the views and
recommendations of any government office, agency, or
instrumentality. The Commission shall submit its findings and
recommendations to the NEDA within thirty (30) days after the
termination of the public hearings.

(c) The power of the President to increase or decrease rates of import

duty within the limits fixed in subsection (a) hereof shall include the
authority to modify the form of duty. In modifying the form of duty,
the corresponding ad valorem or specific equivalents of the duty with
respect to imports from the principal competing foreign country for
the most recent representative period shall be used as basis.

(d) Any order issued by the President pursuant to the provisions of

this section shall take effect thirty (30) days after promulgation,
except in the imposition of additional duty not exceeding ten percent
(10%) ad valorem which shall take effect at the discretion of the
President.

(e) The power delegated to the President as provided for in this

section shall be exercised only when Congress is not in session.

(f) The power herein delegated may be withdrawn or terminated by

Congress through a joint resoution.

The NEDA shall promulgate rules and regulations necessary to carry

out the provisions of this section.
Republic of the Philippines
SUPREME COURT
EN BANC
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E.
ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA,
SECRETARY OF FINANCE, GUILLERMO L. PARAYNO, JR.,
COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its
President, ROSARIO ANTONIO; PETRON DEALERS’ ASSOCIATION
represented by its President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS’ OF THE PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under the
name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES
MARTINEZ doing business under the name and style of "SHELL GATE –
N. DOMINGO"; BETHZAIDA TAN doing business under the name and
style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing
business under the name and style of "NEW LAMUAN SHELL SERVICE
STATION"; EFREN SOTTO doing business under the name and style of
"RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION
represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI
doing business under the name and style of "R&R PETRON STATION";
PETER M. UNGSON doing business under the name and style of
"CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE
doing business under the name and style of "NTE GASOLINE &
SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under
the name and style of "STARCARGA ENTERPRISES"; ADORACION
MAÑEBO doing business under the name and style of "CMA
MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the
name and style of "LEONA’S GASOLINE STATION and SERVICE
CENTER"; CARMELITA BALDONADO doing business under the name
and style of "FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA
doing business under the name and style of "LORPED SERVICE
CENTER"; RHEAMAR A. RAMOS doing business under the name and
style of "RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGO doing
business under the name and style of "VIOLAGO-PTT SERVICE
CENTER"; MOTORISTS’ HEART CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS’
HARVARD CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; MOTORISTS’ HERITAGE
CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION
represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing business under the name and
style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III
doing business under the name and style of "TRUE SERVICE STATION",
Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of
Finance and GUILLERMO L. PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue, Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL
JOEL J. VILLANUEVA, RODOLFO G. PLAZA, DARLENE ANTONINO-
CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G.
NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ,
RODOLFO Q. AGBAYANI and TEODORO A. CASIÑO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance,
GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of
Internal Revenue, and EDUARDO R. ERMITA, in his capacity as
Executive Secretary,Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary;
HON. MARGARITO TEVES, in his capacity as Secretary of Finance;
HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of
the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in
his capacity as the OIC Commissioner of the Bureau of Customs,
Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of
all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal
allocation for education, increased emoluments for health workers,
and wider coverage for full value-added tax benefits … these are the
reasons why Republic Act No. 9337 (R.A. No. 9337)1 was enacted.
Reasons, the wisdom of which, the Court even with its extensive
constitutional power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law, but also
perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality.
Their arguments notwithstanding, petitioners failed to justify their
call for the invalidity of the law. Hence, R.A. No. 9337 is not
unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely,
House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7,
2005. The House Committee on Ways and Means approved the bill, in
substitution of House Bill No. 1468, which Representative (Rep.) Eric
D. Singson introduced on August 8, 2004. The President certified the
bill on January 7, 2005 for immediate enactment. On January 27,
2005, the House of Representatives approved the bill on second and
third reading.
House Bill No. 37053 on the other hand, substituted House Bill No.
3105 introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381
introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No.
3555. The House Committee on Ways and Means approved the bill on
February 2, 2005. The President also certified it as urgent on February
8, 2005. The House of Representatives approved the bill on second
and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means
approved Senate Bill No. 19504 on March 7, 2005, "in substitution of
Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House
Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate
Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N.
Pangilinan. The President certified the bill on March 11, 2005, and
was approved by the Senate on second and third reading on April 13,
2005.
On the same date, April 13, 2005, the Senate agreed to the request of
the House of Representatives for a committee conference on the
disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions
of House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950,
"after having met and discussed in full free and conference,"
recommended the approval of its report, which the Senate did on
May 10, 2005, and with the House of Representatives agreeing
thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and
Senate version was transmitted to the President, who signed the
same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date
came, the Court issued a temporary restraining order, effective
immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the
hearing, the Court speaking through Mr. Justice Artemio V.
Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your
presentation, let me just tell you a little background. You know when
the law took effect on July 1, 2005, the Court issued a TRO at about 5
o’clock in the afternoon. But before that, there was a lot of
complaints aired on television and on radio. Some people in a gas
station were complaining that the gas prices went up by 10%. Some
people were complaining that their electric bill will go up by 10%.
Other times people riding in domestic air carrier were complaining
that the prices that they’ll have to pay would have to go up by 10%.
While all that was being aired, per your presentation and per our own
understanding of the law, that’s not true. It’s not true that the e-vat
law necessarily increased prices by 10% uniformly isn’t it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive
Order that granted the Petroleum companies some subsidy . . .
interrupted
J. PANGANIBAN : That’s correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the
impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures
would be the elimination of the Excise Tax and the import duties. That
is why, it is not correct to say that the VAT as to petroleum dealers
increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing
the retail price by 10% to cover the E-Vat tax. If you consider the
excise tax and the import duties, the Net Tax would probably be in
the neighborhood of 7%? We are not going into exact figures I am just
trying to deliver a point that different industries, different products,
different services are hit differently. So it’s not correct to say that all
prices must go up by 10%.
ATTY. BANIQUED : You’re right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr.
Counsel, are at present imposed a Sales Tax of 3%. When this E-Vat
law took effect the Sales Tax was also removed as a mitigating
measure. So, therefore, there is no justification to increase the fares
by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were
complaining on that first day, were being increased arbitrarily by 10%.
And that’s one reason among many others this Court had to issue TRO
because of the confusion in the implementation. That’s why we
added as an issue in this case, even if it’s tangentially taken up by the
pleadings of the parties, the confusion in the implementation of the E-
vat. Our people were subjected to the mercy of that confusion of an
across the board increase of 10%, which you yourself now admit and I
think even the Government will admit is incorrect. In some cases, it
should be 3% only, in some cases it should be 6% depending on these
mitigating measures and the location and situation of each product,
of each service, of each company, isn’t it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So that’s one reason why we had to issue a
TRO pending the clarification of all these and we wish the
government will take time to clarify all these by means of a more
detailed implementing rules, in case the law is upheld by this Court. . .
.6
The Court also directed the parties to file their respective
Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party
List, et al., filed a petition for prohibition on May 27, 2005. They
question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the National
Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of
goods and properties, Section 5 imposes a 10% VAT on importation of
goods, and Section 6 imposes a 10% VAT on sale of services and use or
lease of properties. These questioned provisions contain a
uniform proviso authorizing the President, upon recommendation of
the Secretary of Finance, to raise the VAT rate to 12%, effective
January 1, 2006, after any of the following conditions have been
satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes
abandonment by Congress of its exclusive authority to fix the rate of
taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition
for certiorari likewise assailing the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the
President to increase the VAT rate to 12%, on the ground that it
amounts to an undue delegation of legislative power, petitioners also
contend that the increase in the VAT rate to 12% contingent on any of
the two conditions being satisfied violates the due process clause
embodied in Article III, Section 1 of the Constitution, as it imposes an
unfair and additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate would be
returned to the original 10% if the conditions are no longer satisfied;
(2) the rate is unfair and unreasonable, as the people are unsure of
the applicable VAT rate from year to year; and (3) the increase in the
VAT rate, which is supposed to be an incentive to the President to
raise the VAT collection to at least 2 4/5 of the GDP of the previous
year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by
authority granted to the President by the Bicameral Conference
Committee is a violation of the "no-amendment rule" upon last
reading of a bill laid down in Article VI, Section 26(2) of the
Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by
the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that
the input tax on depreciable goods shall be amortized over a 60-
month period, if the acquisition, excluding the VAT components,
exceeds One Million Pesos (₱1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70%
limit on the amount of input tax to be credited against the output tax;
and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the
Government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, to deduct a 5% final withholding tax on
gross payments of goods and services, which are subject to 10% VAT
under Sections 106 (sale of goods and properties) and 108 (sale of
services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for
being arbitrary, oppressive, excessive, and confiscatory.
Petitioners’ argument is premised on the constitutional right of non-
deprivation of life, liberty or property without due process of law
under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount
of input tax that may be claimed. Petitioners also argue that the input
tax partakes the nature of a property that may not be confiscated,
appropriated, or limited without due process of law. Petitioners
further contend that like any other property or property right, the
input tax credit may be transferred or disposed of, and that by
limiting the same, the government gets to tax a profit or value-added
even if there is no profit or value-added.
Petitioners also believe that these provisions violate the
constitutional guarantee of equal protection of the law under Article
III, Section 1 of the Constitution, as the limitation on the creditable
input tax if: (1) the entity has a high ratio of input tax; or (2) invests in
capital equipment; or (3) has several transactions with the
government, is not based on real and substantial differences to meet
a valid classification.
Lastly, petitioners contend that the 70% limit is anything but
progressive, violative of Article VI, Section 28(1) of the Constitution,
and that it is the smaller businesses with higher input tax to output
tax ratio that will suffer the consequences thereof for it wipes out
whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis
Joseph G. Escudero filed this petition for certiorari on June 30, 2005.
They question the constitutionality of R.A. No. 9337 on the following
grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation
of legislative power, in violation of Article VI, Section 28(2) of the
Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in
deleting the no pass on provisions present in Senate Bill No. 1950 and
House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27,
28, 34, 116, 117, 119, 121, 125,7 148, 151, 236, 237 and 288, which
were present in Senate Bill No. 1950, violates Article VI, Section 24(1)
of the Constitution, which provides that all appropriation, revenue or
tariff bills shall originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition
for certiorari and prohibition on July 20, 2005, alleging
unconstitutionality of the law on the ground that the limitation on the
creditable input tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, thus violating the principle
that tax collection and revenue should be solely allocated for public
purposes and expenditures. Petitioner Garcia further claims that
allowing these establishments to pass on the tax to the consumers is
inequitable, in violation of Article VI, Section 28(1) of the
Constitution.
RESPONDENTS’ COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of
respondents. Preliminarily, respondents contend that R.A. No. 9337
enjoys the presumption of constitutionality and petitioners failed to
cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by
petitioners, i.e., legality of the bicameral proceedings, exclusive
origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the
issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any of
the two conditions provided therein arise.
Respondents also refute petitioners’ argument that the increase to
12%, as well as the 70% limitation on the creditable input tax, the 60-
month amortization on the purchase or importation of capital goods
exceeding ₱1,000,000.00, and the 5% final withholding tax by
government agencies, is arbitrary, oppressive, and confiscatory, and
that it violates the constitutional principle on progressive taxation,
among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the
government’s fiscal reform agenda. A reform in the value-added
system of taxation is the core revenue measure that will tilt the
balance towards a sustainable macroeconomic environment
necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108 of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2)
and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending
Section 114(C) of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles
and concepts of value-added tax (VAT), as the confusion and
inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale,
barter, exchange or lease of goods or properties and services.8 Being
an indirect tax on expenditure, the seller of goods or services may
pass on the amount of tax paid to the buyer,9 with the seller acting
merely as a tax collector.10 The burden of VAT is intended to fall on
the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable
on the transaction or business it engages in, without transferring the
burden to someone else.11 Examples are individual and corporate
income taxes, transfer taxes, and residence taxes.12
In the Philippines, the value-added system of sales taxation has long
been in existence, albeit in a different mode. Prior to 1978, the
system was a single-stage tax computed under the "cost deduction
method" and was payable only by the original sellers. The single-stage
system was subsequently modified, and a mixture of the "cost
deduction method" and "tax credit method" was used to determine
the value-added tax payable.13 Under the "tax credit method," an
entity can credit against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and imports.14
It was only in 1987, when President Corazon C. Aquino issued
Executive Order No. 273, that the VAT system was rationalized by
imposing a multi-stage tax rate of 0% or 10% on all sales using the
"tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT
Law,16 R.A. No. 8241 or the Improved VAT Law,17 R.A. No. 8424 or the
Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A.
No. 9337, also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the
Bicameral Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in
Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House
and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input
tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the
Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and
discipline are intrinsic in any legislative body for, as unerringly
elucidated by Justice Story, "[i]f the power did not exist, it would be
utterly impracticable to transact the business of the nation, either at
all, or at least with decency, deliberation, and order."19 Thus, Article
VI, Section 16 (3) of the Constitution provides that "each House may
determine the rules of its proceedings." Pursuant to this inherent
constitutional power to promulgate and implement its own rules of
procedure, the respective rules of each house of Congress provided
for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of
Representatives provides as follows:
Sec. 88. Conference Committee. – In the event that the House does
not agree with the Senate on the amendment to any bill or joint
resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as
much as possible, adhere to and support the House Bill. If the
differences with the Senate are so substantial that they materially
impair the House Bill, the panel shall report such fact to the House for
the latter’s appropriate action.
Sec. 89. Conference Committee Reports. – . . . Each report shall
contain a detailed, sufficiently explicit statement of the changes in or
amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the
Conference Committee Report prior to the voting thereon. The House
shall vote on the Conference Committee Report in the same manner
and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of
Representatives on the provision of any bill or joint resolution, the
differences shall be settled by a conference committee of both
Houses which shall meet within ten (10) days after their composition.
The President shall designate the members of the Senate Panel in the
conference committee with the approval of the Senate.
Each Conference Committee Report shall contain a detailed and
sufficiently explicit statement of the changes in, or amendments to
the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate
provisions and a reconciled version thereof with the explanatory
statement of the conference committee shall be attached to the
report.
...
The creation of such conference committee was apparently in
response to a problem, not addressed by any constitutional provision,
where the two houses of Congress find themselves in disagreement
over changes or amendments introduced by the other house in a
legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of
proceedings and to discipline its members, may the Court then delve
into the details of how Congress complies with its internal rules or
how it conducts its business of passing legislation? Note that in the
present petitions, the issue is not whether provisions of the rules of
both houses creating the bicameral conference committee are
unconstitutional, but whether the bicameral conference committee
has strictly complied with the rules of both houses, thereby remaining
within the jurisdiction conferred upon it by Congress.
In the recent case of Fariñas vs. The Executive Secretary,20 the
Court En Banc, unanimously reiterated and emphasized its adherence
to the "enrolled bill doctrine," thus, declining therein petitioners’ plea
for the Court to go behind the enrolled copy of the bill. Assailed in
said case was Congress’s creation of two sets of bicameral conference
committees, the lack of records of said committees’ proceedings, the
alleged violation of said committees of the rules of both houses, and
the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It
was argued that such irregularities in the passage of the law nullified
R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker
of the House and the Senate President and the certification of the
Secretaries of both Houses of Congress that it was passed are
conclusive of its due enactment. A review of cases reveals the Court’s
consistent adherence to the rule. The Court finds no reason to deviate
from the salutary rule in this case where the irregularities alleged by
the petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the enforcement of
these internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance
the courts have no concern. Whatever doubts there may be as to the
formal validity of Rep. Act No. 9006 must be resolved in its favor.The
Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression,
all deny to the courts the power to inquire into allegations that, in
enacting a law, a House of Congress failed to comply with its own
rules, in the absence of showing that there was a violation of a
constitutional provision or the rights of private individuals. In Osmeña
v. Pendatun, it was held: "At any rate, courts have declared that ‘the
rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting
them.’ And it has been said that "Parliamentary rules are merely
procedural, and with their observance, the courts have no concern.
They may be waived or disregarded by the legislative body."
Consequently, "mere failure to conform to parliamentary usage will
not invalidate the action (taken by a deliberative body) when the
requisite number of members have agreed to a particular
measure."21 (Emphasis supplied)
The foregoing declaration is exactly in point with the present cases,
where petitioners allege irregularities committed by the conference
committee in introducing changes or deleting provisions in the House
and Senate bills. Akin to the Fariñas case,22 the present petitions also
raise an issue regarding the actions taken by the conference companies.
committee on matters regarding Congress’ compliance with its own
internal rules. As stated earlier, one of the most basic and inherent
power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the best
judge of how it should conduct its own business expeditiously and in
the most orderly manner. It is also the sole
With regard to 70% limit on input tax credit
concern of Congress to instill discipline among the members of its
conference committee if it believes that said members violated any of
its rules of proceedings. Even the expanded jurisdiction of this Court
cannot apply to questions regarding only the internal operation of
Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case
of Tolentino vs. Secretary of Finance,23 the Court already made the
pronouncement that "[i]f a change is desired in the practice [of the
Bicameral Conference Committee] it must be sought in Congress since
this question is not covered by any constitutional provision but is only With regard to amendments to be made to NIRC provisions regarding
an internal rule of each house." 24 To date, Congress has not seen it fit income and excise taxes
to make such changes adverted to by the Court. It seems, therefore, No similar No similar provision Provided for
that Congress finds the practices of the bicameral conference provision amendments to
committee to be very useful for purposes of prompt and efficient several NIRC
legislative action. provisions regarding
corporate income,
Nevertheless, just to put minds at ease that no blatant irregularities percentage,
tainted the proceedings of the bicameral conference committees, the franchise and excise
Court deems it necessary to dwell on the issue. The Court observes taxes
that there was a necessity for a conference committee because a Provides that the No similar provision Provides that the input
comparison of the provisions of House Bill Nos. 3555 and 3705 on one input tax credit for tax credit for capital
hand, and Senate Bill No. 1950 on the other, reveals that there were capital goods on goods on which a VAT
which a VAT has been has been paid shall be
indeed disagreements. As pointed out in the petitions, said
paid shall be equally equally distributed
disagreements were as follows: distributed over 5 over 5 years or the
years or the depreciable life of such
House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950 depreciable life of capital goods; the
With regard to "Stand-By Authority" in favor of President such capital goods; input tax credit for
the input tax credit goods and services
Provides for 12% VAT Provides for 12% VAT in Provides for a single
for goods and services other than capital
on every sale of goods general on sales of goods rate of 10% VAT on
other than capital goods shall not exceed
or properties or properties and sale of goods or
goods shall not 90% of the output VAT.
(amending Sec. 106 of reduced rates for sale of properties (amending
exceed 5% of the total
NIRC); 12% VAT on certain locally Sec. 106 of NIRC), 10%
amount of such goods
importation of goods manufactured goods and VAT on sale of services
and services; and for
(amending Sec. 107 of petroleum products and including sale of
persons engaged in
NIRC); and 12% VAT raw materials to be used electricity by
retail trading of
on sale of services and in the manufacture generation companies,
goods, the allowable
use or lease of thereof (amending Sec. transmission and
input tax credit shall
properties (amending 106 of NIRC); 12% VAT on distribution
not exceed 11% of the
Sec. 108 of NIRC) importation of goods and companies, and use or
total amount of goods
reduced rates for certain lease of properties
purchased.
imported products (amending Sec. 108 of
including petroleum NIRC)
products (amending Sec. The disagreements between the provisions in the House bills and the
107 of NIRC); and 12% Senate bill were with regard to (1) what rate of VAT is to be imposed;
VAT on sale of services
(2) whether only the VAT imposed on electricity generation,
and use or lease of
properties and a reduced
transmission and distribution companies should not be passed on to
rate for certain services consumers, as proposed in the Senate bill, or both the VAT imposed
including power on electricity generation, transmission and distribution companies
generation (amending and the VAT imposed on sale of petroleum products should not be
Sec. 108 of NIRC) passed on to consumers, as proposed in the House bill; (3) in what
With regard to the "no pass-on" provision manner input tax credits should be limited; (4) and whether the NIRC
No similar provision Provides that the VAT Provides that the VAT provisions on corporate income taxes, percentage, franchise and
imposed on power imposed on sales of excise taxes should be amended.
generation and on the electricity by
sale of petroleum generation companies
products shall be and services of There being differences and/or disagreements on the foregoing
absorbed by generation transmission provisions of the House and Senate bills, the Bicameral Conference
companies or sellers, companies and Committee was mandated by the rules of both houses of Congress to
respectively, and shall distribution act on the same by settling said differences and/or disagreements.
not be passed on to companies, as well as The Bicameral Conference Committee acted on the disagreeing
consumers those of franchise provisions by making the following changes:
grantees of electric
utilities shall not apply
to residential 1. With regard to the disagreement on the rate of VAT to be imposed,
it would appear from the Conference Committee Report that the
end-users. VAT shall be Bicameral Conference Committee tried to bridge the gap in the
absorbed by difference between the 10% VAT rate proposed by the Senate, and
generation, the various rates with 12% as the highest VAT rate proposed by the
transmission, and House, by striking a compromise whereby the present 10% VAT rate
distribution would be retained until certain conditions arise, i.e., the value-added
tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds 2 4/5%, or National Government deficit as a
percentage of GDP of the previous year exceeds 1½%, when the
President, upon recommendation of the Secretary of Finance shall
raise the rate of VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed
on electricity generation, transmission and distribution companies
should not be passed on to consumers or whether both the VAT
imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products may
be passed on to consumers, the Bicameral Conference Committee
chose to settle such disagreement by altogether deleting from its
Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits
should be limited or not, the Bicameral Conference Committee
decided to adopt the position of the House by putting a limitation on
the amount of input tax that may be credited against the output tax,
although it crafted its own language as to the amount of the
limitation on input tax credits and the manner of computing the same
by providing thus:
(A) Creditable Input Tax. – . . .
...
Provided, The input tax on goods purchased or imported in a calendar
month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months if
the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds one million Pesos (₱1,000,000.00):
PROVIDED, however, that if the estimated useful life of the capital
good is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. – If at the end of any taxable quarter
the output tax exceeds the input tax, the excess shall be paid by the
VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters:
PROVIDED that the input tax inclusive of input VAT carried over from
the previous quarter that may be credited in every quarter shall not
exceed seventy percent (70%) of the output VAT: PROVIDED,
HOWEVER, THAT any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on
corporate income tax, franchise, percentage and excise taxes, the
conference committee decided to include such amendments and
basically adopted the provisions found in Senate Bill No. 1950, with
some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill. The term
"settle" is synonymous to "reconcile" and "harmonize."25 To reconcile
or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the
House bill or Senate bill, (b) decide that neither provisions in the
House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a
compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant only to
reconcile and harmonize the disagreeing provisions for it did not
inject any idea or intent that is wholly foreign to the subject
embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby
the rate of 10% VAT wanted by the Senate is retained until such time
that certain conditions arise when the 12% VAT wanted by the House
shall be imposed, appears to be a compromise to try to bridge the
difference in the rate of VAT proposed by the two houses of Congress.
Nevertheless, such compromise is still totally within the subject of
what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of
the proceedings of the Bicameral Conference Committee held on May
10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained
the reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple.
And we were thinking that no sector should be a beneficiary of
legislative grace, neither should any sector be discriminated on. The
VAT is an indirect tax. It is a pass on-tax. And let’s keep it plain and
simple. Let’s not confuse the bill and put a no pass-on provision. Two-
thirds of the world have a VAT system and in this two-thirds of the
globe, I have yet to see a VAT with a no pass-though provision. So, the
thinking of the Senate is basically simple, let’s keep the VAT
simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-
on provision "never really enjoyed the support of either House." 27
With regard to the amount of input tax to be credited against output
tax, the Bicameral Conference Committee came to a compromise on
the percentage rate of the limitation or cap on such input tax credit,
but again, the change introduced by the Bicameral Conference
Committee was totally within the intent of both houses to put a cap
on input tax that may be
credited against the output tax. From the inception of the subject
revenue bill in the House of Representatives, one of the major
objectives was to "plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input
VAT tax credits . . ." and "[b]y introducing limitations on the claiming
of tax credit, we are capping a major leakage that has placed our
collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the
value-added tax proposed in Senate Bill No. 1950, since said
provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the
version of the Senate.
Thus, all the changes or modifications made by the Bicameral
Conference Committee were germane to subjects of the provisions
referred
to it for reconciliation. Such being the case, the Court does not see
any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs.
Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized
the long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the
Senate and the House. Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in its
report an entirely new provision that is not found either in the House
bill or in the Senate bill. If the committee can propose an amendment
consisting of one or two provisions, there is no reason why it cannot
propose several provisions, collectively considered as an "amendment
in the nature of a substitute," so long as such amendment is germane
to the subject of the bills before the committee. After all, its report
was not final but needed the approval of both houses of Congress to
become valid as an act of the legislative department. The charge that
in this case the Conference Committee acted as a third legislative
chamber is thus without any basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the
Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed
three readings on separate days, and printed copies thereof in its final
form have been distributed to its Members three days before its
passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon
the last reading of a bill, no amendment thereto shall be allowed, and
the vote thereon shall be taken immediately thereafter, and the yeas
and nays entered in the Journal.
Petitioners’ argument that the practice where a bicameral conference
committee is allowed to add or delete provisions in the House bill and
the Senate bill after these had passed three readings is in effect a
circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the
1987 Constitution), fails to convince the Court to deviate from its
ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committee’s Report in
these cases must have undergone three readings in each of the two
houses. If that be the case, there would be no end to negotiation
since each house may seek modification of the compromise bill. . . .
Art. VI. § 26 (2) must, therefore, be construed as referring only to bills
introduced for the first time in either house of Congress, not to the
conference committee report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only
to the procedure to be followed by each house of Congress with
regard to bills initiated in each of said respective houses, before said
bill is transmitted to the other house for its concurrence or
amendment. Verily, to construe said provision in a way as to
proscribe any further changes to a bill after one house has voted on it
would lead to absurdity as this would mean that the other house of
Congress would be deprived of its constitutional power to amend or
introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by the
Bicameral Conference Committee of amendments and modifications
to disagreeing provisions in bills that have been acted upon by both
houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made
regarding the NIRC provisions on corporate income taxes and
percentage, excise taxes. Petitioners refer to the following provisions,
to wit:
Section 27 Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices Verily, Article VI, Section 24 of the Constitution does not contain any
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the
NIRC did not at all originate from the House. They aver that House Bill
No. 3555 proposed amendments only regarding Sections 106, 107,
108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed
amendments only to Sections 106, 107,108, 109, 110 and 111 of the
NIRC; thus, the other sections of the NIRC which the Senate amended
but which amendments were not found in the House bills are not
intended to be amended by the House of Representatives. Hence,
they argue that since the proposed amendments did not originate
from the House, such amendments are a violation of Article VI,
Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills
shall originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill
Nos. 3555 and 3705 that initiated the move for amending provisions
of the NIRC dealing mainly with the value-added tax. Upon
transmittal of said House bills to the Senate, the Senate came out
with Senate Bill No. 1950 proposing amendments not only to NIRC
provisions on the value-added tax but also amendments to NIRC
provisions on other kinds of taxes. Is the introduction by the Senate of
provisions not dealing directly with the value- added tax, which is the
only kind of tax being amended in the House bills, still within the
purview of the constitutional provision authorizing the Senate to
propose or concur with amendments to a revenue bill that originated
from the House?
The foregoing question had been squarely answered in
the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law – but the revenue bill – which is
required by the Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. . . . At this
point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue
statute – and not only the bill which initiated the legislative process
culminating in the enactment of the law – must substantially be the
same as the House bill would be to deny the Senate’s power not only
to "concur with amendments" but also to "propose amendments." It
would be to violate the coequality of legislative power of the two
houses of Congress and in fact make the House superior to the
Senate.
…
…Given, then, the power of the Senate to propose amendments, the
Senate can propose its own version even with respect to bills which
are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come from
the House of Representatives on the theory that, elected as they are
from the districts, the members of the House can be expected to be
more sensitive to the local needs and problems. On the other hand,
the senators, who are elected at large, are expected to approach the
same problems from the national perspective. Both views are thereby
made to bear on the enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated
in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, excise and franchise taxes.
prohibition or limitation on the extent of the amendments that may
be introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC
provisions that had not been touched in the House bills are still in
furtherance of the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill No. 1468, the very
first House bill introduced on the floor, which was later substituted by
House Bill No. 3555, stated:
One of the challenges faced by the present administration is the
urgent and daunting task of solving the country’s serious financial
problems. To do this, government expenditures must be strictly
monitored and controlled and revenues must be significantly
increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a
balanced budget by the year 2009. In fact, several measures that will
result to significant expenditure savings have been identified by the
administration. It is supported with a credible package of revenue
measures that include measures to improve tax administration and
control the leakages in revenues from income taxes and the value-
added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555,
declared that:
In the budget message of our President in the year 2005, she
reiterated that we all acknowledged that on top of our agenda must
be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit
and eventually achieve a balanced budget by the year 2009, we need
to seize windows of opportunities which might seem poignant in the
beginning, but in the long run prove effective and beneficial to the
overall status of our economy. One such opportunity is a review of
existing tax rates, evaluating the relevance given our present
conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the
House of Representatives is to bring in sizeable revenues for the
government
to supplement our country’s serious financial problems, and improve
tax administration and control of the leakages in revenues from
income taxes and value-added taxes. As these house bills were
transmitted to the Senate, the latter, approaching the measures from
the point of national perspective, can introduce amendments within
the purposes of those bills. It can provide for ways that would soften
the impact of the VAT measure on the consumer, i.e., by distributing
the burden across all sectors instead of putting it entirely on the
shoulders of the consumers. The sponsorship speech of Sen. Ralph
Recto on why the provisions on income tax on corporation were
included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means
will raise ₱64.3 billion in additional revenues annually even while by
mitigating prices of power, services and petroleum products.
However, not all of this will be wrung out of VAT. In fact, only ₱48.7
billion amount is from the VAT on twelve goods and services. The rest
of the tab – ₱10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate
Philippines and the consumer. Why should the latter bear all the
pain? Why should the fiscal salvation be only on the burden of the
consumer?
The corporate world’s equity is in form of the increase in the
corporate income tax from 32 to 35 percent, but up to 2008 only. This
will raise ₱10.5 billion a year. After that, the rate will slide back, not
to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to
bear with this emergency provision that will be in effect for 1,200
days, while we put our fiscal house in order. This fiscal medicine will
have an expiry date.
For their assistance, a reward of tax reduction awaits them. We
intend to keep the length of their sacrifice brief. We would like to
assure them that not because there is a light at the end of the tunnel,
this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the
small man. Big business will be there to share the burden.35
As the Court has said, the Senate can propose amendments and in
fact, the amendments made on provisions in the tax on income of
corporations are germane to the purpose of the house bills which is to
raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage
and excise taxes germane to the reforms to the VAT system, as these
sections would cushion the effects of VAT on consumers. Considering
that certain goods and services which were subject to percentage tax
and excise tax would no longer be VAT-exempt, the consumer would
be burdened more as they would be paying the VAT in addition to
these taxes. Thus, there is a need to amend these sections to soften
the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the
present excise tax on bunker fuel, to lessen the effect of a VAT on this
product.
For electric utilities like Meralco, we will wipe out the franchise tax in
exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil
products, so as not to destroy the VAT chain, we will however bring
down the excise tax on socially sensitive products such as diesel,
bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of
giving to the left hand what was taken from the right. Rather, these
sprang from our concern of softening the impact of VAT, so that the
people can cushion the blow of higher prices they will have to pay as
a result of VAT.36
The other sections amended by the Senate pertained to matters of
tax administration which are necessary for the implementation of the
changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to
the subject matter and purposes of the house bills, which is to
supplement our country’s fiscal deficit, among others. Thus, the
Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108 of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and
Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A.
No. 9337, amending Sections 106, 107 and 108, respectively, of the
NIRC giving the President the stand-by authority to raise the VAT rate
from 10% to 12% when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further
amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties, a
value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%) or
(ii) national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
SEC. 5. Section 107 of the same Code, as amended, is hereby further
amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods. –
(A) In General. – There shall be levied, assessed and collected on
every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges, such tax to be paid by
the importer prior to the release of such goods from customs custody:
Provided, That where the customs duties are determined on the basis
of the quantity or volume of the goods, the value-added tax shall be
based on the landed cost plus excise taxes, if any: provided, further,
that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%) after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%) or
(ii) national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
SEC. 6. Section 108 of the same Code, as amended, is hereby further
amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services: provided, that
the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied.
(i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%) or
(ii) national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%). (Emphasis
supplied)
Petitioners allege that the grant of the stand-by authority to the
President to increase the VAT rate is a virtual abdication by Congress
of its exclusive power to tax because such delegation is not within the
purview of Section 28 (2), Article VI of the Constitution, which
provides:
The Congress may, by law, authorize the President to fix within
specified limits, and may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the
government.
They argue that the VAT is a tax levied on the sale, barter or exchange
of goods and properties as well as on the sale or exchange of services,
which cannot be included within the purview of tariffs under the
exempted delegation as the latter refers to customs duties, tolls or
tribute payable upon merchandise to the government and usually
imposed on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that
delegating to the President the legislative power to tax is contrary to
republicanism. They insist that accountability, responsibility and
transparency should dictate the actions of Congress and they should
not pass to the President the decision to impose taxes. They also
argue that the law also effectively nullified the President’s power of
control, which includes the authority to set aside and nullify the acts
of her subordinates like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the recommendation of
the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers
to cause, influence or create the conditions provided by the law to
bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and
revolting the situation that the imposition of the 12% rate would be
subject to the whim of the Secretary of Finance, an unelected
bureaucrat, contrary to the principle of no taxation without
representation. They submit that the Secretary of Finance is not
mandated to give a favorable recommendation and he may not even
give his recommendation. Moreover, they allege that no guiding
standards are provided in the law on what basis and as to how he will
make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed
aside by the President since the former is a mere alter ego of the
latter, such that, ultimately, it is the President who decides whether
to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is
instructive.
The principle of separation of powers ordains that each of the three
great branches of government has exclusive cognizance of and is
supreme in matters falling within its own constitutionally allocated
sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of
non-delegation of powers, as expressed in the Latin maxim: potestas
delegata non delegari potest which means "what has been delegated,
cannot be delegated."38 This doctrine is based on the ethical principle
that such as delegated power constitutes not only a right but a duty
to be performed by the delegate through the instrumentality of his
own judgment and not through the intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the
Constitution provides that "the Legislative power shall be vested in
the Congress of the Philippines which shall consist of a Senate and a
House of Representatives." The powers which Congress is prohibited
from delegating are those which are strictly, or inherently and
exclusively, legislative. Purely legislative power, which can never be
delegated, has been described as the authority to make a complete
law – complete as to the time when it shall take effect and as to
whom it shall be applicable – and to determine the expediency of its
enactment.40 Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely
legislative in nature – that is, one appertaining exclusively to the
legislative department. It is the nature of the power, and not the
liability of its use or the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers
is subject to the following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of
Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23
(2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that
the delegation itself is valid. It is valid only if the law (a) is complete in
itself, setting forth therein the policy to be executed, carried out, or
implemented by the delegate;41 and (b) fixes a standard — the limits
of which are sufficiently determinate and determinable — to which
the delegate must conform in the performance of his functions.42 A
sufficient standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency to
apply it. It indicates the circumstances under which the legislative
command is to be effected.43 Both tests are intended to prevent a
total transference of legislative authority to the delegate, who is not
allowed to step into the shoes of the legislature and exercise a power
essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel,
expounded on the concept and extent of delegation of power in this
wise:
In testing whether a statute constitutes an undue delegation of
legislative power or not, it is usual to inquire whether the statute was
complete in all its terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of any other
appointee or delegate of the legislature.
...
‘The true distinction’, says Judge Ranney, ‘is between the delegation
of power to make the law, which necessarily involves a discretion as
to what it shall be, and conferring an authority or discretion as to its
execution, to be exercised under and in pursuance of the law. The
first cannot be done; to the latter no valid objection can be made.’
...
It is contended, however, that a legislative act may be made to the
effect as law after it leaves the hands of the legislature. It is true that
laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a
particular community. In Wayman vs. Southard, the Supreme Court of
the United States ruled that the legislature may delegate a power not
legislative which it may itself rightfully exercise. The power to
ascertain facts is such a power which may be delegated. There is
nothing essentially legislative in ascertaining the existence of facts or
conditions as the basis of the taking into effect of a law. That is a
mental process common to all branches of the
government. Notwithstanding the apparent tendency, however, to
relax the rule prohibiting delegation of legislative authority on
account of the complexity arising from social and economic forces at
work in this modern industrial age, the orthodox pronouncement of
Judge Cooley in his work on Constitutional Limitations finds
restatement in Prof. Willoughby's treatise on the Constitution of the
United States in the following language — speaking of declaration of
legislative power to administrative agencies: The principle which
permits the legislature to provide that the administrative agent may
determine when the circumstances are such as require the application
of a law is defended upon the ground that at the time this authority is
granted, the rule of public policy, which is the essence of the
legislative act, is determined by the legislature. In other words, the
legislature, as it is its duty to do, determines that, under given
circumstances, certain executive or administrative action is to be
taken, and that, under other circumstances, different or no action at
all is to be taken. What is thus left to the administrative official is not
the legislative determination of what public policy demands, but
simply the ascertainment of what the facts of the case require to be
done according to the terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative will must, of course,
come from Congress, but the ascertainment of the contingency upon
which the Act shall take effect may be left to such agencies as it may
designate. The legislature, then, may provide that a law shall take
effect upon the happening of future specified contingencies leaving to
some other person or body the power to determine when the
specified contingency has arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to
make laws and to alter and repeal them; the test is the completeness
of the statute in all its terms and provisions when it leaves the hands
of the legislature. To determine whether or not there is an undue
delegation of legislative power, the inquiry must be directed to the
scope and definiteness of the measure enacted. The legislative does
not abdicate its functions when it describes what job must be done,
who is to do it, and what is the scope of his authority. For a complex
economy, that may be the only way in which the legislative process
can go forward. A distinction has rightfully been made between
delegation of power to make the laws which necessarily involves a
discretion as to what it shall be, which constitutionally may not be
done, and delegation of authority or discretion as to its execution to
be exercised under and in pursuance of the law, to which no valid
objection can be made. The Constitution is thus not to be regarded as
denying the legislature the necessary resources of flexibility and
practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies
the power to determine certain facts or conditions, or the happening
of contingencies, on which the operation of a statute is, by its terms,
made to depend, but the legislature must prescribe sufficient
standards, policies or limitations on their authority.49 While the
power to tax cannot be delegated to executive agencies, details as to
the enforcement and administration of an exercise of such power may
be left to them, including the power to determine the existence of
facts on which its operation depends.50
The rationale for this is that the preliminary ascertainment of facts as
basis for the enactment of legislation is not of itself a legislative
function, but is simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is the kind of
subsidiary activity which the legislature may perform through its
members, or which it may delegate to others to perform. Intelligent
legislation on the complicated problems of modern society is
impossible in the absence of accurate information on the part of the
legislators, and any reasonable method of securing such information
is proper.51 The Constitution as a continuously operative charter of
government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it
make for itself detailed determinations which it has declared to be
prerequisite to application of legislative policy to particular facts and
circumstances impossible for Congress itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the
common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
The case before the Court is not a delegation of legislative power. It is
simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law is
contingent. The legislature has made the operation of the 12% rate
effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the 12%
rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the
absence of discretion is the fact that the word shall is used in the
common proviso. The use of the word shall connotes a mandatory
order. Its use in a statute denotes an imperative obligation and is
inconsistent with the idea of discretion.53 Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and
courts have no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose
the 12% rate upon the existence of any of the conditions specified by
Congress. This is a duty which cannot be evaded by the President.
Inasmuch as the law specifically uses the word shall, the exercise of
discretion by the President does not come into play. It is a clear
directive to impose the 12% VAT rate when the specified conditions
are present. The time of taking into effect of the 12% VAT rate is
based on the happening of a certain specified contingency, or upon
the ascertainment of certain facts or conditions by a person or body
other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA
GURO Party List, et al. that the law effectively nullified the President’s
power of control over the Secretary of Finance by mandating the
fixing of the tax rate by the President upon the recommendation of
the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners
Pimentel, et al. that the word shall should be interpreted to
mean may in view of the phrase "upon the recommendation of the
Secretary of Finance." Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any recommendation
by the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the
President, it simply means that as head of the Department of Finance
he is the assistant and agent of the Chief Executive. The multifarious
executive and administrative functions of the Chief Executive are
performed by and through the executive departments, and the acts of
the secretaries of such departments, such as the Department of
Finance, performed and promulgated in the regular course of
business, are, unless disapproved or reprobated by the Chief
Executive, presumptively the acts of the Chief Executive. The
Secretary of Finance, as such, occupies a political position and holds
office in an advisory capacity, and, in the language of Thomas
Jefferson, "should be of the President's bosom confidence" and, in
the language of Attorney-General Cushing, is "subject to the direction
of the President."55
In the present case, in making his recommendation to the President
on the existence of either of the two conditions, the Secretary of
Finance is not acting as the alter ego of the President or even her
subordinate. In such instance, he is not subject to the power of
control and direction of the President. He is acting as the agent of the
legislative department, to determine and declare the event upon
which its expressed will is to take effect.56 The Secretary of Finance
becomes the means or tool by which legislative policy is determined
and implemented, considering that he possesses all the facilities to
gather data and information and has a much broader perspective to
properly evaluate them. His function is to gather and collate statistical
data and other pertinent information and verify if any of the two
conditions laid out by Congress is present. His personality in such
instance is in reality but a projection of that of Congress. Thus, being
the agent of Congress and not of the President, the President cannot
alter or modify or nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former for that of the
latter.
Congress simply granted the Secretary of Finance the authority to
ascertain the existence of a fact, namely, whether by December 31,
2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-
fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half
percent (1½%). If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be
imposed by the President effective January 1, 2006. There is no undue
delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible.57 Congress
does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the
scope of his authority; in our complex economy that is frequently the
only way in which the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et
al. that delegating to the President the legislative power to tax is
contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the
mere implementation of the law. The intent and will to increase the
VAT rate to 12% came from Congress and the task of the President is
to simply execute the legislative policy. That Congress chose to do so
in such a manner is not within the province of the Court to inquire
into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has
ample powers to cause, influence or create the conditions to bring
about either or both the conditions precedent does not deserve any
merit as this argument is highly speculative. The Court does not rule
on allegations which are manifestly conjectural, as these may not
exist at all. The Court deals with facts, not fancies; on realities, not
appearances. When the Court acts on appearances instead of
realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and
Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT
rate imposes an unfair and additional tax burden on the people.
Petitioners also argue that the 12% increase, dependent on any of the
2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the
original 10% if the rates are no longer satisfied. Petitioners also argue
that such rate is unfair and unreasonable, as the people are unsure of
the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if
any of the two conditions set forth therein are satisfied, the President
shall increase the VAT rate to 12%. The provisions of the law are clear.
It does not provide for a return to the 10% rate nor does it empower
the President to so revert if, after the rate is increased to 12%, the
VAT collection goes below the 24/5 of the GDP of the previous year or
that the national government deficit as a percentage of GDP of the
previous year does not exceed 1½%.
Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.60
Thus, in the absence of any provision providing for a return to the
10% rate, which in this case the Court finds none, petitioners’
argument is, at best, purely speculative. There is no basis for
petitioners’ fear of a fluctuating VAT rate because the law itself does
not provide that the rate should go back to 10% if the conditions
provided in Sections 4, 5 and 6 are no longer present. The rule is that
where the provision of the law is clear and unambiguous, so that
there is no occasion for the court's seeking the legislative intent, the
law must be taken as it is, devoid of judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which was
allegedly an incentive to the President to raise the VAT collection to
at least 2 4/5 of the GDP of the previous year, should be based on
fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not
the only condition. There is another condition, i.e., the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 ½%).
Respondents explained the philosophy behind these alternative
conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT or
that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such action
will also be ineffectual.
2. Nat’l Gov’t Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less
means the fiscal condition of government has reached a relatively
sound position or is towards the direction of a balanced budget
position. Therefore, there is no need to increase the VAT rate since
the fiscal house is in a relatively healthy position. Otherwise stated, if
the ratio is more than 1.5%, there is indeed a need to increase the
VAT rate.62
That the first condition amounts to an incentive to the President to
increase the VAT collection does not render it unconstitutional so long
as there is a public purpose for which the law was passed, which in
this case, is mainly to raise revenue. In fact, fiscal adequacy dictated
the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax
system was originally stated by Adam Smith in his Canons of
Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep
out of the pockets of the people as little as possible over and above
what it brings into the public treasury of the state.63
It simply means that sources of revenues must be adequate to meet
government expenditures and their variations.64
The dire need for revenue cannot be ignored. Our country is in a
quagmire of financial woe. During the Bicameral Conference
Committee hearing, then Finance Secretary Purisima bluntly depicted
the country’s gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in
right now. We are in a position where 90 percent of our revenue is
used for debt service. So, for every peso of revenue that we currently
raise, 90 goes to debt service. That’s interest plus amortization of our
debt. So clearly, this is not a sustainable situation. That’s the first fact.
The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from that
international financial markets. Our debt to GDP is approximately
equal to our GDP. Again, that shows you that this is not a sustainable
situation.
The third thing that I’d like to point out is the environment that we
are presently operating in is not as benign as what it used to be the
past five years.
What do I mean by that?
In the past five years, we’ve been lucky because we were operating in
a period of basically global growth and low interest rates. The past
few months, we have seen an inching up, in fact, a rapid increase in
the interest rates in the leading economies of the world. And,
therefore, our ability to borrow at reasonable prices is going to be
challenged. In fact, ultimately, the question is our ability to access the
financial markets.
When the President made her speech in July last year, the
environment was not as bad as it is now, at least based on the
forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then
convince them to improve our ability to borrow at lower rates. But
conditions have changed on us because the interest rates have gone
up. In fact, just within this room, we tried to access the market for a
billion dollars because for this year alone, the Philippines will have to
borrow 4 billion dollars. Of that amount, we have borrowed 1.5
billion. We issued last January a 25-year bond at 9.7 percent cost. We
were trying to access last week and the market was not as favorable
and up to now we have not accessed and we might pull back because
the conditions are not very good.
So given this situation, we at the Department of Finance believe that
we really need to front-end our deficit reduction. Because it is deficit
that is causing the increase of the debt and we are in what we call a
debt spiral. The more debt you have, the more deficit you have
because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way, I
think, we can get out of this debt spiral is really have a front-end
adjustment in our revenue base.65
The image portrayed is chilling. Congress passed the law hoping for
rescue from an inevitable catastrophe. Whether the law is indeed
sufficient to answer the state’s economic dilemma is not for the Court
to judge. In the Fariñas case, the Court refused to consider the various
arguments raised therein that dwelt on the wisdom of Section 14 of
R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government
policy is within the exclusive dominion of the political branches of the
government. It is not for this Court to look into the wisdom or
propriety of legislative determination. Indeed, whether an enactment
is wise or unwise, whether it is based on sound economic theory,
whether it is the best means to achieve the desired results, whether,
in short, the legislative discretion within its prescribed limits should
be exercised in a particular manner are matters for the judgment of
the legislature, and the serious conflict of opinions does not suffice to
bring them within the range of judicial cognizance.66
In the same vein, the Court in this case will not dawdle on the
purpose of Congress or the executive policy, given that it is not for the
judiciary to "pass upon questions of wisdom, justice or expediency of
legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and
110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that
Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and
Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are
arbitrary, oppressive, excessive and confiscatory. Their argument is
premised on the constitutional right against deprivation of life, liberty
of property without due process of law, as embodied in Article III,
Section 1 of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection
clauses are invoked, 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.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC
imposes a limitation on the amount of input tax that may be credited
against the output tax. It states, in part: "[P]rovided, that the input
tax inclusive of the input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT: …"
Input Tax is defined under Section 110(A) of the NIRC, as amended, as
the value-added tax due from or paid by a VAT-registered person on
the importation of goods or local purchase of good and services,
including lease or use of property, in the course of trade or business,
from a VAT-registered person, and Output Tax is the value-added
tax due on the sale or lease of taxable goods or properties or services
by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on
the amount of input tax that may be claimed. In effect, a portion of
the input tax that has already been paid cannot now be credited
against the output tax.
Petitioners’ argument is not absolute. It assumes that the input tax
exceeds 70% of the output tax, and therefore, the input tax in excess
of 70% remains uncredited. However, to the extent that the input tax
is less than 70% of the output tax, then 100% of such input tax is still
creditable.
More importantly, the excess input tax, if any, is retained in a
business’s books of accounts and remains creditable in the succeeding
quarter/s. This is explicitly allowed by Section 110(B), which provides
that "if the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters." In addition,
Section 112(B) allows a VAT-registered person to apply for the
issuance of a tax credit certificate or refund for any unused input
taxes, to the extent that such input taxes have not been applied
against the output taxes. Such unused input tax may be used in
payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is
not ad infinitum, as petitioners exaggeratedly contend. Their analysis
of the effect of the 70% limitation is incomplete and one-sided. It
ends at the net effect that there will be unapplied/unutilized inputs
VAT for a given quarter. It does not proceed further to the fact that
such unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of Section
110(B) or that it may later on be refunded through a tax credit
certificate under Section 112(B).
Therefore, petitioners’ argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to
comprehend the operation of the 70% limitation on the input tax.
According to petitioner, the limitation on the creditable input tax in
effect allows VAT-registered establishments to retain a portion of the
taxes they collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on
to him by the seller, when he buys goods. Output tax meanwhile is
the tax due to the person when he sells goods. In computing the VAT
payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by
the seller are equal to the input taxes that he paid and passed on by
the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person
shall be liable for the excess, which has to be paid to the Bureau of
Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the input
taxes result from zero-rated or effectively zero-rated transactions,
any excess over the output taxes shall instead be refunded to the
taxpayer or credited against other internal revenue taxes, at the
taxpayer’s option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the
input tax. Thus, a person can credit his input tax only up to the extent
of 70% of the output tax. In layman’s term, the value-added taxes
that a person/taxpayer paid and passed on to him by a seller can only
be credited up to 70% of the value-added taxes that is due to him on a
taxable transaction. There is no retention of any tax collection
because the person/taxpayer has already previously paid the input
tax to a seller, and the seller will subsequently remit such input tax to
the BIR. The party directly liable for the payment of the tax is the
seller.71 What only needs to be done is for the person/taxpayer to
apply or credit these input taxes, as evidenced by receipts, against his
output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue
that the input tax partakes the nature of a property that may not be
confiscated, appropriated, or limited without due process of law.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
person’s entitlement to the creditable input tax is a mere statutory
privilege.
The distinction between statutory privileges and vested rights must
be borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away
property, which was vested by virtue of such rights.72
Under the previous system of single-stage taxation, taxes paid at
every level of distribution are not recoverable from the taxes payable,
although it becomes part of the cost, which is deductible from the
gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10%
multi-stage tax on all sales, it was then that the crediting of the input
tax paid on purchase or importation of goods and services by VAT-
registered persons against the output tax was introduced.73 This was
adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax
Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax as
against the output tax is clearly a privilege created by law, a privilege
that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and
confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of
the NIRC, which provides:
SEC. 110. Tax Credits. –
(A) Creditable Input Tax. – …
Provided, That the input tax on goods purchased or imported in a
calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months if
the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos
(₱1,000,000.00): Provided, however, That if the estimated useful life
of the capital goods is less than five (5) years, as used for depreciation
purposes, then the input VAT shall be spread over such a shorter
period: Provided, finally, That in the case of purchase of services,
lease or use of properties, the input tax shall be creditable to the
purchaser, lessee or license upon payment of the compensation,
rental, royalty or fee.
The foregoing section imposes a 60-month period within which to
amortize the creditable input tax on purchase or importation of
capital goods with acquisition cost of ₱1 Million pesos, exclusive of
the VAT component. Such spread out only poses a delay in the
crediting of the input tax. Petitioners’ argument is without basis
because the taxpayer is not permanently deprived of his privilege to
credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of
the creditable input tax in this case amounts to a 4-year interest-free
loan to the government.76 In the same breath, Congress also justified
its move by saying that the provision was designed to raise an annual
revenue of 22.6 billion.77 The legislature also dispelled the fear that
the provision will fend off foreign investments, saying that foreign
investors have other tax incentives provided by law, and citing the
case of China, where despite a 17.5% non-creditable VAT, foreign
investments were not deterred.78 Again, for whatever is the purpose
of the 60-month amortization, this involves executive economic policy
and legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions, Section
12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Value-added Tax. – The Government or any of its
political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods and services
which are subject to the value-added tax imposed in Sections 106 and
108 of this Code, deduct and withhold a final value-added tax at the
rate of five percent (5%) of the gross payment thereof: Provided, That
the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding
tax at the time of payment. For purposes of this Section, the payor or
person in control of the payment shall be considered as the
withholding agent.
The value-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made.
Section 114(C) merely provides a method of collection, or as stated by
respondents, a more simplified VAT withholding system. The
government in this case is constituted as a withholding agent with
respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of
value-added taxes to be withheld -- 3% on gross payments for
purchases of goods; 6% on gross payments for services supplied by
contractors other than by public works contractors; 8.5% on gross
payments for services supplied by public work contractors; or 10% on
payment for the lease or use of properties or property rights to
nonresident owners. Under the present Section 114(C), these
different rates, except for the 10% on lease or property rights
payment to nonresidents, were deleted, and a uniform rate of 5% is
applied.
The Court observes, however, that the law the used the word final. In
tax usage, final, as opposed to creditable, means full. Thus, it is
provided in Section 114(C): "final value-added tax at the rate of five
percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The
Tax Reform Act of 1997), the concept of final withholding tax on
income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. – Under the final withholding tax system
the amount of income tax withheld by the withholding agent is
constituted as full and final payment of the income tax due from the
payee on the said income. The liability for payment of the tax rests
primarily on the payor as a withholding agent. Thus, in case of his
failure to withhold the tax or in case of underwithholding, the
deficiency tax shall be collected from the payor/withholding agent. …
(B) Creditable Withholding Tax. – Under the creditable withholding
tax system, taxes withheld on certain income payments are intended
to equal or at least approximate the tax due of the payee on said
income. … Taxes withheld on income payments covered by the
expanded withholding tax (referred to in Sec. 2.57.2 of these
regulations) and compensation income (referred to in Sec. 2.78 also of
these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions
with the government are subject to a 5% rate, which constitutes as
full payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. The other 5% effectively accounts
for the standard input VAT (deemed input VAT), in lieu of the actual
input VAT directly or attributable to the taxable transaction. 79
The Court need not explore the rationale behind the provision. It is
clear that Congress intended to treat differently taxable transactions
with the government.80 This is supported by the fact that under the
old provision, the 5% tax withheld by the government remains
creditable against the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Creditable Value-added Tax. – The Government or
any of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods
from sellers and services rendered by contractors which are subject to
the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold the value-added tax due at the rate of three
percent (3%) of the gross payment for the purchase of goods and six
percent (6%) on gross receipts for services rendered by contractors on
every sale or installment payment which shall be creditable against
the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors,
the withholding rate shall be eight and one-half percent (8.5%):
Provided, further, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten percent
(10%) withholding tax at the time of payment. For this purpose, the
payor or person in control of the payment shall be considered as the
withholding agent.
The valued-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the
word creditable exhibits Congress’s intention to treat transactions
with the government differently. Since it has not been shown that the
class subject to the 5% final withholding tax has been unreasonably
narrowed, there is no reason to invalidate the provision. Petitioners,
as petroleum dealers, are not the only ones subjected to the 5% final
withholding tax. It applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as
petitioners believe. Revenue Regulations No. 14-2005 or the
Consolidated Value-Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5% of gross
payments, the excess may form part of the cost. Equally, should the
actual input tax be less than 5%, the difference is treated as income.81
Petitioners also argue that by imposing a limitation on the creditable
input tax, the government gets to tax a profit or value-added even if
there is no profit or value-added.
Petitioners’ stance is purely hypothetical, argumentative, and again,
one-sided. The Court will not engage in a legal joust where premises
are what ifs, arguments, theoretical and facts, uncertain. Any
disquisition by the Court on this point will only be, as Shakespeare
describes life in Macbeth,82 "full of sound and fury, signifying
nothing."
What’s more, petitioners’ contention assumes the proposition that
there is no profit or value-added. It need not take an astute
businessman to know that it is a matter of exception that a business
will sell goods or services without profit or value-added. It cannot be
overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that "no
person or class of persons shall be deprived of the same protection of
laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."83
The power of the State to make reasonable and natural classifications
for the purposes of taxation has long been established. Whether it
relates to the subject of taxation, the kind of property, the rates to be
levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the State’s power is entitled to presumption
of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or
arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if
the entity has a high ratio of input tax, or invests in capital
equipment, or has several transactions with the government, is not
based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law does not
make any classification in the subject of taxation, the kind of
property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners’ alleged
distinctions are based on variables that bear different consequences.
While the implementation of the law may yield varying end results
depending on one’s profit margin and value-added, the Court cannot
go beyond what the legislature has laid down and interfere with the
affairs of business.
The equal protection clause does not require the universal application
of the laws on all persons or things without distinction. This might in
fact sometimes result in unequal protection. What the clause requires
is equality among equals as determined according to a valid
classification. By classification is meant the grouping of persons or
things similar to each other in certain particulars and different from
all others in these same particulars.85
Petitioners brought to the Court’s attention the introduction of
Senate Bill No. 2038 by Sens. S.R. Osmeña III and Ma. Ana Consuelo
A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric
D. Singson. The proposed legislation seeks to amend the 70%
limitation by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation is arbitrary
and confiscatory. On this score, suffice it to say that these are still
proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. Different
articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times.86
In this case, the tax law is uniform as it provides a standard rate of 0%
or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A.
No. 9337, amending Sections 106, 107 and 108, respectively, of the
NIRC, provide for a rate of 10% (or 12%) on sale of goods and
properties, importation of goods, and sale of services and use or lease
of properties. These same sections also provide for a 0% rate on
certain sales and transaction.
Neither does the law make any distinction as to the type of industry
or trade that will bear the 70% limitation on the creditable input tax,
5-year amortization of input tax paid on purchase of capital goods or
the 5% final withholding tax by the government. It must be stressed
that the rule of uniform taxation does not deprive Congress of the
power to classify subjects of taxation, and only demands uniformity
within the particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a threshold
margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of
goods or services with gross annual sales or receipts not exceeding
₱1,500,000.00.88Also, basic marine and agricultural food products in
their original state are still not subject to the tax,89 thus ensuring that
prices at the grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.
Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of
goods or services by persons engaged in business with an aggregate
gross annual sales exceeding ₱200,000.00. Small corner sari-
sari stores are consequently exempt from its application. Likewise
exempt from the tax are sales of farm and marine products, so that
the costs of basic food and other necessities, spared as they are from
the incidence of the VAT, are expected to be relatively lower and
within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with
low profit margins, and unduly favors those with high profit margins.
Congress was not oblivious to this. Thus, to equalize the weighty
burden the law entails, the law, under Section 116, imposed a 3%
percentage tax on VAT-exempt persons under Section 109(v), i.e.,
transactions with gross annual sales and/or receipts not exceeding
₱1.5 Million. This acts as a equalizer because in effect, bigger
businesses that qualify for VAT coverage and VAT-exempt taxpayers
stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the
impact of the imposition of the tax on those previously exempt.
Excise taxes on petroleum products91 and natural gas92 were reduced.
Percentage tax on domestic carriers was removed.93 Power producers
are now exempt from paying franchise tax. 94
Aside from these, Congress also increased the income tax rates of
corporations, in order to distribute the burden of taxation. Domestic,
foreign, and non-resident corporations are now subject to a 35%
income tax rate, from a previous 32%.95 Intercorporate dividends of
non-resident foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the corporation’s
domicile was increased to 20%.96 The Philippine Amusement and
Gaming Corporation (PAGCOR) is not exempt from income taxes
anymore.97 Even the sale by an artist of his works or services
performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of
taxation, which would otherwise rest largely on the consumers. It
cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input
tax is anything but regressive. It is the smaller business with higher
input tax-output tax ratio that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayer’s ability
to pay. This principle was also lifted from Adam Smith’s Canons of
Taxation, and it states:
I. The subjects of every state ought to contribute towards the support
of the government, as nearly as possible, in proportion to their
respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the
resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it
is regressive. The principle of progressive taxation has no relation
with the VAT system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed is the same
regardless of income. In
other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by a
person or profit margin marked by a business, such that the higher
the income or profit margin, the smaller the portion of the income or
profit that is eaten by VAT. A converso, the lower the income or profit
margin, the bigger the part that the VAT eats away. At the end of the
day, it is really the lower income group or businesses with low-profit
margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition
of indirect taxes, like the VAT. What it simply provides is that
Congress shall "evolve a progressive system of taxation." The Court
stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall ‘evolve a progressive system of taxation.’ The
constitutional provision has been interpreted to mean simply that
‘direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized.’ (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed,
the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the
oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which
the present Art. VI, §28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid them by imposing
such taxes according to the taxpayers' ability to pay. In the case of the
VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, §3,
amending §102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, §4 amending §103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this
case, it is just an enema, a first-aid measure to resuscitate an
economy in distress. The Court is neither blind nor is it turning a deaf
ear on the plight of the masses. But it does not have the panacea for
the malady that the law seeks to remedy. As in other cases, the Court
cannot strike down a law as unconstitutional simply because of its
yokes.
Let us not be overly influenced by the plea that for every wrong there
is a remedy, and that the judiciary should stand ready to afford relief.
There are undoubtedly many wrongs the judicature may not correct,
for instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary
is the repository of remedies for all political or social ills; We should
not forget that the Constitution has judiciously allocated the powers
of government to three distinct and separate compartments; and that
judicial interpretation has tended to the preservation of the
independence of the three, and a zealous regard of the prerogatives
of each, knowing full well that one is not the guardian of the others
and that, for official wrong-doing, each may be brought to account,
either by impeachment, trial or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it still
holds true now. All things considered, there is no raison d'être for the
unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the
petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730,
are hereby DISMISSED.

There being no constitutional impediment to the full enforcement

and implementation of R.A. No. 9337, the temporary restraining order
issued by the Court on July 1, 2005 is LIFTED upon finality of herein
decision.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 172087 March 15, 2011
PHILIPPINE AMUSEMENT AND GAMING CORPORATION
(PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by
HON. JOSE MARIO BUÑAG, in his official capacity as COMMISSIONER
OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or
under the authority of Respondent.Public and Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and
Prohibition1 with prayer for the issuance of a Temporary Restraining
Order and/or Preliminary Injunction, dated April 17, 2006, of
petitioner Philippine Amusement and Gaming Corporation (PAGCOR),
seeking the declaration of nullity of Section 1 of Republic Act (R.A.)
No. 9337 insofar as it amends Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner from exemption from
corporate income tax for being repugnant to Sections 1 and 10 of
Article III of the Constitution. Petitioner further seeks to prohibit the
implementation of Bureau of Internal Revenue (BIR) Revenue
Regulations No. 16-2005 for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-
A2 on January 1, 1977. Simultaneous to its creation, P.D. No. 1067-
B3 (supplementing P.D. No. 1067-A) was issued exempting PAGCOR
from the payment of any type of tax, except a franchise tax of five
percent (5%) of the gross revenue.4 Thereafter, on June 2, 1978, P.D.
No. 1399 was issued expanding the scope of PAGCOR's exemption.5
To consolidate the laws pertaining to the franchise and powers of
PAGCOR, P.D. No. 18696 was issued. Section 13 thereof reads as
follows:
Sec. 13. Exemptions. — x x x
(1) Customs Duties, taxes and other imposts on
importations. - All importations of equipment, vehicles,
automobiles, boats, ships, barges, aircraft and such other
gambling paraphernalia, including accessories or related
facilities, for the sole and exclusive use of the casinos, the
proper and efficient management and administration
thereof and such other clubs, recreation or amusement
places to be established under and by virtue of this
Franchise shall be exempt from the payment of duties, taxes
and other imposts, including all kinds of fees, levies, or
charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be
imported by any corporation having existing contractual
arrangements with the Corporation, for the sole and
exclusive use of the casino or to be used to service the
operations and requirements of the casino, shall likewise be
totally exempt from the payment of all customs duties,
taxes and other imposts, including all kinds of fees, levies,
assessments or charges of any kind or nature, whether
National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of
any kind or form, income or otherwise, as well as fees,
charges, or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge
attach in any way to the earnings of the Corporation, except
a Franchise Tax of five percent (5%)of the gross revenue or
earnings derived by the Corporation from its operation
under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of
all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established, or collected by
any municipal, provincial or national government authority.
(b) Others: The exemption herein granted for
earnings derived from the operations conducted
under the franchise, specifically from the payment
of any tax, income or otherwise, as well as any
form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with
whom the Corporation or operator has any
contractual relationship in connection with the
operations of the casino(s) authorized to be
conducted under this Franchise and to those
receiving compensation or other remuneration
from the Corporation as a result of essential
facilities furnished and/or technical services
rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted
by the Corporation or operator in pursuance of this
provision shall be free of any tax.
(3) Dividend Income. − Notwithstanding any provision of law
to the contrary, in the event the Corporation should declare
a cash dividend income corresponding to the participation
of the private sector shall, as an incentive to the
beneficiaries, be subject only to a final flat income rate of
ten percent (10%) of the regular income tax rates. The
dividend income shall not in such case be considered as part
of the beneficiaries' taxable income; provided, however,
that such dividend income shall be totally exempted from
income or other form of taxes if invested within six (6)
months from the date the dividend income is received in the
following:
(a) operation of the casino(s) or investments in any
affiliate activity that will ultimately redound to the
benefit of the Corporation; or any other
corporation with whom the Corporation has any
existing arrangements in connection with or
related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes,
or government debentures; or
(c) BOI-registered or export-oriented
corporation(s).7
PAGCOR's tax exemption was removed in June 1984 through P.D. No.
1931, but it was later restored by Letter of Instruction No. 1430,
which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National
Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No.
8424 provides that government-owned and controlled corporations
(GOCCs) shall pay corporate income tax, except petitioner PAGCOR,
the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the
Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to
the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the
Philippine Amusement and Gaming Corporation (PAGCOR), shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.9
With the enactment of R.A. No. 933710 on May 24, 2005, certain
sections of the National Internal Revenue Code of 1997 were
amended. The particular amendment that is at issue in this case is
Section 1 of R.A. No. 9337, which amended Section 27 (c) of the
National Internal Revenue Code of 1997 by excluding PAGCOR from
the enumeration of GOCCs that are exempt from payment of
corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to
the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall
pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.
Different groups came to this Court via petitions for certiorari and
prohibition11 assailing the validity and constitutionality of R.A. No.
9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT)
on sale of goods and properties; Section 5, which imposes a
10% VAT on importation of goods; and Section 6, which
imposes a 10% VAT on sale of services and use or lease of
properties, all contain a uniform proviso authorizing the
 President, upon the recommendation of the Secretary of
Finance, to raise the VAT rate to 12%. The said provisions
were alleged to be violative of Section 28 (2), Article VI of
the Constitution, which section vests in Congress the
exclusive authority to fix the rate of taxes, and of Section 1,
Article III of the Constitution on due process, as well as of
Section 26 (2), Article VI of the Constitution, which section
provides for the "no amendment rule" upon the last reading
of a bill;
2) Sections 8 and 12 were alleged to be violative of Section
1, Article III of the Constitution, or the guarantee of equal
protection of the laws, and Section 28 (1), Article VI of the
Constitution; and
3) other technical aspects of the passage of the law,
questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and
upheld the constitutionality of R.A. No. 9337.12
On the same date, respondent BIR issued Revenue Regulations (RR)
No. 16-2005,13 specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No.
9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by
Sec. 119 of the Tax Code, regardless of how their franchisees may
have been granted, shall be subject to the 10% VAT imposed under
Sec.108 of the Tax Code. This includes, among others, the Philippine
Amusement and Gaming Corporation (PAGCOR), and its licensees or
franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I petitioner was one of the five GOCCs exempted from payment of
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB
INITIO FOR BEING REPUGNANT TO THE EQUAL PROTECTION [CLAUSE]
EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB
INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE]
EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS
NULL AND VOID AB INITIO FOR BEING BEYOND THE SCOPE OF THE
BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID
REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS
WELL AS PETITIONER’S LICENSEES OR FRANCHISEES WHEN THE BASIC
LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT
IMPOSE VAT ON PETITIONER OR ON PETITIONER’S LICENSEES OR
FRANCHISEES.14
The BIR, in its Comment15 dated December 29, 2006, counters:
I on Ways on Means to the request of PAGCOR that it be exempt from
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE
BOTH VALID AND CONSTITUTIONAL PROVISIONS OF LAWS THAT
SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE
EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND
SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND
CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation
In Lieu of Comment,16 concurred with the arguments of the
petitioner. It added that although the State is free to select the
subjects of taxation and that the inequity resulting from singling out a
particular class for taxation or exemption is not an infringement of
the constitutional limitation, a tax law must operate with the same
force and effect to all persons, firms and corporations placed in a
similar situation. Furthermore, according to the OSG, public
respondent BIR exceeded its statutory authority when it enacted RR
No. 16-2005, because the latter's provisions are contrary to the
mandates of P.D. No. 1869 in relation to R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from
corporate income tax and VAT with the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this
Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the
National Internal Revenue Code of 1977, petitioner is no longer
exempt from corporate income tax as it has been effectively omitted
from the list of GOCCs that are exempt from it. Petitioner argues that
such omission is unconstitutional, as it is violative of its right to equal
protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without
due process of law, nor shall any person be denied the equal
protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning
and scope of equal protection, thus:
Equal protection requires that all persons or things similarly situated
should be treated alike, both as to rights conferred and
responsibilities imposed. Similar subjects, in other words, should not
be treated differently, so as to give undue favor to some and unjustly
discriminate against others. The guarantee means that no person or
class of persons shall be denied the same protection of laws which is
enjoyed by other persons or other classes in like circumstances. The
"equal protection of the laws is a pledge of the protection of equal
laws." It limits governmental discrimination. The equal protection
clause extends to artificial persons but only insofar as their property is
concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If
the classification is reasonable, the law may operate only on some
and not all of the people without violating the equal protection
clause. The classification must, as an indispensable requisite, not be
arbitrary. To be valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.18
It is not contested that before the enactment of R.A. No. 9337,
corporate income tax as shown in R.A. No. 8424, Section 27 (c) of
which, reads:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special or general laws
to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the
Philippine Amusement and Gaming Corporation (PAGCOR), shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.19
A perusal of the legislative records of the Bicameral Conference
Meeting of the Committee on Ways on Means dated October 27, 1997
would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee
such tax.20 The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax
on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the tax
on --- Whether on a universal basis, we included a tax on cockfighting
winnings.
CHAIRMAN ENRILE. No, we removed the ---
HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang
request ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon, maliliit
na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we
factored in an amount that would reflect the VAT and other sales
taxes---
CHAIRMAN ENRILE. No, we’re talking of this measure only. We will
not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption.
Assuming that when we release the money into the hands of the
public, they will not use that to --- for wallpaper. They will spend that
eh, Mr. Chairman. So when they spend that---
CHAIRMAN ENRILE. There’s a VAT.
HON. ROXAS. There will be a VAT and there will be other sales taxes
no. Is there a quantification? Is there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven billion.
In effect, it is not circulating in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent by
government, somebody receives it in the form of wages and supplies
and other services and other goods. They are not being taken from
the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will
be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21
The discussion above bears out that under R.A. No. 8424, the
exemption of PAGCOR from paying corporate income tax was not
based on a classification showing substantial distinctions which make
for real differences, but to reiterate, the exemption was granted upon
the request of PAGCOR that it be exempt from the payment of
corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No.
8424, PAGCOR has been excluded from the enumeration of GOCCs
that are exempt from paying corporate income tax. The records of the
Bicameral Conference Meeting dated April 18, 2005, of the
Committee on the Disagreeing Provisions of Senate Bill No. 1950 and
House Bill No. 3555, show that it is the legislative intent that PAGCOR
be subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the
amendment.
SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're
even considering this VAT bill is we want to show the world who our
creditors, that we are increasing official revenues that go to the
national budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net
income of 9.7 billion after paying some small taxes that they are
subjected to. Of the 9.7 billion, they claim they remitted to national
government seven billion. Pagkatapos, there are other specific
remittances like to the Philippine Sports Commission, etc., as
mandated by various laws, and then about 400 million to the
President's Social Fund. But all in all, their net profit today should be
about 12 billion. That's why I am questioning this two billion. Because
while essentially they claim that the money goes to government, and I
will accept that just for the sake of argument. It does not pass
through the appropriation process. And I think that at least if we can
capture 35 percent or 32 percent through the budgetary process, first,
it is reflected in our official income of government which is applied to
the national budget, and secondly, it goes through what is
constitutionally mandated as Congress appropriating and defining
where the money is spent and not through a board of directors that
has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow
up lang.
There is wisdom in the comments of my good friend from Cebu,
Senator Osmeña.
SEN. OSMEÑA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I
would not want to put my friends from the Department of Finance in
a difficult position, but may we know your comments on this knowing
that as Senator Osmeña just mentioned, he said, "I accept that that a
lot of it is going to spending for basic services," you know, going to
most, I think, supposedly a lot or most of it should go to government
spending, social services and the like. What is your comment on this?
This is going to affect a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEÑA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr.
Senator, because you may have your own pre-judgment on this and I
don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social
services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that
question also. Wouldn't it be easier for you to explain to, say, foreign
creditors, how do you explain to them that if there is a fiscal gap
some of our richest corporations has [been] spared [from] taxation by
the government which is one rich source of revenues. Now, why do
you save, why do you spare certain government corporations on that,
like Pagcor? So, would it be easier for you to make an argument if
everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to
those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us because it
will then enter as an official revenue although when dividends declare
it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on
income tax. Now, we are talking here on value-added tax. Do you
mean to say we are going to amend it from income tax to value-added
tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section
with regard to the exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly
are the functions of Pagcor that are VATable? What will we VAT in
Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is
Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale
of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing
Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way
they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate
version does not discuss a VAT on Pagcor but it just takes away their
exemption from non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of
proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed.24 As a rule, tax
exemptions are construed strongly against the claimant. 25 Exemptions
must be shown to exist clearly and categorically, and supported by
clear legal provision.26
In this case, PAGCOR failed to prove that it is still exempt from the
payment of corporate income tax, considering that Section 1 of R.A.
No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The
legislative intent, as shown by the discussions in the Bicameral
Conference Meeting, is to require PAGCOR to pay corporate income
tax; hence, the omission or removal of PAGCOR from exemption from
the payment of corporate income tax. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim
expressio unius est exclusio alterius.27 Thus, the express mention of
the GOCCs exempted from payment of corporate income tax excludes
all others. Not being excepted, petitioner PAGCOR must be regarded
as coming within the purview of the general rule that GOCCs shall pay
corporate income tax, expressed in the maxim: exceptio firmat
regulam in casibus non exceptis.28
PAGCOR cannot find support in the equal protection clause of the
Constitution, as the legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee on Ways and
Means, show that PAGCOR’s exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the
National Internal Revenue Code of 1997, was not made pursuant to a
valid classification based on substantial distinctions and the other
requirements of a reasonable classification by legislative bodies, so
that the law may operate only on some, and not all, without violating
the equal protection clause. The legislative records show that the
basis of the grant of exemption to PAGCOR from corporate income
tax was PAGCOR’s own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null
and void ab initio for violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part of, and is read into,
the contract even without the parties expressly saying so. Petitioner
states that the private parties/investors transacting with it considered
the tax exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to transact/invest
with it. Petitioner argues that the withdrawal of its exemption from
corporate income tax by R.A. No. 9337 has the effect of changing the
main consideration and inducement for the transactions of private
parties with it; thus, the amendatory provision is violative of the non-
impairment clause of the Constitution.
Petitioner’s contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the
Constitution, which provides that no law impairing the obligation of
contracts shall be passed. The non-impairment clause is limited in
application to laws that derogate from prior acts or contracts by
enlarging, abridging or in any manner changing the intention of the
parties.29 There is impairment if a subsequent law changes the terms
of a contract between the parties, imposes new conditions, dispenses
with those agreed upon or withdraws remedies for the enforcement
of the rights of the parties.30
As regards franchises, Section 11, Article XII of the
Constitution31 provides that no franchise or right shall be granted
except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so
requires.32
In Manila Electric Company v. Province of Laguna,33 the Court held
that a franchise partakes the nature of a grant, which is beyond the
purview of the non-impairment clause of the Constitution.34 The
pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts and
a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives
its governmental immunity. Truly, tax exemptions of this kind may
not be revoked without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature
of a grant which is beyond the purview of the non-impairment clause
of the Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public
utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as
and when the common good so requires.35
In this case, PAGCOR was granted a franchise to operate and maintain
gambling casinos, clubs and other recreation or amusement places,
sports, gaming pools, i.e., basketball, football, lotteries, etc., whether
on land or sea, within the territorial jurisdiction of the Republic of the
Philippines.36 Under Section 11, Article XII of the Constitution,
PAGCOR’s franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A. No. 9377.
Hence, the provision in Section 1 of R.A. No. 9337, amending Section
27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR
from corporate income tax, which may affect any benefits to
PAGCOR’s transactions with private parties, is not violative of the
non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the
provision subjecting PAGCOR to 10% VAT is invalid for being contrary
to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to
the removal of petitioner's exemption from the payment of corporate
income tax, which was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner
from VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further
amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of
Subsection (2) hereof, the following transactions shall be exempt
from the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws, except
Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCOR’s
charter, P.D. No. 1869, is a special law that grants petitioner
exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by
Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A.
No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424),
as amended, is hereby further amended to read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of
Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services, including the
use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. — The following
services performed in the Philippines by VAT-registered persons shall
be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero
percent (0%) rate;
x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced
amendments to Section 108 of R.A. No. 8424 by imposing VAT on
other services not previously covered, it did not amend the portion of
Section 108 (B) (3) that subjects to zero percent rate services
performed by VAT-registered persons to persons or entities whose
exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects the supply of such
services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No.
8424 has been thoroughly and extensively discussed in Commissioner
of Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and operator of the Holiday Inn
Manila Pavilion Hotel. It leased a portion of the hotel’s premises to
PAGCOR. It incurred VAT amounting to ₱30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR from January 1996
to April 1997. Acesite tried to shift the said taxes to PAGCOR by
incorporating it in the amount assessed to PAGCOR. However,
PAGCOR refused to pay the taxes because of its tax-exempt status.
PAGCOR paid only the amount due to Acesite minus VAT in the sum
of ₱30,152,892.02. Acesite paid VAT in the amount of ₱30,152,892.02
to the Commissioner of Internal Revenue, fearing the legal
consequences of its non-payment. In May 1998, Acesite sought the
refund of the amount it paid as VAT on the ground that its transaction
with PAGCOR was subject to zero rate as it was rendered to a tax-
exempt entity. The Court ruled that PAGCOR and Acesite were both
exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants
the latter an exemption from the payment of taxes. Section 13 of P.D.
1869 pertinently provides:
Sec. 13. Exemptions. —
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind
or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the Corporation from its operation
under this Franchise. Such tax shall be due and payable quarterly to
the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial, or national
government authority.
(b) Others: The exemptions herein granted for earnings derived from
the operations conducted under the franchise specifically from the
payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom
the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation
or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the
Corporation or operator.
Petitioner contends that the above tax exemption refers only to
PAGCOR's direct tax liability and not to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is
exemption to taxes with no distinction on whether the taxes are exempt from VAT under R.A. No. 9337, the BIR exceeded its authority
direct or indirect. We are one with the CA ruling that PAGCOR is also in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the
exempt from indirect taxes, like VAT, as follows: said regulatory provision is hereby nullified.
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic
"Corporation" or operator refers to PAGCOR. Although the law does Act No. 9337, amending Section 27 (c) of the National Internal
not specifically mention PAGCOR's exemption from indirect taxes, Revenue Code of 1997, by excluding petitioner Philippine Amusement
PAGCOR is undoubtedly exempt from such taxes because the law and Gaming Corporation from the enumeration of government-
exempts from taxes persons or entities contracting with PAGCOR in owned and controlled corporations exempted from corporate income
casino operations. Although, differently worded, the provision clearly tax is valid and constitutional, while BIR Revenue Regulations No. 16-
exempts PAGCOR from indirect taxes. In fact, it goes one step further 2005 insofar as it subjects PAGCOR to 10% VAT is null and void for
by granting tax exempt status to persons dealing with PAGCOR in being contrary to the National Internal Revenue Code of 1997, as
casino operations. The unmistakable conclusion is that PAGCOR is not amended by Republic Act No. 9337.
liable for the P30, 152,892.02 VAT and neither is Acesite as the latter No costs.
is effectively subject to zero percent rate under Sec. 108 B (3), R.A. SO ORDERED.
8424. (Emphasis supplied.) DIOSDADO M. PERALTA
Indeed, by extending the exemption to entities or individuals dealing
with PAGCOR, the legislature clearly granted exemption also from
indirect taxes. It must be noted that the indirect tax of VAT, as in the
instant case, can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the
goods, properties, or services sold or leased, in which case it is
computed as 1/11 of such value, or charged as an additional 10% to
the value. Verily, the seller or lessor has the option to follow either
way in charging its clients and customer. In the instant case, Acesite
followed the latter method, that is, charging an additional 10% of the
gross sales and rentals. Be that as it may, the use of either method,
and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged
by Acesite, the latter is not liable for the payment of it as it is exempt
in this particular transaction by operation of law to pay the indirect
tax. Such exemption falls within the former Section 102 (b) (3) of the
1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which
provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of
tax - There shall be levied, assessed and collected, a value-added tax
equivalent to 10% of gross receipts derived by any person engaged in
the sale of services x x x; Provided, that the following services
performed in the Philippines by VAT registered persons shall be
subject to 0%.
xxxx
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero (0%)
rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in
P.D. 1869 and the extension of such exemption to entities or
individuals dealing with PAGCOR in casino operations are best
elucidated from the 1987 case of Commissioner of Internal
Revenue v. John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the
exemption of contractee WHO should be implemented to mean that
the entity or person exempt is the contractor itself who constructed
the building owned by contractee WHO, and such does not violate the
rule that tax exemptions are personal because the manifest intention
of the agreement is to exempt the contractor so that no contractor's
tax may be shifted to the contractee WHO. Thus, the proviso in P.D.
1869, extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect tax,
like VAT, that may be shifted to PAGCOR.40
Although the basis of the exemption of PAGCOR and Acesite from VAT
in the case of The Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax
Code, as amended, which section was retained as Section 108 (B) (3)
in R.A. No. 8424,41 it is still applicable to this case, since the provision
relied upon has been retained in R.A. No. 9337.421avvphi1
It is settled rule that in case of discrepancy between the basic law and
a rule or regulation issued to implement said law, the basic law
prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.43 RR No. 16-2005, therefore,
 THIRD DIVISION
[G.R. No. 131359. May 5, 1999]
MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA
and BENITO R. BALAZO, in his capacity as Provincial
Treasurer of Laguna, respondents.
DECISION
VITUG, J.:
On various dates, certain municipalities of the Province of
Laguna including, Bian, Sta Rosa, San Pedro, Luisiana, Calauan and
Cabuyao, by virtue of existing laws then in effect, issued resolutions
through their respective municipal councils granting franchise in favor
of petitioner Manila Electric Company (MERALCO) for the supply of
electric light, heat and power within their concerned areas. On 19
January 1983, MERALCO was likewise granted a franchise by the
National Electrification Administration to operate an electric light and
power service in the Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise
known as the Local Government Code of 1991, was enacted to take
effect on 01 January 1992 enjoining local government units to create
their own sources of revenue and to levy taxes, fees and charges,
subject to the limitations expressed therein, consistent with the basic
policy of local autonomy. Pursuant to the provisions of the Code,
respondent province enacted Laguna Provincial Ordinance No. 01-92,
effective 01 January 1993, providing, in part, as follows:
Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses
enjoying a franchise, at a rate of fifty percent (50%) of one percent
(1%) of the gross annual receipts, which shall include both cash sales
and sales on account realized during the preceding calendar year
within this province, including the territorial limits on any city located
in the province[1]
On the basis of the above ordinance, respondent Provincial
Treasurer sent a demand letter to MERALCO for the corresponding tax
payment. Petitioner MERALCO paid the tax, which then amounted to
P19,520,628.42, under protest. A formal claim for refund was
thereafter sent by MERALCO to the Provincial Treasurer of Laguna
claiming that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included the
franchise tax imposed by the Provincial Tax Ordinance. MERALCO
contended that the imposition of a franchise tax under Section 2.09 of
Laguna Provincial Ordinance No. 01-92, insofar as it concerned
MERALCO, contravened the provisions of Section 1 of P.D. 551 which
read:
Any provision of law or local ordinance to the contrary
notwithstanding, the franchise tax payable by all grantees of
franchises to generate, distribute and sell electric current for light,
heat and power shall be two per cent (2%) of their gross receipts
received from the sale of electric current and from transactions
incident to the generation, distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal
Revenue or his duly authorized representative on or before the
twentieth day of the month following the end of each calendar
quarter or month, as may be provided in the respective franchise or
pertinent municipal regulation and shall, any provision of the Local
Tax Code or any other law to the contrary notwithstanding, be in lieu
of all taxes and assessments of whatever nature imposed by any
national or local authority on earnings, receipts, income and privilege
of generation, distribution and sale of electric current.
On 28 August 1995, the claim for refund of petitioner was
denied in a letter signed by Governor Jose D. Lina. In denying the
claim, respondents relied on a more recent law, i.e., Republic Act No.
7160 or the Local Government Code of 1991, than the old decree
invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the
Regional Trial Court of Sta Cruz, Laguna, a complaint for refund, with
a prayer for the issuance of a writ of preliminary injunction and/or
temporary restraining order, against the Province of Laguna and also
Benito R. Balazo in his capacity as the Provincial Treasurer of
Laguna. Aside from the amount of P19,520,628.42 for which
petitioner MERALCO had priority made a formal request for refund,
petitioner thereafter likewise made additional payments under
protest on various dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997,
dismissed the complaint and concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING
CONSIDERATIONS, JUDGMENT is hereby rendered in favor of the
defendants and against the plaintiff, by:
1. Ordering the dismissal of the Complaint; and
2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid,
binding, reasonable and enforceable.[2]
In the instant petition, MERALCO assails the above ruling and
brings up the following issues; viz:
1. Whether the imposition of a franchise tax under Section 2.09 of
Laguna Provincial Ordinance No. 01-92, insofar as petitioner is
concerned, is violative of the non-impairment clause of the
Constitution and Section 1 of Presidential Decree No. 551.
2. Whether Republic Act. No. 7160, otherwise known as the Local
Government Code of 1991, has repealed, amended or modified
Presidential Decree No. 551.
3. Whether the doctrine of exhaustion of administrative remedies is
applicable in this case.[3]
The petition lacks merit.
Prefatorily, it might be well to recall that local governments do
not have the inherent power to tax[4] except to the extent that such
power might be delegated to them either by the basic law or by
statute. Presently, under Article X of the 1987 Constitution, a general
delegation of that power has been given in favor of local government
units. Thus:
Sec. 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government
structure instituted through a system of decentralization with
effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and
functions, and duties of local officials, and all other matters relating to
the organization and operation of the local units.
xxxxxxxxx
Sec. 5. Each local government shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to
such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the local governments.
The 1987 Constitution has a counterpart provision in the 1973
Constitution which did come out with a similar delegation of revenue
making powers to local governments.[5]
Under the regime of the 1935 Constitution no similar delegation
of tax powers was provided, and local government units instead
derived their tax powers under a limited statutory
authority. Whereas, then, the delegation of tax powers granted at
that time by statute to local governments was confined and defined
(outside of which the power was deemed withheld), the present
constitutional rule (starting with the 1973 Constitution), however,
would broadly confer such tax powers subject only to specific
exceptions that the law might prescribe.
Under the now prevailing Constitution, where there is neither a
grant nor a prohibition by statute, the tax power must be deemed to
exist although Congress may provide statutory limitations and
guidelines. The basic rationale for the current rule is to safeguard the
viability and self-sufficiency of local government units by directly
granting them general and broad tax powers. Nevertheless, the
fundamental law did not intend the delegation to be absolute and
unconditional; the constitutional objective obviously is to ensure that,
while the local government units are being strengthened and made
more autonomous,[6] the legislature must still see to it that (a) the
taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its
fair share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local taxation will
be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and
adopted, by and large the provisions of the now repealed Local Tax
Code, which had been in effect since 01 July 1973, promulgated into
law by Presidential Decree No. 231[7] pursuant to the then provisions
of Section 2, Article XI, of the 1973 Constitution. The 1991 Code
explicitly authorizes provincial governments, notwithstanding any
exemption granted by any law or other special law, x x x (to) impose a
tax on businesses enjoying a franchise. Section 137 thereof provides:
Sec. 137. Franchise Tax Notwithstanding any exemption granted by
any law or other special law, the province may impose a tax on
businesses enjoying a franchise, at a rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction. In the case of a newly started
business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar
year, regardless of when the business started to operate, the tax shall
be based on the gross receipts for the preceding calendar year, or any
fraction thereof, as provided herein. (Underscoring supplied for
emphasis)
Indicative of the legislative intent to carry out the Constitutional
mandate of vesting broad tax powers to local government units, the
Local Government Code has effectively withdrawn under Section 193
thereof, tax exemptions or incentives theretofore enjoyed by certain
entities. This law states:
Section 193 Withdrawal of Tax Exemption Privileges Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938,
non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Underscoring
supplied for emphasis)
The Code, in addition, contains a general repealing clause in its
Section 534; thus:
Section 534. Repealing Clause. x x x.
(f) All general and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or part or parts
thereof which are inconsistent with any of the provisions of this Code
are hereby repealed or modified accordingly. (Underscoring supplied
for emphasis)[8]
To exemplify, in Mactan Cebu International Airport Authority vs.
Marcos,[9] the Court upheld the withdrawal of the real estate tax
exemption previously enjoyed by Mactan Cebu International Airport
Authority. The Court ratiocinated:
x x x These policy considerations are consistent with the State policy
to ensure autonomy to local governments and the objective of the
LGC that they enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of
national goals. The power to tax is the most effective instrument to
raise needed revenues to finance and support myriad activities of
local government units for the delivery of basic service essential to
the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to
recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations
and all other units of government were that such privilege resulted in
serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises, and there was a need for these entities
to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.[10]
Petitioner in its complaint before the Regional Trial Court cited
the ruling of this Court in Province of Misamis Oriental vs. Cagayan
Electric Power and Light Company, Inc.;[11] thus:
In an earlier case, the phrase shall be in lieu of all taxes and at any
time levied, established by, or collected by any authority found in the
franchise of the Visayan Electric Company was held to exempt the
company from payment of the 5% tax on corporate franchise
provided in Section 259 of the Internal Revenue Code (Visayan Electric
Co. vs. David, 49 O.G. [No. 4] 1385)
Similarly, we ruled that the provision: shall be in lieu of all taxes of
every name and nature in the franchise of the Manila Railroad
(Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad
from payment of internal revenue tax for its importations of coal and
oil under Act No. 2432 and the Amendatory Acts of the Philippine
Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co.
(Sec. 13, Act No. 1497) justified the exemption of the Philippine
Railway Company from payment of the tax on its corporate franchise
under Section 259 of the Internal Revenue Code, as amended by R.A.
No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91
Phil. 35).
Those magic words, shall be in lieu of all taxes also excused the
Cotabato Light and Ice Plant Company from the payment of the tax
imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light
and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice
Plant Company when it was required to pay the corporate franchise
tax under Section 259 of the Internal Revenue Code as amended by
R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal
Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such
exemption is part of the inducement for the acceptance of the
franchise and the rendition of public service by the grantee.[12]
In the recent case of the City Government of San Pablo, etc., et
al. vs. Hon. Bienvenido V. Reyes, et al.,[13] the Court has held that the
phrase in lieu of all taxes have to give way to the peremptory
language of the Local Government Code specifically providing for the
withdrawal of such exemptions, privileges, and that upon the
effectivity of the Local Government Code all exemptions except only
as provided therein can no longer be invoked by MERALCO to disclaim
liability for the local tax. In fine, the Court has viewed its previous
rulings as laying stress more on the legislative intent of the
amendatory law whether the tax exemption privilege is to be
withdrawn or not rather than on whether the law can withdraw,
without violating the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax
exemptions contained in special franchises as being in the nature
of contracts and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from being strictly
contractual in nature. Contractual tax exemptions, in the real sense of
the term and where the non-impairment clause of the Constitution
can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in
which the government, acting in its private capacity, sheds its cloak of
authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the
obligations of contracts.[14] These contractual tax exemptions,
however, are not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the
Constitution.[15] Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public
utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as
and when the common good so requires.
WHEREFORE, the instant petition is hereby DISMISSED. No
costs.
SO ORDERED.
Romero, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.
 THIRD DIVISION
Thus, the instant case.

SMART COMMUNICATIONS, INC., G.R. No. 155491 Smart assigns the following errors:
Petitioner,
Present: [a.] THE LOWER COURT ERRED IN NOT HOLDING THAT
UNDER PETITIONERS FRANCHISE (REPUBLIC ACT NO.
- versus - YNARES-SANTIAGO, J., 7294), WHICH CONTAINS THE IN LIEU OF ALL TAXES
Chairperson, CLAUSE, AND WHICH IS A SPECIAL LAW ENACTED
AUSTRIA-MARTINEZ, SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
CHICO-NAZARIO, FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY
THE CITY OF DAVAO, represented herein by NACHURA, and RESPONDENT CITY.
its Mayor HON. RODRIGO R. DUTERTE, and REYES, JJ.
the SANGGUNIANG PANLUNGSOD [b.] THE LOWER COURT ERRED IN HOLDING THAT
OF DAVAO CITY, Promulgated: PETITIONERS FRANCHISE IS A GENERAL LAW AND DID
Respondents. NOT REPEAL RELEVANT PROVISIONS REGARDING
September 16, 2008 FRANCHISE TAX OF THE LOCAL GOVERNMENT CODE,
WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.
x------------------------------------------------------------------------------------x
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT
SECTION 137 OF THE LOCAL GOVERNMENT CODE,
WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS
DECISION RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, AND
SECTION 193 OF THE CODE, WHICH PROVIDES FOR
NACHURA, J.: WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT
APPLICABLE TO THIS CASE.
This is a petition for review on certiorari under Rule 45 of the Rules
of Court filed by Smart Communications, Inc. (Smart) against the City of Davao, [d.] THE LOWER COURT ERRED IN NOT HOLDING THAT
represented by its Mayor, Hon. Rodrigo R. Duterte, and the Sangguniang SECTIONS 137 AND 193 OF THE LOCAL GOVERNMENT
Panlungsod of Davao City, to annul the Decision[1] dated July 19, 2002 of the CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING
Regional Trial Court (RTC) and its Order[2] dated September 26, 2002 in Sp. Civil AT THE TIME OF ITS ENACTMENT BUT NOT TO FUTURE
Case No. 28,976-2002. EXEMPTIONS.

The Facts [e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF
STATUTORY CONSTRUCTION THAT TAX EXEMPTIONS ARE
On February 18, 2002, Smart filed a special civil action for declaratory CONSTRUED STRICTLY AGAINST THE TAXPAYER.
relief[3] under Rule 63 of the Rules of Court, for the ascertainment of its rights
and obligations under the Tax Code of the City of Davao,[4] particularly Section [f.] THE LOWER COURT ERRED IN NOT HOLDING THAT
1, Article 10 thereof, the pertinent portion of which reads: PETITIONERS FRANCHISE (REPUBLIC ACT NO. 7294) HAS
BEEN AMENDED AND EXPANDED BY SECTION 23 OF
Notwithstanding any exemption granted by any law or REPUBLIC ACT NO. 7925, THE PUBLIC
other special law, there is hereby imposed a tax on TELECOMMUNICATIONS POLICY ACT, TAKING INTO
businesses enjoying a franchise, at a rate of seventy-five ACCOUNT THE FRANCHISE OF GLOBE TELECOM, INC.
percent (75%) of one percent (1%) of the gross annual (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE SPECIAL
receipts for the preceding calendar year based on the PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE
income or receipts realized within the territorial LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN
jurisdiction of Davao City. ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE
IMPOSED ON PETITIONER BY RESPONDENT CITY.

Smart contends that its telecenter in Davao City is exempt from payment of [g.] THE LOWER COURT ERRED IN DISREGARDING THE
franchise tax to the City, on the following grounds: (a) the issuance of its RULING OF THE DEPARTMENT OF FINANCE, THROUGH
franchise under Republic Act (R.A.) No. 7294[5] subsequent to R.A. No. 7160 ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT
shows the clear legislative intent to exempt it from the provisions of R.A. PETITIONER IS EXEMPT FROM THE PAYMENT OF THE
7160;[6] (b) Section 137 of R.A. No. 7160 can only apply to exemptions already FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT
existing at the time of its effectivity and not to future exemptions; (c) the UNITS UNDER THE LOCAL GOVERNMENT CODE.
power of the City of Davao to impose a franchise tax is subject to statutory
limitations such as the in lieu of all taxes clause found in Section 9 of R.A. No. [h.] THE LOWER COURT ERRED IN NOT HOLDING THAT
7294; and (d) the imposition of franchise tax by the City of Davao would THE IMPOSITION OF THE LOCAL FRANCHISE TAX ON
amount to a violation of the constitutional provision against impairment of PETITIONER WOULD VIOLATE THE CONSTITUTIONAL
contracts.[7] PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS.

On March 2, 2002, respondents filed their Answer[8] in which they contested [i.] THE LOWER COURT ERRED IN DENYING THE PETITION
the tax exemption claimed by Smart. They invoked the power granted by the BELOW.[17]
Constitution to local government units to create their own sources of
revenue.[9] The Issue

On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues In sum, the pivotal issue in this case is whether Smart is liable to pay the
were involved in the case, the RTC issued an order requiring the parties to franchise tax imposed by the City of Davao.
submit their respective memoranda and, thereafter, the case would be
deemed submitted for resolution.[10] The Ruling of the Court

On July 19, 2002, the RTC rendered its Decision[11] denying the petition. The
trial court noted that the ambiguity of the in lieu of all taxes provision in R.A.
No. 7294, on whether it covers both national and local taxes, must be resolved
against the taxpayer.[12] The RTC ratiocinated that tax exemptions are
construed in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority and, thus, those who assert a tax exemption must justify it
with words too plain to be mistaken and too categorical not to be
misinterpreted.[13] On the issue of violation of the non-impairment clause of
the Constitution, the trial court cited Mactan Cebu International Airport
Authority v. Marcos,[14] and declared that the citys power to tax is based not
merely on a valid delegation of legislative power but on the direct authority
granted to it by the fundamental law. It added that while such power may be
subject to restrictions or conditions imposed by Congress, any such legislated
limitation must be consistent with the basic policy of local autonomy.[15]
Smart filed a motion for reconsideration which was denied by the trial court in
an Order[16] dated September 26, 2002.
We rule in the affirmative.
I. Prospective Effect of R.A. No. 7160
On March 27, 1992, Smarts legislative franchise (R.A. No. 7294) took effect.
Section 9 thereof, quoted hereunder, is at the heart of the present
controversy:
Section 9. Tax provisions. The grantee, its successors or
assigns shall be liable to pay the same taxes on their real
estate buildings and personal property, exclusive of' this
franchise, as other persons or corporations which are
now or hereafter may be required by law to pay. In
addition thereto, the grantee, its successors or assigns
shall pay a franchise tax equivalent to three percent (3%)
of all gross receipts of the business transacted under this
franchise by the grantee, its successors or assigns and
 the said percentage shall be in lieu of all taxes on this
franchise or earnings thereof: Provided, That the
grantee, its successors or assigns shall continue to be
liable for income taxes payable under Title II of the
National Internal Revenue Code pursuant to Section 2 of
Executive Order No. 72 unless the latter enactment is
amended or repealed, in which case the amendment or
repeal shall be applicable thereto.
The grantee shall file the return with and pay the tax due
thereon to the Commissioner of Internal Revenue or his
duly authorized representative in accordance with the
National Internal Revenue Code and the return shall be
subject to audit by the Bureau of Internal
Revenue.(Emphasis supplied.)
Smart alleges that the in lieu of all taxes clause in Section 9 of its franchise
exempts it from all taxes, both local and national, except the national
franchise tax (now VAT), income tax, and real property tax.[18]
On January 1, 1992, two months ahead of Smarts franchise, the Local
Government Code (R.A. No. 7160) took effect. Section 137, in relation to
Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the
local government units; while Section 193 thereof provided for the withdrawal
of tax exemption privileges granted prior to the issuance of R.A. No. 7160
except for those expressly mentioned therein, viz.:
Section 137. Franchise Tax. Notwithstanding any
exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a
franchise, at the rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt,
or realized, within its territorial jurisdiction.
In the case of a newly started business, the
tax shall not exceed one-twentieth (1/20) of one percent
(1%) of the capital investment. In the succeeding
calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for
the preceding calendar year, or any fraction thereon, as
provided herein.
Section 151. Scope of Taxing Powers. Except as otherwise
provided in this Code, the city may levy the taxes, fees,
and charges which the province or municipality may
impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and
independent component cities shall accrue to them and
distributed in accordance with the provisions of this
Code.
The rates of taxes that the city may levy may
exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except
the rates of professional and amusement taxes.
Section 193. Withdrawal of Tax Exemption Privileges.
Unless otherwise provided in this Code, tax exemptions
or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including
government-owned or controlled corporations, except
local water districts, cooperatives duly registered under
RA No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied.)
Smart argues that it is not covered by Section 137, in relation to Section 151 of
R.A. No. 7160, because its franchise was granted after the effectivity of the
said law. We agree with Smarts contention on this matter. The withdrawal of
tax exemptions or incentives provided in R.A. No. 7160 can only affect those
franchises granted prior to the effectivity of the law. The intention of the
legislature to remove all tax exemptions or incentives granted prior to the said
law is evident in the language of Section 193 of R.A. No. 7160. No
interpretation is necessary.
II. The in lieu of all taxes Clause in R.A. No. 7294
The in lieu of all taxes clause in Smarts franchise is put in issue before the
Court. In order to ascertain its meaning, consistent with fundamentals of
statutory construction, all the words in the statute must be considered. The
grant of tax exemption by R.A. No. 7294 is not to be interpreted from a
consideration of a single portion or of isolated words or clauses, but from a
general view of the act as a whole. Every part of the statute must be construed
with reference to the context.[19]
Smart is of the view that the only taxes it may be made to bear under its
franchise are the national franchise tax (now VAT), income tax, and real
property tax.[20] It claims exemption from the local franchise tax because the in
lieu of taxes clause in its franchise does not distinguish between national and
local taxes.[21]
We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart
from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise
tax equivalent to three percent (3%) of all gross receipts of the business
transacted under the franchise and the said percentage shall be in lieu of all
taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly
provide what kind of taxes Smart is exempted from. It is not clear whether the
in lieu of all taxes provision in the franchise of Smart would include exemption
from local or national taxation. What is clear is that Smart shall pay franchise
tax equivalent to three percent (3%) of all gross receipts of the business
transacted under its franchise. But whether the franchise tax exemption would
include exemption from exactions by both the local and the national
government is not unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A. No. 7294 on whether
Smart is exempted from both local and national franchise tax must be
construed strictly against Smart which claims the exemption. Smart has the
burden of proving that, aside from the imposed 3% franchise tax, Congress
intended it to be exempt from all kinds of franchise taxes whether local or
national. However, Smart failed in this regard.
Tax exemptions are never presumed and are strictly construed against the
taxpayer and liberally in favor of the taxing authority.[22] They can only be
given force when the grant is clear and categorical.[23] The surrender of the
power to tax, when claimed, must be clearly shown by a language that will
admit of no reasonable construction consistent with the reservation of the
power. If the intention of the legislature is open to doubt, then the intention
of the legislature must be resolved in favor of the State.[24]
In this case, the doubt must be resolved in favor of the City of Davao. The in
lieu of all taxes clause applies only to national internal revenue taxes and not
to local taxes. As appropriately pointed out in the separate opinion of Justice
Antonio T. Carpio in a similar case[25] involving a demand for exemption from
local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise
refers only to taxes, other than income tax, imposed
under the National Internal Revenue Code. The "in lieu
of all taxes" clause does not apply to local taxes. The
proviso in the first paragraph of Section 9 of Smart's
franchise states that the grantee shall "continue to be
liable for income taxes payable under Title II of the
National Internal Revenue Code." Also, the second
paragraph of Section 9 speaks of tax returns filed and
taxes paid to the "Commissioner of Internal Revenue or
his duly authorized representative in accordance with
the National Internal Revenue Code." Moreover, the
same paragraph declares that the tax returns "shall be
subject to audit by the Bureau of Internal Revenue."
Nothing is mentioned in Section 9 about local taxes. The
clear intent is for the "in lieu of all taxes" clause to apply
only to taxes under the National Internal Revenue Code
and not to local taxes. Even with respect to national
internal revenue taxes, the "in lieu of all taxes" clause
does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in
Smart's franchise to also apply to local taxes, Congress
would have expressly mentioned the exemption from
municipal and provincial taxes. Congress could have used
the language in Section 9(b) of Clavecilla's old franchise,
as follows:
x x x in lieu of any and all taxes of
any kind, nature or description
levied, established or collected by
any authority
whatsoever, municipal,
provincial or national, from which
the grantee is hereby expressly
exempted, x x x. (Emphasis
supplied).
However, Congress did not expressly exempt Smart from
local taxes. Congress used the "in lieu of all taxes" clause
only in reference to national internal revenue taxes. The
only interpretation, under the rule on strict construction
of tax exemptions, is that the "in lieu of all taxes" clause
in Smart's franchise refers only to national and not to
local taxes.
It should be noted that the in lieu of all taxes clause in R.A. No. 7294 has
become functus officio with the abolition of the franchise tax on
telecommunications companies.[26] As admitted by Smart in its pleadings, it
is no longer paying the 3% franchise tax mandated in its franchise.
Currently, Smart along with other telecommunications companies pays the
uniform 10% value-added tax.[27]
The VAT on sale of services of telephone franchise grantees is equivalent to
10% of gross receipts derived from the sale or exchange of services. [28] R.A. No.
7716, as amended by the Expanded Value Added Tax Law (R.A. No. 8241), the
pertinent portion of which is hereunder quoted, amended Section 9 of R.A. No.
7294:
SEC. 102. Value-added tax on sale of services and use or
lease of properties. (a) Rate and base of tax. There shall
be levied assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services, including the use
or lease of properties.
The phrase sale or exchange of services means the
performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration,
including those performed or rendered by construction
and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or
keepers of hotels, motels, rest houses, pension houses,
inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending
investors; transportation contractors on their transport
of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common
carriers by land, air, and water relative to their transport
of goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television
broadcasting and all other franchise grantees except
those under Section 117 of this Code; services of banks,
non-bank financial intermediaries and finance
companies; and non-life insurance companies (except
their crop insurances) including surety, fidelity,
indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental
faculties. x x x.[29]
R.A. No. 7716, specifically Section 20 thereof, expressly repealed the
provisions of all special laws relative to the rate of franchise taxes. It also
repealed, amended, or modified all other laws, orders, issuances, rules and
regulations, or parts thereof which are inconsistent with it.[30] In effect, the in
lieu of all taxes clause in R.A. No. 7294 was rendered ineffective by the advent
of the VAT Law.[31]
However, the franchise tax that the City of Davao may impose must comply
with Sections 137 and 151 of R.A. No. 7160. Thus, the local franchise tax that
may be imposed by the City must not exceed 50% of 1% of the gross annual
receipts for the preceding calendar year based on the income on receipts
realized within the territorial jurisdiction of Davao.
III. Opinion of the Bureau of Local Government Finance (BLGF)
In support of its argument that the in lieu of all taxes clause is to be construed
as an exemption from local franchise taxes, Smart submits the opinion of the
Department of Finance, through the BLGF, dated August 13, 1998 and February
24, 1998, regarding the franchises of Smart and Globe, respectively. [32] Smart
presents the same arguments as the Philippine Long Distance Telephone
Company in the previous cases already decided by this Court.[33] As previously
held by the Court, the findings of the BLGF are not conclusive on the courts:
[T]he BLGF opined that 23 of R.A. No. 7925 amended the
franchise of petitioner and in effect restored its
exemptions from local taxes. Petitioner contends that
courts should not set aside conclusions reached by the
BLGF because its function is precisely the study of local
tax problems and it has necessarily developed an
expertise on the subject.
To be sure, the BLGF is not an administrative agency
whose findings on questions of fact are given weight and
deference in the courts. The authorities cited by
petitioner pertain to the Court of Tax Appeals, a highly
specialized court which performs judicial functions as it
was created for the review of tax cases. In contrast, the
BLGF was created merely to provide consultative services
and technical assistance to local governments and the
general public on local taxation, real property
assessment, and other related matters, among others.
The question raised by petitioner is a legal question, to
wit, the interpretation of 23 of R.A. No. 7925. There is,
therefore, no basis for claiming expertise for the BLGF
that administrative agencies are said to possess in their
respective fields.
Petitioner likewise argues that the BLGF enjoys the
presumption of regularity in the performance of its duty.
It does enjoy this presumption, but this has nothing to do
with the question in this case. This case does not concern
the regularity of performance of the BLGF in the exercise
of its duties, but the correctness of its interpretation of a
provision of law.[34]
IV. Tax Exclusion/Tax Exemption
Smart gives another perspective of the in lieu of all taxes clause in Section 9 of
R.A. No. 7294 in order to avoid the payment of local franchise tax. It says that,
viewed from another angle, the in lieu of all taxes clause partakes of the
nature of a tax exclusion and not a tax exemption. A tax exemption means
that the taxpayer does not pay any tax at all. Smart pays VAT, income tax, and
real property tax. Thus, what it enjoys is more accurately a tax exclusion.[35]
However, as previously held by the Court, both in their nature and effect,
there is no essential difference between a tax exemption and a tax
exclusion. An exemption is an immunity or a privilege; it is the freedom from a
charge or burden to which others are subjected. An exclusion, on the other
hand, is the removal of otherwise taxable items from the reach of
taxation, e.g., exclusions from gross income and allowable deductions. An
exclusion is, thus, also an immunity or privilege which frees a taxpayer from a
charge to which others are subjected. Consequently, the rule that a tax
exemption should be applied in strictissimi juris against the taxpayer and
liberally in favor of the government applies equally to tax exclusions.[36]
V. Section 23 of R.A. No. 7925
To further its claim, Smart invokes Section 23 of the Public
Telecommunications Policy Act (R.A. No. 7925):
SECTION 23. Equality of Treatment in the
Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing
franchises, or may hereafter be granted, shall ipso
facto become part of previously granted
telecommunications franchise and shall be accorded
immediately and unconditionally to the grantees of such
franchises: Provided, however, That the foregoing shall
neither apply to nor affect provisions of
telecommunications franchises concerning territory
covered by the franchise, the life span of the franchise,
or the type of service authorized by the
franchise. (Emphasis supplied.)
In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in
connection with the franchise of Globe (R.A. No. 7227),[37] which was enacted
on March 19, 1992.
Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise known as the
most favored treatment clause or the equality clause, the provision in the
franchise of Globe exempting it from local taxes is automatically incorporated
in the franchise of Smart.[38] Smart posits that, since the franchise of Globe
contains a provision exempting it from municipal or local franchise tax, this
provision should also benefit Smart by virtue of Section 23 of R.A. No. 7925.
The provision in Globes franchise invoked by Smart reads:
(b) The grantee shall further pay to the Treasurer of the
Philippines each year after the audit and approval of the
accounts as prescribed in this Act, one and one-half per
centum of all gross receipts from business transacted
under this franchise by the said grantee in the
Philippines, in lieu of any and all taxes of any kind,
nature or description levied, established or collected by
any authority whatsoever, municipal, provincial or
national, from which the grantee is hereby expressly
exempted, effective from the date of the approval of
Republic Act Numbered Sixteen hundred eighteen.[39]
We find no reason to disturb the previous pronouncements of this Court
regarding the interpretation of Section 23 of R.A. No. 7925. As aptly explained
in the en banc decision of this Court in Philippine Long Distance Telephone In truth, the Contract Clause has never been thought as a
Company, Inc. v. City of Davao,[40] and recently in Digital Telecommunications limitation on the exercise of the States power of taxation
Philippines, Inc. (Digitel) v. Province of Pangasinan,[41] Congress, in approving save only where a tax exemption has been granted for a
Section 23 of R.A. No. 7925, did not intend it to operate as a blanket tax valid consideration. x x x.
exemption to all telecommunications entities.[42] The language of Section 23 of
R.A. No. 7925 and the proceedings of both Houses of Congress are bereft of
anything that would signify the grant of tax exemptions to all WHEREFORE, the instant petition is DENIED for lack of merit. Costs against
telecommunications entities, including those whose exemptions had been petitioner.
withdrawn by R.A. No. 7160.[43] The term exemption in Section 23 of R.A. No.
7925 does not mean tax exemption. The term refers to exemption from certain SO ORDERED.
regulations and requirements imposed by the National Telecommunications
Commission.[44]

Furthermore, in the franchise of Globe (R.A. No. 7229), the legislature

incontrovertibly stated that it will be liable for one and one-half per centum of
all gross receipts from business transacted under the franchise, in lieu of any
and all taxes of any kind, nature, or description levied, established, or
collected by any authority whatsoever, municipal, provincial, or national, from
which the grantee is hereby expressly exempted.[45] The grant of exemption
from municipal, provincial, or national is clear and categorical that aside from
the franchise tax collected by virtue of R.A. No. 7229, no other franchise tax
may be collected from Globe regardless of who the taxing power is. No such
provision is found in the franchise of Smart; the kind of tax from which it is
exempted is not clearly specified.

As previously explained by the Court, the stance of Smart would lead to absurd
consequences.

The acceptance of petitioner's theory would result in

absurd consequences. To illustrate: In its franchise,
Globe is required to pay a franchise tax of only one and
one-half percentum (1%) of all gross receipts from its
transactions while Smart is required to pay a tax of three
percent (3%) on all gross receipts from business
transacted. Petitioner's theory would require that, to
level the playing field, any "advantage, favor, privilege,
exemption, or immunity" granted to Globe must be
extended to all telecommunications companies,
including Smart. If, later, Congress again grants a
franchise to another telecommunications company
imposing, say, one percent (1%) franchise tax, then all
other telecommunications franchises will have to be
adjusted to "level the playing field" so to speak. This
could not have been the intent of Congress in enacting
23 of Rep. Act 7925. Petitioner's theory will leave the
Government with the burden of having to keep track of
all granted telecommunications franchises, lest some
companies be treated unequally. It is different if
Congress enacts a law specifically granting uniform
advantages, favor, privilege, exemption, or immunity to
all telecommunications entities.[46]

VI. Non-impairment Clause of the Constitution

Another argument of Smart is that the imposition of the local franchise tax by
the City of Davao would violate the constitutional prohibition against
impairment of contracts. The franchise, according to petitioner, is in the
nature of a contract between the government and Smart.[47]

However, we find that there is no violation of Article III, Section 10 of the 1987
Philippine Constitution. As previously discussed, the franchise of Smart does
not expressly provide for exemption from local taxes. Absent the express
provision on such exemption under the franchise, we are constrained to rule
against it. The in lieu of all taxes clause in Section 9 of R.A. No. 7294 leaves
much room for interpretation. Due to this ambiguity in the law, the doubt
must be resolved against the grant of tax exemption.

Moreover, Smarts franchise was granted with the express condition that it is
subject to amendment, alteration, or repeal.[48] As held in Tolentino v.
Secretary of Finance: [49]

It is enough to say that the parties to a contract cannot,

through the exercise of prophetic discernment, fetter the
exercise of the taxing power of the State. For not only
are existing laws read into contracts in order to fix
obligations as between parties, but the reservation of
essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The
policy of protecting contracts against impairment
presupposes the maintenance of a government which
retains adequate authority to secure the peace and good
order of society.
 Republic of the Philippines
Quarter Amount of Sales
SUPREME COURT
Manila
4th quarter 1945 P1,244.21
EN BANC
G.R. No. L-9637 April 30, 1957 1st quarter 1946 2,206.85
AMERICAN BIBLE SOCIETY, plaintiff-appellant,
vs. 2nd quarter 1946 1,950.38
CITY OF MANILA, defendant-appellee.
City Fiscal Eugenio Angeles and Juan Nabong for appellant. 3rd quarter 1946 2,235.99
Assistant City Fiscal Arsenio Nañawa for appellee.
FELIX, J.: 4th quarter 1946 3,256.04

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, 1st quarter 1947 13,241.07

missionary corporation duly registered and doing business in the
Philippines through its Philippine agency established in Manila in 2nd quarter 1947 15,774.55
November, 1898, with its principal office at 636 Isaac Peral in said
City. The defendant appellee is a municipal corporation with powers 3rd quarter 1947 14,654.13
that are to be exercised in conformity with the provisions of Republic
Act No. 409, known as the Revised Charter of the City of Manila. 4th quarter 1947 12,590.94

1st quarter 1948 11,143.90

In the course of its ministry, plaintiff's Philippine agency has been
distributing and selling bibles and/or gospel portions thereof (except
2nd quarter 1948 14,715.26
during the Japanese occupation) throughout the Philippines and
translating the same into several Philippine dialects. On May 29 1953, 3rd quarter 1948 38,333.83
the acting City Treasurer of the City of Manila informed plaintiff that
it was conducting the business of general merchandise since 4th quarter 1948 16,179.90
November, 1945, without providing itself with the necessary Mayor's
permit and municipal license, in violation of Ordinance No. 3000, as 1st quarter 1949 23,975.10
amended, and Ordinances Nos. 2529, 3028 and 3364, and required
plaintiff to secure, within three days, the corresponding permit and 2nd quarter 1949 17,802.08
license fees, together with compromise covering the period from the
4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of 3rd quarter 1949 16,640.79
P5,821.45 (Annex A).
4th quarter 1949 15,961.38
Plaintiff protested against this requirement, but the City Treasurer
demanded that plaintiff deposit and pay under protest the sum of 1st quarter 1950 18,562.46
P5,891.45, if suit was to be taken in court regarding the same (Annex
B). To avoid the closing of its business as well as further fines and 2nd quarter 1950 21,816.32
penalties in the premises on October 24, 1953, plaintiff paid to the
defendant under protest the said permit and license fees in the 3rd quarter 1950 25,004.55
aforementioned amount, giving at the same time notice to the City
Treasurer that suit would be taken in court to question the legality of 4th quarter 1950 45,287.92
the ordinances under which, the said fees were being collected
(Annex C), which was done on the same date by filing the complaint 1st quarter 1951 37,841.21
that gave rise to this action. In its complaint plaintiff prays that
judgment be rendered declaring the said Municipal Ordinance No. 2nd quarter 1951 29,103.98
3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal
and unconstitutional, and that the defendant be ordered to refund to 3rd quarter 1951 20,181.10
the plaintiff the sum of P5,891.45 paid under protest, together with
4th quarter 1951 22,968.91
legal interest thereon, and the costs, plaintiff further praying for such
other relief and remedy as the court may deem just equitable.
1st quarter 1952 23,002.65

Defendant answered the complaint, maintaining in turn that said 2nd quarter 1952 17,626.96
ordinances were enacted by the Municipal Board of the City of Manila
by virtue of the power granted to it by section 2444, subsection (m-2) 3rd quarter 1952 17,921.01
of the Revised Administrative Code, superseded on June 18, 1949, by
section 18, subsection (1) of Republic Act No. 409, known as the 4th quarter 1952 24,180.72
Revised Charter of the City of Manila, and praying that the complaint
be dismissed, with costs against plaintiff. This answer was replied by 1st quarter 1953 29,516.21
the plaintiff reiterating the unconstitutionality of the often-repeated
2. That the parties hereby reserve the right to present
ordinances.
evidence of other facts not herein stipulated.

Before trial the parties submitted the following stipulation of facts:

COME NOW the parties in the above-entitled case, thru
their undersigned attorneys and respectfully submit the
following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its
principal office at 636 Isaac Peral, Manila, Bibles, New
Testaments, bible portions and bible concordance in English
and other foreign languages imported by it from the United
States as well as Bibles, New Testaments and bible portions
in the local dialects imported and/or purchased locally; that
from the fourth quarter of 1945 to the first quarter of 1953
inclusive the sales made by the plaintiff were as follows:
WHEREFORE, it is respectfully prayed that this case be set
for hearing so that the parties may present further evidence
on their behalf. (Record on Appeal, pp. 15-16).
When the case was set for hearing, plaintiff proved, among other
things, that it has been in existence in the Philippines since 1899, and
that its parent society is in New York, United States of America; that
its, contiguous real properties located at Isaac Peral are exempt from
real estate taxes; and that it was never required to pay any municipal
license fee or tax before the war, nor does the American Bible Society
in the United States pay any license fee or sales tax for the sale of
bible therein. Plaintiff further tried to establish that it never made any
profit from the sale of its bibles, which are disposed of for as low as
one third of the cost, and that in order to maintain its operating cost
it obtains substantial remittances from its New York office and
voluntary contributions and gifts from certain churches, both in the
United States and in the Philippines, which are interested in its
missionary work. Regarding plaintiff's contention of lack of profit in
the sale of bibles, defendant retorts that the admissions of plaintiff-
appellant's lone witness who testified on cross-examination that
bibles bearing the price of 70 cents each from plaintiff-appellant's
New York office are sold here by plaintiff-appellant at P1.30 each;
those bearing the price of $4.50 each are sold here at P10 each; those
bearing the price of $7 each are sold here at P15 each; and those
bearing the price of $11 each are sold here at P22 each, clearly show
that plaintiff's contention that it never makes any profit from the sale
of its bible, is evidently untenable.
After hearing the Court rendered judgment, the last part of which is
as follows:
As may be seen from the repealed section (m-2) of the
Revised Administrative Code and the repealing portions (o)
of section 18 of Republic Act No. 409, although they
seemingly differ in the way the legislative intent is
expressed, yet their meaning is practically the same for the
purpose of taxing the merchandise mentioned in said legal
provisions, and that the taxes to be levied by said
ordinances is in the nature of percentage graduated taxes
(Sec. 3 of Ordinance No. 3000, as amended, and Sec. 1,
Group 2, of Ordinance No. 2529, as amended by Ordinance
No. 3364).
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is
of the opinion and so holds that this case should be
dismissed, as it is hereby dismissed, for lack of merits, with
costs against the plaintiff.
Not satisfied with this verdict plaintiff took up the matter to the Court
of Appeals which certified the case to Us for the reason that the
errors assigned to the lower Court involved only questions of law.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as
respectively amended, are not unconstitutional;
2. In holding that subsection m-2 of Section 2444 of the
Revised Administrative Code under which Ordinances Nos.
2592 and 3000 were promulgated, was not repealed by
Section 18 of Republic Act No. 409;
3. In not holding that an ordinance providing for taxes based
on gross sales or receipts, in order to be valid under the new
Charter of the City of Manila, must first be approved by the
President of the Philippines; and
4. In holding that, as the sales made by the plaintiff-
appellant have assumed commercial proportions, it cannot
escape from the operation of said municipal ordinances
under the cloak of religious privilege.
The issues. — As may be seen from the proceeding statement of the
case, the issues involved in the present controversy may be reduced
to the following: (1) whether or not the ordinances of the City of
Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are
constitutional and valid; and (2) whether the provisions of said
ordinances are applicable or not to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the
Republic of the Philippines, provides that:
(7) No law shall be made respecting an establishment of
religion, or prohibiting the free exercise thereof, and the
free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall forever
be allowed. No religion test shall be required for the
exercise of civil or political rights.
Predicated on this constitutional mandate, plaintiff-appellant
contends that Ordinances Nos. 2529 and 3000, as respectively
amended, are unconstitutional and illegal in so far as its society is
concerned, because they provide for religious censorship and restrain
the free exercise and enjoyment of its religious profession, to wit: the
distribution and sale of bibles and other religious literature to the
people of the Philippines.
Before entering into a discussion of the constitutional aspect of the
case, We shall first consider the provisions of the questioned
ordinances in relation to their application to the sale of bibles, etc. by
appellant. The records, show that by letter of May 29, 1953 (Annex A),
the City Treasurer required plaintiff to secure a Mayor's permit in
connection with the society's alleged business of distributing and
selling bibles, etc. and to pay permit dues in the sum of P35 for the
period covered in this litigation, plus the sum of P35 for compromise
on account of plaintiff's failure to secure the permit required by
Ordinance No. 3000 of the City of Manila, as amended. This Ordinance
is of general application and not particularly directed against
institutions like the plaintiff, and it does not contain any provisions
whatever prescribing religious censorship nor restraining the free
exercise and enjoyment of any religious profession. Section 1 of
Ordinance No. 3000 reads as follows:
SEC. 1. PERMITS NECESSARY. — It shall be unlawful for any
person or entity to conduct or engage in any of the
businesses, trades, or occupations enumerated in Section 3
of this Ordinance or other businesses, trades, or occupations
for which a permit is required for the proper supervision and
enforcement of existing laws and ordinances governing the
sanitation, security, and welfare of the public and the health
of the employees engaged in the business specified in said
section 3 hereof, WITHOUT FIRST HAVING OBTAINED A
PERMIT THEREFOR FROM THE MAYOR AND THE NECESSARY
LICENSE FROM THE CITY TREASURER.
The business, trade or occupation of the plaintiff involved in this case
is not particularly mentioned in Section 3 of the Ordinance, and the
record does not show that a permit is required therefor under existing
laws and ordinances for the proper supervision and enforcement of
their provisions governing the sanitation, security and welfare of the
public and the health of the employees engaged in the business of the
plaintiff. However, sections 3 of Ordinance 3000 contains item No. 79,
which reads as follows:
79. All other businesses, trades or occupations not
mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00
Therefore, the necessity of the permit is made to depend upon the
power of the City to license or tax said business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required
the society to pay from the 4th quarter of 1945 to the 1st quarter of
1953 in the sum of P5,821.45, including the sum of P50 as
compromise, Ordinance No. 2529, as amended by Ordinances Nos.
2779, 2821 and 3028 prescribes the following:
SEC. 1. FEES. — Subject to the provisions of section 578 of
the Revised Ordinances of the City of Manila, as amended,
there shall be paid to the City Treasurer for engaging in any
of the businesses or occupations below enumerated,
quarterly, license fees based on gross sales or receipts
realized during the preceding quarter in accordance with the
rates herein prescribed: PROVIDED, HOWEVER, That a
person engaged in any businesses or occupation for the first
time shall pay the initial license fee based on the probable
gross sales or receipts for the first quarter beginning from
the date of the opening of the business as indicated herein
for the corresponding business or occupation.
xxx xxx xxx
GROUP 2. — Retail dealers in new (not yet used)
merchandise, which dealers are not yet subject to the
payment of any municipal tax, such as (1) retail dealers in
general merchandise; (2) retail dealers exclusively engaged
in the sale of . . . books, including stationery.
xxx xxx xxx
As may be seen, the license fees required to be paid quarterly in
Section 1 of said Ordinance No. 2529, as amended, are not imposed
directly upon any religious institution but upon those engaged in any
of the business or occupations therein enumerated, such as retail
"dealers in general merchandise" which, it is alleged, cover the
business or occupation of selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section
2444, subsection (m-2) of said legal body, as amended by Act No.
3659, approved on December 8, 1929, empowers the Municipal Board
of the City of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new
automobiles or accessories or both, and (b) retail dealers in
new (not yet used) merchandise, which dealers are not yet
subject to the payment of any municipal tax.
For the purpose of taxation, these retail dealers shall be
classified as (1) retail dealers in general merchandise, and
(2) retail dealers exclusively engaged in the sale of (a)
textiles . . . (e) books, including stationery, paper and office
supplies, . . .: PROVIDED, HOWEVER, That the combined
total tax of any debtor or manufacturer, or both,
enumerated under these subsections (m-1) and (m-2),
whether dealing in one or all of the articles mentioned
herein, SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS
PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529 and
3000, as amended, were enacted in virtue of the power that said Act
No. 3669 conferred upon the City of Manila. Appellant, however,
contends that said ordinances are longer in force and effect as the law
under which they were promulgated has been expressly repealed by
Section 102 of Republic Act No. 409 passed on June 18, 1949, known
as the Revised Manila Charter.
Passing upon this point the lower Court categorically stated that
Republic Act No. 409 expressly repealed the provisions of Chapter 60
of the Revised Administrative Code but in the opinion of the trial
Judge, although Section 2444 (m-2) of the former Manila Charter and
section 18 (o) of the new seemingly differ in the way the legislative
intent was expressed, yet their meaning is practically the same for the
purpose of taxing the merchandise mentioned in both legal provisions
and, consequently, Ordinances Nos. 2529 and 3000, as amended, are
to be considered as still in full force and effect uninterruptedly up to
the present.
Often the legislature, instead of simply amending the pre-
existing statute, will repeal the old statute in its entirety and
by the same enactment re-enact all or certain portions of
the preexisting law. Of course, the problem created by this
sort of legislative action involves mainly the effect of the
repeal upon rights and liabilities which accrued under the
original statute. Are those rights and liabilities destroyed or
preserved? The authorities are divided as to the effect of
simultaneous repeals and re-enactments. Some adhere to
the view that the rights and liabilities accrued under the
repealed act are destroyed, since the statutes from which
they sprang are actually terminated, even though for only a
very short period of time. Others, and they seem to be in the
majority, refuse to accept this view of the situation, and
consequently maintain that all rights an liabilities which
have accrued under the original statute are preserved and
may be enforced, since the re-enactment neutralizes the
repeal, therefore, continuing the law in force without
interruption. (Crawford-Statutory Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No, 409
introduces a new and wider concept of taxation and is different from
the provisions of Section 2444(m-2) that the former cannot be
considered as a substantial re-enactment of the provisions of the
latter. We have quoted above the provisions of section 2444(m-2) of
the Revised Administrative Code and We shall now copy hereunder
the provisions of Section 18, subdivision (o) of Republic Act No. 409,
which reads as follows:
(o) To tax and fix the license fee on dealers in general
merchandise, including importers and indentors, except
those dealers who may be expressly subject to the payment
of some other municipal tax under the provisions of this
section.
Dealers in general merchandise shall be classified as (a)
wholesale dealers and (b) retail dealers. For purposes of the
tax on retail dealers, general merchandise shall be classified
into four main classes: namely (1) luxury articles, (2) semi-
luxury articles, (3) essential commodities, and (4)
miscellaneous articles. A separate license shall be prescribed
for each class but where commodities of different classes
are sold in the same establishment, it shall not be
compulsory for the owner to secure more than one license if
he pays the higher or highest rate of tax prescribed by
ordinance. Wholesale dealers shall pay the license tax as
such, as may be provided by ordinance.
For purposes of this section, the term "General
merchandise" shall include poultry and livestock,
agricultural products, fish and other allied products.
The only essential difference that We find between these two
provisions that may have any bearing on the case at bar, is that, while
subsection (m-2) prescribes that the combined total tax of any dealer
or manufacturer, or both, enumerated under subsections (m-1) and
(m-2), whether dealing in one or all of the articles mentioned
therein, shall not be in excess of P500 per annum, the corresponding
section 18, subsection (o) of Republic Act No. 409, does not contain
any limitation as to the amount of tax or license fee that the retail
dealer has to pay per annum. Hence, and in accordance with the
weight of the authorities above referred to that maintain that "all
rights and liabilities which have accrued under the original statute are
preserved and may be enforced, since the reenactment neutralizes
the repeal, therefore continuing the law in force without
interruption", We hold that the questioned ordinances of the City of
Manila are still in force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid,
must first be approved by the President of the Philippines as per
section 18, subsection (ii) of Republic Act No. 409, which reads as
follows:
(ii) To tax, license and regulate any business, trade or
occupation being conducted within the City of Manila, not
otherwise enumerated in the preceding subsections,
including percentage taxes based on gross sales or receipts,
subject to the approval of the PRESIDENT, except
amusement taxes.
but this requirement of the President's approval was not contained in
section 2444 of the former Charter of the City of Manila under which
Ordinance No. 2529 was promulgated. Anyway, as stated by
appellee's counsel, the business of "retail dealers in general
merchandise" is expressly enumerated in subsection (o), section 18 of
Republic Act No. 409; hence, an ordinance prescribing a municipal tax
on said business does not have to be approved by the President to be
effective, as it is not among those referred to in said subsection (ii).
Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the
authority granted to it by law.
The question that now remains to be determined is whether said
ordinances are inapplicable, invalid or unconstitutional if applied to
the alleged business of distribution and sale of bibles to the people of
the Philippines by a religious corporation like the American Bible
Society, plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos.
2779, 2821 and 3028, appellant contends that it is unconstitutional
and illegal because it restrains the free exercise and enjoyment of the
religious profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines
aforequoted, guarantees the freedom of religious profession and
worship. "Religion has been spoken of as a profession of faith to an
active power that binds and elevates man to its Creator" (Aglipay vs.
Ruiz, 64 Phil., 201).It has reference to one's views of his relations to
His Creator and to the obligations they impose of reverence to His
being and character, and obedience to His Will (Davis vs. Beason, 133
U.S., 342). The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with it the right
to disseminate religious information. Any restraints of such right can
only be justified like other restraints of freedom of expression on the
grounds that there is a clear and present danger of any substantive
evil which the State has the right to prevent". (Tañada and Fernando
on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the
case at bar the license fee herein involved is imposed upon appellant
for its distribution and sale of bibles and other religious literature:
In the case of Murdock vs. Pennsylvania, it was held that an
ordinance requiring that a license be obtained before a
person could canvass or solicit orders for goods, paintings,
pictures, wares or merchandise cannot be made to apply to
members of Jehovah's Witnesses who went about from
door to door distributing literature and soliciting people to
"purchase" certain religious books and pamphlets, all
published by the Watch Tower Bible & Tract Society. The
"price" of the books was twenty-five cents each, the "price"
of the pamphlets five cents each. It was shown that in
making the solicitations there was a request for additional
 "contribution" of twenty-five cents each for the books and
five cents each for the pamphlets. Lesser sum were
accepted, however, and books were even donated in case
interested persons were without funds.
On the above facts the Supreme Court held that it could not
be said that petitioners were engaged in commercial rather
than a religious venture. Their activities could not be
described as embraced in the occupation of selling books
and pamphlets. Then the Court continued:
"We do not mean to say that religious groups and the press
are free from all financial burdens of government.
See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80
L. ed. 660, 668, 56 S. Ct. 444. We have here something quite
different, for example, from a tax on the income of one who
engages in religious activities or a tax on property used or
employed in connection with activities. It is one thing to
impose a tax on the income or property of a preacher. It is
quite another to exact a tax from him for the privilege of
delivering a sermon. The tax imposed by the City of
Jeannette is a flat license tax, payment of which is a
condition of the exercise of these constitutional privileges.
The power to tax the exercise of a privilege is the power to
control or suppress its enjoyment. . . . Those who can tax
the exercise of this religious practice can make its exercise
so costly as to deprive it of the resources necessary for its
maintenance. Those who can tax the privilege of engaging in
this form of missionary evangelism can close all its doors to
all those who do not have a full purse. Spreading religious
beliefs in this ancient and honorable manner would thus be
denied the needy. . . .
It is contended however that the fact that the license tax
can suppress or control this activity is unimportant if it does
not do so. But that is to disregard the nature of this tax. It is
a license tax — a flat tax imposed on the exercise of a
privilege granted by the Bill of Rights . . . The power to
impose a license tax on the exercise of these freedom is
indeed as potent as the power of censorship which this
Court has repeatedly struck down. . . . It is not a nominal fee
imposed as a regulatory measure to defray the expenses of
policing the activities in question. It is in no way
apportioned. It is flat license tax levied and collected as a
condition to the pursuit of activities whose enjoyment is
guaranteed by the constitutional liberties of press and
religion and inevitably tends to suppress their exercise. That
is almost uniformly recognized as the inherent vice and evil
of this flat license tax."
Nor could dissemination of religious information be
conditioned upon the approval of an official or manager
even if the town were owned by a corporation as held in the
case of Marsh vs. State of Alabama (326 U.S. 501), or by the
United States itself as held in the case of Tucker vs. Texas
(326 U.S. 517). In the former case the Supreme Court
expressed the opinion that the right to enjoy freedom of the
press and religion occupies a preferred position as against
the constitutional right of property owners.
"When we balance the constitutional rights of owners of
property against those of the people to enjoy freedom of
press and religion, as we must here, we remain mindful of
the fact that the latter occupy a preferred position. . . . In
our view the circumstance that the property rights to the
premises where the deprivation of property here involved,
took place, were held by others than the public, is not
sufficient to justify the State's permitting a corporation to
govern a community of citizens so as to restrict their
fundamental liberties and the enforcement of such restraint
by the application of a State statute." (Tañada and Fernando
on the Constitution of the Philippines, Vol. 1, 4th ed., p. 304-
306).
Section 27 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. —
The following organizations shall not be taxed under this
Title in respect to income received by them as such —
(e) Corporations or associations organized and operated
exclusively for religious, charitable, . . . or educational
purposes, . . .: Provided, however, That the income of
whatever kind and character from any of its properties, real
or personal, or from any activity conducted for profit,
regardless of the disposition made of such income, shall be
liable to the tax imposed under this Code;
Appellant's counsel claims that the Collector of Internal Revenue has
exempted the plaintiff from this tax and says that such exemption
clearly indicates that the act of distributing and selling bibles, etc. is
purely religious and does not fall under the above legal provisions.
It may be true that in the case at bar the price asked for the bibles
and other religious pamphlets was in some instances a little bit higher
than the actual cost of the same but this cannot mean that appellant
was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason We believe that the
provisions of City of Manila Ordinance No. 2529, as amended, cannot
be applied to appellant, for in doing so it would impair its free
exercise and enjoyment of its religious profession and worship as well
as its rights of dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the
obtention the Mayor's permit before any person can engage in any of
the businesses, trades or occupations enumerated therein, We do not
find that it imposes any charge upon the enjoyment of a right granted
by the Constitution, nor tax the exercise of religious practices. In the
case of Coleman vs. City of Griffin, 189 S.E. 427, this point was
elucidated as follows:
An ordinance by the City of Griffin, declaring that the
practice of distributing either by hand or otherwise,
circulars, handbooks, advertising, or literature of any kind,
whether said articles are being delivered free, or whether
same are being sold within the city limits of the City of
Griffin, without first obtaining written permission from the
city manager of the City of Griffin, shall be deemed a
nuisance and punishable as an offense against the City of
Griffin, does not deprive defendant of his constitutional
right of the free exercise and enjoyment of religious
profession and worship, even though it prohibits him from
introducing and carrying out a scheme or purpose which he
sees fit to claim as a part of his religious system.
It seems clear, therefore, that Ordinance No. 3000 cannot be
considered unconstitutional, even if applied to plaintiff Society. But as
Ordinance No. 2529 of the City of Manila, as amended, is not
applicable to plaintiff-appellant and defendant-appellee is powerless
to license or tax the business of plaintiff Society involved herein for,
as stated before, it would impair plaintiff's right to the free exercise
and enjoyment of its religious profession and worship, as well as its
rights of dissemination of religious beliefs, We find that Ordinance
No. 3000, as amended is also inapplicable to said business, trade or
occupation of the plaintiff.
Wherefore, and on the strength of the foregoing considerations, We
hereby reverse the decision appealed from, sentencing defendant
return to plaintiff the sum of P5,891.45 unduly collected from it.
Without pronouncement as to costs. It is so ordered.
Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador,
Concepcion and Endencia, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 115455 October 30, 1995
ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE
OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as
Commissioner of Internal Revenue; and their AUTHORIZED AGENTS
OR REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE
PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE
COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.;
KAMAHALAN PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS,
INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of
Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity
as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his
capacity as Secretary of Finance, respondents.
G.R. No. 115754 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,
(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM
TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN,
FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE
CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"),
FREEDOM FROM DEBT COALITION, INC., and PHILIPPINE BIBLE
SOCIETY, INC. and WIGBERTO TAÑADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF
CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115873 October 30, 1995
COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of
Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as
Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his
capacity as Secretary of Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and
ASSOCIATION OF PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON.
LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue; and
HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner
of Customs, respondents.
RESOLUTION
MENDOZA, J.:
These are motions seeking reconsideration of our decision dismissing
the petitions filed in these cases for the declaration of
unconstitutionality of R.A. No. 7716, otherwise known as the
Expanded Value-Added Tax Law. The motions, of which there are 10
in all, have been filed by the several petitioners in these cases, with
the exception of the Philippine Educational Publishers Association,
Inc. and the Association of Philippine Booksellers, petitioners in G.R.
No. 115931.
The Solicitor General, representing the respondents, filed a
consolidated comment, to which the Philippine Airlines, Inc.,
petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No.
115525, each filed a reply. In turn the Solicitor General filed on June 1,
1995 a rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some
of the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines
(PAL), Roco, and Chamber of Real Estate and Builders Association
(CREBA)) reiterate previous claims made by them that R.A. No. 7716
did not "originate exclusively" in the House of Representatives as
required by Art. VI, §24 of the Constitution. Although they admit that
H. No. 11197 was filed in the House of Representatives where it
passed three readings and that afterward it was sent to the Senate
where after first reading it was referred to the Senate Ways and
Means Committee, they complain that the Senate did not pass it on
second and third readings. Instead what the Senate did was to pass its
own version (S. No. 1630) which it approved on May 24, 1994.
Petitioner Tolentino adds that what the Senate committee should
have done was to amend H. No. 11197 by striking out the text of the
bill and substituting it with the text of S. No. 1630. That way, it is said,
"the bill remains a House bill and the Senate version just becomes the
text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the
Senate proposed an amendment to a House revenue bill by enacting
its own version of a revenue bill. On at least two occasions during
the Eighth Congress, the Senate passed its own version of revenue
bills, which, in consolidation with House bills earlier passed, became
the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE
OF 1987 BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE
PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON
CAPITAL EQUIPMENT) which was approved by the President on April
10, 1992. This Act is actually a consolidation of H. No. 34254, which
was approved by the House on January 29, 1992, and S. No. 1920,
which was approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER
SHALL GIVE REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL
IN OLYMPIC GAMES) which was approved by the President on May
22, 1992. This Act is a consolidation of H. No. 22232, which was
approved by the House of Representatives on August 2, 1989, and S.
No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which
were also the result of the consolidation of House and Senate bills.
These are the following, with indications of the dates on which the
laws were approved by the President and dates the separate bills of
the two chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING
FOR THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE
TO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH
AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT
REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE
NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE
TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE
TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL
SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE
OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF
GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES
RENDERED BY CONTRACTORS (April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN
CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND
ADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDING
FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC
PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF
SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK
EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR
THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which
the Senate, in the exercise of its power to propose amendments to
bills required to originate in the House, passed its own version of a
House revenue measure. It is noteworthy that, in the particular case
of S. No. 1630, petitioners Tolentino and Roco, as members of the
Senate, voted to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged
by petitioner Tolentino, concerns a mere matter of form. Petitioner
has not shown what substantial difference it would make if, as the
Senate actually did in this case, a separate bill like S. No. 1630 is
instead enacted as a substitute measure, "taking into Consideration . .
. H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
§68. Not more than one amendment to the original amendment shall
be considered.
No amendment by substitution shall be entertained unless the text
thereof is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken
thereon.
§69. No amendment which seeks the inclusion of a legislative
provision foreign to the subject matter of a bill (rider) shall be
entertained.
xxx xxx xxx
§70-A. A bill or resolution shall not be amended by substituting it with
another which covers a subject distinct from that proposed in the
original bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to
revenue bills, the Philippine Senate possesses less power than the
U.S. Senate because of textual differences between constitutional
provisions giving them the power to propose or concur with
amendments.
Art. I, §7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of
Representatives; but the Senate may propose or concur with
amendments as on other Bills.
Art. VI, §24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives, but the Senate
may propose or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution
and the decision to drop the phrase "as on other Bills" in the
American version, according to petitioners, shows the intention of the
framers of our Constitution to restrict the Senate's power to propose
amendments to revenue bills. Petitioner Tolentino contends that the
word "exclusively" was inserted to modify "originate" and "the words
'as in any other bills' (sic) were eliminated so as to show that these
bills were not to be like other bills but must be treated as a special
kind."
The history of this provision does not support this contention. The
supposed indicia of constitutional intent are nothing but the relics of
an unsuccessful attempt to limit the power of the Senate. It will be
recalled that the 1935 Constitution originally provided for a
unicameral National Assembly. When it was decided in 1939 to
change to a bicameral legislature, it became necessary to provide for
the procedure for lawmaking by the Senate and the House of
Representatives. The work of proposing amendments to the
Constitution was done by the National Assembly, acting as a
constituent assembly, some of whose members, jealous of preserving
the Assembly's lawmaking powers, sought to curtail the powers of the
proposed Senate. Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively in the
Assembly, but the Senate may propose or concur with amendments.
In case of disapproval by the Senate of any such bills, the Assembly
may repass the same by a two-thirds vote of all its members, and
thereupon, the bill so repassed shall be deemed enacted and may be
submitted to the President for corresponding action. In the event that
the Senate should fail to finally act on any such bills, the Assembly
may, after thirty days from the opening of the next regular session of
the same legislative term, reapprove the same with a vote of two-
thirds of all the members of the Assembly. And upon such reapproval,
the bill shall be deemed enacted and may be submitted to the
President for corresponding action.
The special committee on the revision of laws of the Second National
Assembly vetoed the proposal. It deleted everything after the first
sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by
Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and
ratified by them in the elections held on June 18, 1940.
This is the history of Art. VI, §18 (2) of the 1935 Constitution, from
which Art. VI, §24 of the present Constitution was derived. It explains
why the word "exclusively" was added to the American text from
which the framers of the Philippine Constitution borrowed and why
the phrase "as on other Bills" was not copied. Considering the defeat
of the proposal, the power of the Senate to propose amendments
must be understood to be full, plenary and complete "as on other
Bills." Thus, because revenue bills are required to originate exclusively
in the House of Representatives, the Senate cannot enact revenue
measures of its own without such bills. After a revenue bill is passed
and sent over to it by the House, however, the Senate certainly can
pass its own version on the same subject matter. This follows from
the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the
Senate's power to concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this
power, the Senate can practically re-write a bill required to come
from the House and leave only a trace of the original bill. For
example, a general revenue bill passed by the lower house of the
United States Congress contained provisions for the imposition of an
inheritance tax . This was changed by the Senate into a corporation
tax. The amending authority of the Senate was declared by the United
States Supreme Court to be sufficiently broad to enable it to make the
alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES
247 (1961))
The above-mentioned bills are supposed to be initiated by the House
of Representatives because it is more numerous in membership and
therefore also more representative of the people. Moreover, its
members are presumed to be more familiar with the needs of the
country in regard to the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its
power to propose or concur with amendments to the bills initiated by
the House of Representatives. Thus, in one case, a bill introduced in
the U.S. House of Representatives was changed by the Senate to
make a proposed inheritance tax a corporation tax. It is also accepted
practice for the Senate to introduce what is known as an amendment
by substitution, which may entirely replace the bill initiated in the
House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, §24 provides that all appropriation, revenue or
tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills must "originate exclusively in the House
of Representatives," it also adds, "but the Senate may propose or
concur with amendments." In the exercise of this power, the Senate
may propose an entirely new bill as a substitute measure. As
petitioner Tolentino states in a high school text, a committee to which
a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and
endorse an entirely new bill as a substitute, in which case it will be
known as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are
required to originate in the House by prescribing that the number of
the House bill and its other parts up to the enacting clause must be
preserved although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to insist on a
mere technicality. At any rate there is no rule prescribing this form. S.
No. 1630, as a substitute measure, is therefore as much an
amendment of H. No. 11197 as any which the Senate could have
made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic
error is that they assume that S. No. 1630 is an independent and
distinct bill. Hence their repeated references to its certification that it
was passed by the Senate "in substitution of S.B. No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197," implying that
there is something substantially different between the reference to S.
No. 1129 and the reference to H. No. 11197. From this premise, they
conclude that R.A. No. 7716 originated both in the House and in the
Senate and that it is the product of two "half-baked bills because
neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."
In point of fact, in several instances the provisions of S. No. 1630,
clearly appear to be mere amendments of the corresponding
provisions of H. No. 11197. The very tabular comparison of the
provisions of H. No. 11197 and S. No. 1630 attached as Supplement A
to the basic petition of petitioner Tolentino, while showing
differences between the two bills, at the same time indicates that the
provisions of the Senate bill were precisely intended to be
amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630.
Because the Senate bill was a mere amendment of the House bill, H.
No. 11197 in its original form did not have to pass the Senate on
second and three readings. It was enough that after it was passed on
first reading it was referred to the Senate Committee on Ways and
Means. Neither was it required that S. No. 1630 be passed by the
House of Representatives before the two bills could be referred to the
Conference Committee.
There is legislative precedent for what was done in the case of H. No.
11197 and S. No. 1630. When the House bill and Senate bill, which
became R.A. No. 1405 (Act prohibiting the disclosure of bank
deposits), were referred to a conference committee, the question was
raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the
other and vice versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to
procedure: If a House bill is passed by the House but not passed by the
Senate, and a Senate bill of a similar nature is passed in the Senate
but never passed in the House, can the two bills be the subject of a
conference, and can a law be enacted from these two bills? I
understand that the Senate bill in this particular instance does not
refer to investments in government securities, whereas the bill in the
House, which was introduced by the Speaker, covers two subject
matters: not only investigation of deposits in banks but also
investigation of investments in government securities. Now, since the
two bills differ in their subject matter, I believe that no law can be
enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel,
Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is
precisely in cases like this where a conference should be had. If the
House bill had been approved by the Senate, there would have been
no need of a conference; but precisely because the Senate passed
another bill on the same subject matter, the conference committee
had to be created, and we are now considering the report of that
committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No.
11197 and S. No. 1630 are distinct and unrelated measures also
accounts for the petitioners' (Kilosbayan's and PAL's) contention that
because the President separately certified to the need for the
immediate enactment of these measures, his certification was
ineffectual and void. The certification had to be made of the version
of the same revenue bill which at the moment was being considered.
Otherwise, to follow petitioners' theory, it would be necessary for the
President to certify as many bills as are presented in a house of
Congress even though the bills are merely versions of the bill he has
already certified. It is enough that he certifies the bill which, at the
time he makes the certification, is under consideration. Since on
March 22, 1994 the Senate was considering S. No. 1630, it was that
bill which had to be certified. For that matter on June 1, 1993 the
President had earlier certified H. No. 9210 for immediate enactment
because it was the one which at that time was being considered by
the House. This bill was later substituted, together with other bills, by
H. No. 11197.
As to what Presidential certification can accomplish, we have already
explained in the main decision that the phrase "except when the
President certifies to the necessity of its immediate enactment, etc."
in Art. VI, §26 (2) qualifies not only the requirement that "printed
copies [of a bill] in its final form [must be] distributed to the members
three days before its passage" but also the requirement that before a
bill can become a law it must have passed "three readings on
separate days." There is not only textual support for such
construction but historical basis as well.
Art. VI, §21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been
printed and copies thereof in its final form furnished its Members at
least three calendar days prior to its passage, except when the
President shall have certified to the necessity of its immediate
enactment. Upon the last reading of a bill, no amendment thereof
shall be allowed and the question upon its passage shall be taken
immediately thereafter, and the yeas and nays entered on the
Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII,
§19 (2):
(2) No bill shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been
distributed to the Members three days before its passage, except
when the Prime Minister certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall be allowed, and the
vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was
adopted in Art. VI, §26 (2) of the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof in
its final form have been distributed to its Members three days before
its passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon
the last reading of a bill, no amendment thereto shall be allowed, and
the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all
cases three readings on separate days are required and a bill has to be
printed in final form before it can be passed, the need for a law may
be rendered academic by the occurrence of the very emergency or
public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an
emergency, especially in a country like the Philippines where budget
deficit is a chronic condition. Even if this were the case, an enormous
budget deficit does not make the need for R.A. No. 7716 any less
urgent or the situation calling for its enactment any less an
emergency.
Apparently, the members of the Senate (including some of the
petitioners in these cases) believed that there was an urgent need for
consideration of S. No. 1630, because they responded to the call of
the President by voting on the bill on second and third readings on
the same day. While the judicial department is not bound by the
Senate's acceptance of the President's certification, the respect due
coequal departments of the government in matters committed to
them by the Constitution and the absence of a clear showing of grave
abuse of discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough
consideration in the Senate where it was discussed for six days. Only
its distribution in advance in its final printed form was actually
dispensed with by holding the voting on second and third readings on
the same day (March 24, 1994). Otherwise, sufficient time between
the submission of the bill on February 8, 1994 on second reading and
its approval on March 24, 1994 elapsed before it was finally voted on
by the Senate on third reading.
The purpose for which three readings on separate days is required is
said to be two-fold: (1) to inform the members of Congress of what
they must vote on and (2) to give them notice that a measure is
progressing through the enacting process, thus enabling them and
others interested in the measure to prepare their positions with
reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY
CONSTRUCTION §10.04, p. 282 (1972)). These purposes were
substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by
Kilosbayan, Inc. and the Movement of Attorneys for Brotherhood,
Integrity and Nationalism, Inc. (MABINI)) that in violation of the
constitutional policy of full public disclosure and the people's right to
know (Art. II, §28 and Art. III, §7) the Conference Committee met for
two days in executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was
customary to hold such sessions with only the conferees and their
staffs in attendance and it was only in 1975 when a new rule was
adopted requiring open sessions. Unlike its American counterpart, the
Philippine Congress has not adopted a rule prescribing open hearings
for conference committees.
It is nevertheless claimed that in the United States, before the
adoption of the rule in 1975, at least staff members were present.
These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the
conference were excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as to give
petitioner Kilosbayan basis for claiming that even in secret diplomatic
negotiations involving state interests, conferees keep notes of their
meetings. Above all, the public's right to know was fully served
because the Conference Committee in this case submitted a report
showing the changes made on the differing versions of the House and
the Senate.
Petitioners cite the rules of both houses which provide that
conference committee reports must contain "a detailed, sufficiently
explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee
Report. The members of both houses could thus ascertain what
changes had been made in the original bills without the need of a
statement detailing the changes.
The same question now presented was raised when the bill which
became R.A. No. 1400 (Land Reform Act of 1955) was reported by the
Conference Committee. Congressman Bengzon raised a point of
order. He said:
MR. BENGZON. My point of order is that it is out of order to consider
the report of the conference committee regarding House Bill No.
2557 by reason of the provision of Section 11, Article XII, of the Rules
of this House which provides specifically that the conference report
must be accompanied by a detailed statement of the effects of the
amendment on the bill of the House. This conference committee
report is not accompanied by that detailed statement, Mr. Speaker.
Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in
connection with the point of order raised by the gentleman from
Pangasinan.
There is no question about the provision of the Rule cited by the
gentleman from Pangasinan, but this provision applies to those cases
where only portions of the bill have been amended. In this case before
us an entire bill is presented; therefore, it can be easily seen from the
reading of the bill what the provisions are. Besides, this procedure has
been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into
the reason for the provisions of the Rules, and the reason for the
requirement in the provision cited by the gentleman from Pangasinan
is when there are only certain words or phrases inserted in or deleted
from the provisions of the bill included in the conference report, and
we cannot understand what those words and phrases mean and their
relation to the bill. In that case, it is necessary to make a detailed
statement on how those words and phrases will affect the bill as a
whole; but when the entire bill itself is copied verbatim in the
conference report, that is not necessary. So when the reason for the
Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows
that when the ruling was appealed, it was upheld by viva voce and
when a division of the House was called, it was sustained by a vote of
48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to
insert new provisions as long as these are germane to the subject of
the conference. As this Court held in Philippine Judges Association
v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice
Cruz, the jurisdiction of the conference committee is not limited to
resolving differences between the Senate and the House. It may
propose an entirely new provision. What is important is that its report
is subsequently approved by the respective houses of Congress. This
Court ruled that it would not entertain allegations that, because new
provisions had been added by the conference committee, there was
thereby a violation of the constitutional injunction that "upon the last
reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners'
charges that an amendment was made upon the last reading of the
bill that eventually became R.A. No. 7354 and that copies thereof in
its final form were not distributed among the members of each
House. Both the enrolled bill and the legislative journals certify that
the measure was duly enacted i.e., in accordance with Article VI, Sec.
26 (2) of the Constitution. We are bound by such official assurances
from a coordinate department of the government, to which we owe,
at the very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference
committees in the Philippines in a 1979 study:
Conference committees may be of two types: free or instructed.
These committees may be given instructions by their parent bodies or
they may be left without instructions. Normally the conference
committees are without instructions, and this is why they are often
critically referred to as "the little legislatures." Once bills have been
sent to them, the conferees have almost unlimited authority to
change the clauses of the bills and in fact sometimes introduce new
measures that were not in the original legislation. No minutes are
kept, and members' activities on conference committees are difficult
to determine. One congressman known for his idealism put it this
way: "I killed a bill on export incentives for my interest group [copra]
in the conference committee but I could not have done so anywhere
else." The conference committee submits a report to both houses,
and usually it is accepted. If the report is not accepted, then the
committee is discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES
AND LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND
M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of
conference committees. We cite it only to say that conference
committees here are no different from their counterparts in the
United States whose vast powers we noted in Philippine Judges
Association v. Prado, supra. At all events, under Art. VI, §16(3) each
house has the power "to determine the rules of its proceedings,"
including those of its committees. Any meaningful change in the
method and procedures of Congress or its committees must therefore
be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A.
No. 7716 violates Art. VI, §26 (1) of the Constitution which provides
that "Every bill passed by Congress shall embrace only one subject
which shall be expressed in the title thereof." PAL contends that the
amendment of its franchise by the withdrawal of its exemption from
the VAT is not expressed in the title of the law.
Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its
gross revenue "in lieu of all other taxes, duties, royalties, registration,
license and other fees and charges of any kind, nature, or description,
imposed, levied, established, assessed or collected by any municipal,
city, provincial or national authority or government agency, now or in
the future."
PAL was exempted from the payment of the VAT along with other
entities by §103 of the National Internal Revenue Code, which
provides as follows:
§103. Exempt transactions. — The following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that
granted to PAL, by amending §103, as follows:
§103. Exempt transactions. — The following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of §103 is expressed in the title of R.A. No. 7716
which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-
ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER
PURPOSES," Congress thereby clearly expresses its intention to
amend any provision of the NIRC which stands in the way of
accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in
the title of the law by specific reference to P.D. No. 1590. It is
unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to
amend the pertinent provisions of the NIRC, among which is §103(q),
in order to widen the base of the VAT. Actually, it is the bill which
becomes a law that is required to express in its title the subject of
legislation. The titles of H. No. 11197 and S. No. 1630 in fact
specifically referred to §103 of the NIRC as among the provisions
sought to be amended. We are satisfied that sufficient notice had
been given of the pendency of these bills in Congress before they
were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as
that now made by PAL was rejected. R.A. No. 7354 is entitled AN ACT
CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS
POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a provision repealing all
franking privileges. It was contended that the withdrawal of franking
privileges was not expressed in the title of the law. In holding that
there was sufficient description of the subject of the law in its title,
including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of
the general objectives of the statute to be expressed in its title would
not only be unreasonable but would actually render legislation
impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has
been correctly explained:
The details of a legislative act need not be specifically stated in its
title, but matter germane to the subject as expressed in the title, and
adopted to the accomplishment of the object in view, may properly
be included in the act. Thus, it is proper to create in the same act the
machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of its
execution. If such matters are properly connected with the subject as
expressed in the title, it is unnecessary that they should also have
special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that,
as a general proposition, the press is not exempt from the taxing
power of the State and that what the constitutional guarantee of free
press prohibits are laws which single out the press or target a group
belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the
publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the
press from the VAT while maintaining those granted to others, the
law discriminates against the press. At any rate, it is averred, "even
nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to say that since
the law granted the press a privilege, the law could take back the
privilege anytime without offense to the Constitution. The reason is
simple: by granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the
press to the same tax burden to which other businesses have long ago
been subject. It is thus different from the tax involved in the cases
invoked by the PPI. The license tax in Grosjean v. American Press Co.,
297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory
because it was laid on the gross advertising receipts only of
newspapers whose weekly circulation was over 20,000, with the
result that the tax applied only to 13 out of 124 publishers in
Louisiana. These large papers were critical of Senator Huey Long who
controlled the state legislature which enacted the license tax. The
censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota
Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was
found to be discriminatory because although it could have been made
liable for the sales tax or, in lieu thereof, for the use tax on the
privilege of using, storing or consuming tangible goods, the press was
not. Instead, the press was exempted from both taxes. It was,
however, later made to pay a special use tax on the cost of paper and
ink which made these items "the only items subject to the use tax
that were component of goods to be sold at retail." The U.S. Supreme
Court held that the differential treatment of the press "suggests that
the goal of regulation is not related to suppression of expression, and
such goal is presumptively unconstitutional." It would therefore
appear that even a law that favors the press is constitutionally
suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No.
273 are withdrawn "absolutely and unqualifiedly" by R.A. No. 7716.
Other exemptions from the VAT, such as those previously granted to
PAL, petroleum concessionaires, enterprises registered with the
Export Processing Zone Authority, and many more are likewise totally
withdrawn, in addition to exemptions which are partially withdrawn,
in an effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is
highlighted by the fact that transactions, which are profit oriented,
continue to enjoy exemption under R.A. No. 7716. An enumeration of
some of these transactions will suffice to show that by and large this
is not so and that the exemptions are granted for a purpose. As the
Solicitor General says, such exemptions are granted, in some cases, to
encourage agricultural production and, in other cases, for the
personal benefit of the end-user rather than for profit. The exempt
transactions are:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their
original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of
feeds).
(b) Goods used for personal consumption or use (household and
personal effects of citizens returning to the Philippines) or for
professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be
used for manufacture of petroleum products subject to excise tax and
services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary
services, and services rendered under employer-employee
relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international
agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not
discriminate against the press because "even nondiscriminatory
taxation on constitutionally guaranteed freedom is unconstitutional."
PPI cites in support of this assertion the following statement
in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The
protection afforded by the First Amendment is not so restricted. A
license tax certainly does not acquire constitutional validity because it
classifies the privileges protected by the First Amendment along with
the wares and merchandise of hucksters and peddlers and treats
them all alike. Such equality in treatment does not save the
ordinance. Freedom of press, freedom of speech, freedom of religion
are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an
ordinary tax, is mainly for regulation. Its imposition on the press is
unconstitutional because it lays a prior restraint on the exercise of its
right. Hence, although its application to others, such those selling
goods, is valid, its application to the press or to religious groups, such
as the Jehovah's Witnesses, in connection with the latter's sale of
religious books and pamphlets, is unconstitutional. As the U.S.
Supreme Court put it, "it is one thing to impose a tax on income or
property of a preacher. It is quite another thing to exact a tax on him
for delivering a sermon."
A similar ruling was made by this Court in American Bible Society
v. City of Manila, 101 Phil. 386 (1957) which invalidated a city
ordinance requiring a business license fee on those engaged in the
sale of general merchandise. It was held that the tax could not be
imposed on the sale of bibles by the American Bible Society without
restraining the free exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on
the exercise of a privilege, much less a constitutional right. It is
imposed on the sale, barter, lease or exchange of goods or properties
or the sale or exchange of services and the lease of properties purely
for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay
income tax or subject it to general regulation is not to violate its
freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it
sells bibles, the proceeds derived from the sales are used to subsidize
the cost of printing copies which are given free to those who cannot
afford to pay so that to tax the sales would be to increase the price,
while reducing the volume of sale. Granting that to be the case, the
resulting burden on the exercise of religious freedom is so incidental
as to make it difficult to differentiate it from any other economic
imposition that might make the right to disseminate religious
doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an
impermissible burden on the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by §107
of the NIRC, as amended by §7 of R.A. No. 7716, although fixed in
amount, is really just to pay for the expenses of registration and
enforcement of provisions such as those relating to accounting in
§108 of the NIRC. That the PBS distributes free bibles and therefore is
not liable to pay the VAT does not excuse it from the payment of this
fee because it also sells some copies. At any rate whether the PBS is
liable for the VAT must be decided in concrete cases, in the event it is
assessed this tax by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and
contract clauses and the rule on taxation. CREBA asserts that R.A. No.
7716 (1) impairs the obligations of contracts, (2) classifies transactions
as covered or exempt without reasonable basis and (3) violates the
rule that taxes should be uniform and equitable and that Congress
shall "evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application
of the tax to existing contracts of the sale of real property by
installment or on deferred payment basis would result in substantial
increases in the monthly amortizations to be paid because of the 10%
VAT. The additional amount, it is pointed out, is something that the
buyer did not anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early
case: "Authorities from numerous sources are cited by the plaintiffs,
but none of them show that a lawful tax on a new subject, or an
increased tax on an old one, interferes with a contract or impairs its
obligation, within the meaning of the Constitution. Even though such
taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose
additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of any
existing contract in its true legal sense." (La Insular v. Machuca Go-
Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not only
existing laws but also "the reservation of the essential attributes of
sovereignty, is . . . read into contracts as a postulate of the legal
order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA
135, 147 (1968)) Contracts must be understood as having been made
in reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the defeat of
that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885
(1935)).
It is next pointed out that while §4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items,
petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The
sale of real property for socialized and low-cost housing is exempted
from the tax, but CREBA claims that real estate transactions of "the
less poor," i.e., the middle class, who are equally homeless, should
likewise be exempted.
The sale of food items, petroleum, medical and veterinary services,
etc., which are essential goods and services was already exempt
under §103, pars. (b) (d) (1) of the NIRC before the enactment of R.A.
No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner
to the payment of the VAT. Moreover, there is a difference between
the "homeless poor" and the "homeless less poor" in the example
given by petitioner, because the second group or middle class can
afford to rent houses in the meantime that they cannot yet buy their
own homes. The two social classes are thus differently situated in life.
"It is inherent in the power to tax that the 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.'" (Lutz v. Araneta, 98
Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912
(1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng
mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA
371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No.
7716 also violates Art. VI, §28(1) which provides that "The rule of
taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or
kinds of property of the same class be taxed at the same rate. The
taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it
is enough that the statute or ordinance applies equally to all persons,
forms and corporations placed in similar situation. (City of Baguio v.
De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A.
No. 7716 was enacted. R.A. No. 7716 merely expands the base of the
tax. The validity of the original VAT Law was questioned in Kapatiran
ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383
(1988) on grounds similar to those made in these cases, namely, that
the law was "oppressive, discriminatory, unjust and regressive in
violation of Art. VI, §28(1) of the Constitution." (At 382) Rejecting the
challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid
tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and
services sold to the public, which are not exempt, at the constant rate
of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of
goods or services by persons engaged in business with an aggregate
gross annual sales exceeding P200,000.00. Small corner sari-sari
stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products, so that the costs
of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within
the reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made
by the Cooperative Union of the Philippines, Inc. (CUP), while
petitioner Juan T. David argues that the law contravenes the mandate
of Congress to provide for a progressive system of taxation because
the law imposes a flat rate of 10% and thus places the tax burden on
all taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall "evolve a progressive system of taxation." The
constitutional provision has been interpreted to mean simply that
"direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized." (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed,
the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the
oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, §17(1) of the 1973 Constitution from which
the present Art. VI, §28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid them by imposing
such taxes according to the taxpayers' ability to pay. In the case of the
VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, §3,
amending §102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).
Thus, the following transactions involving basic and essential goods
and services are exempted from the VAT:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their
original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of
feeds).
(b) Goods used for personal consumption or use (household and
personal effects of citizens returning to the Philippines) and or
professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be
used for manufacture of petroleum products subject to excise tax and
services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary
services, and services rendered under employer-employee
relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international
agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are
those which involve goods and services which are used or availed of
mainly by higher income groups. These include real properties held
primarily for sale to customers or for lease in the ordinary course of
trade or business, the right or privilege to use patent, copyright, and
other similar property or right, the right or privilege to use industrial,
commercial or scientific equipment, motion picture films, tapes and
discs, radio, television, satellite transmission and cable television
time, hotels, restaurants and similar places, securities, lending
investments, taxicabs, utility cars for rent, tourist buses, and other
common carriers, services of franchise grantees of telephone and
telegraph.
The problem with CREBA's petition is that it presents broad claims of
constitutional violations by tendering issues not at retail but at
wholesale and in the abstract. There is no fully developed record
which can impart to adjudication the impact of actuality. There is no
factual foundation to show in the concrete the application of the law
to actual contracts and exemplify its effect on property rights. For the
fact is that petitioner's members have not even been assessed the
VAT. Petitioner's case is not made concrete by a series of hypothetical
questions asked which are no different from those dealt with in
advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here, does not suffice. There must
be a factual foundation of such unconstitutional taint. Considering
that petitioner here would condemn such a provision as void on its
face, he has not made out a case. This is merely to adhere to the
authoritative doctrine that where the due process and equal
protection clauses are invoked, 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.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a
concrete case. It may be that postponement of adjudication would
result in a multiplicity of suits. This need not be the case, however.
Enforcement of the law may give rise to such a case. A test case,
provided it is an actual case and not an abstract or hypothetical one,
may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for
adjudicating abstract issues. Otherwise, adjudication would be no
different from the giving of advisory opinion that does not really
settle legal issues.
We are told that it is our duty under Art. VIII, §1, ¶2 to decide
whenever a claim is made that "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." This duty can only
arise if an actual case or controversy is before us. Under Art . VIII, §5
our jurisdiction is defined in terms of "cases" and all that Art. VIII, §1,
¶2 can plausibly mean is that in the exercise of that jurisdiction we
have the judicial power to determine questions of grave abuse of
discretion by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial
power," which is "the power of a court to hear and decide cases
pending between parties who have the right to sue and be sued in the
courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as
distinguished from legislative and executive power. This power
cannot be directly appropriated until it is apportioned among several
courts either by the Constitution, as in the case of Art. VIII, §5, or by
statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and
the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power
thus apportioned constitutes the court's "jurisdiction," defined as
"the power conferred by law upon a court or judge to take cognizance
of a case, to the exclusion of all others." (United States v. Arceo, 6
Phil. 29 (1906)) Without an actual case coming within its jurisdiction,
this Court cannot inquire into any allegation of grave abuse of
discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other
hand, the Cooperative Union of the Philippines (CUP), after briefly
surveying the course of legislation, argues that it was to adopt a
definite policy of granting tax exemption to cooperatives that the
present Constitution embodies provisions on cooperatives. To subject
cooperatives to the VAT would therefore be to infringe a
constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was
promulgated exempting cooperatives from the payment of income
taxes and sales taxes but in 1984, because of the crisis which menaced
the national economy, this exemption was withdrawn by P.D. No.
1955; that in 1986, P.D. No. 2008 again granted cooperatives
exemption from income and sales taxes until December 31, 1991, but,
in the same year, E.O. No. 93 revoked the exemption; and that finally
in 1987 the framers of the Constitution "repudiated the previous
actions of the government adverse to the interests of the
cooperatives, that is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening the
cooperatives by way of the grant of tax exemptions," by providing the
following in Art. XII:
§1. The goals of the national economy are a more equitable
distribution of opportunities, income, and wealth; a sustained
increase in the amount of goods and services produced by the nation
for the benefit of the people; and an expanding productivity as the
key to raising the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based
on sound agricultural development and agrarian reform, through
industries that make full and efficient use of human and natural
resources, and which are competitive in both domestic and foreign
markets. However, the State shall protect Filipino enterprises against
unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all
regions of the country shall be given optimum opportunity to
develop. Private enterprises, including corporations, cooperatives,
and similar collective organizations, shall be encouraged to broaden
the base of their ownership.
§15. The Congress shall create an agency to promote the viability and
growth of cooperatives as instruments for social justice and economic
development.
Petitioner's contention has no merit. In the first place, it is not true
that P.D. No. 1955 singled out cooperatives by withdrawing their
exemption from income and sales taxes under P.D. No. 175, §5. What
P.D. No. 1955, §1 did was to withdraw the exemptions and
preferential treatments theretofore granted to private business
enterprises in general, in view of the economic crisis which then beset
the nation. It is true that after P.D. No. 2008, §2 had restored the tax
exemptions of cooperatives in 1986, the exemption was again
repealed by E.O. No. 93, §1, but then again cooperatives were not the
only ones whose exemptions were withdrawn. The withdrawal of tax
incentives applied to all, including government and private entities. In
the second place, the Constitution does not really require that
cooperatives be granted tax exemptions in order to promote their
growth and viability. Hence, there is no basis for petitioner's assertion
that the government's policy toward cooperatives had been one of
vacillation, as far as the grant of tax privileges was concerned, and
that it was to put an end to this indecision that the constitutional
provisions cited were adopted. Perhaps as a matter of policy
cooperatives should be granted tax exemptions, but that is left to the
discretion of Congress. If Congress does not grant exemption and
there is no discrimination to cooperatives, no violation of any
constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the
Constitution cooperatives are exempt from taxation. Such theory is
contrary to the Constitution under which only the following are
exempt from taxation: charitable institutions, churches and
parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit
educational institutions by reason of Art. XIV, §4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is
that it denies cooperatives the equal protection of the law because
electric cooperatives are exempted from the VAT. The classification
between electric and other cooperatives (farmers cooperatives,
producers cooperatives, marketing cooperatives, etc.) apparently
rests on a congressional determination that there is greater need to
provide cheaper electric power to as many people as possible,
especially those living in the rural areas, than there is to provide them
with other necessities in life. We cannot say that such classification is
unreasonable.
We have carefully read the various arguments raised against the
constitutional validity of R.A. No. 7716. We have in fact taken the
extraordinary step of enjoining its enforcement pending resolution of
these cases. We have now come to the conclusion that the law suffers
from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not
constitute a grave abuse of discretion. Any question as to its
necessity, desirability or expediency must be addressed to Congress
as the body which is electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the ultimate guardians of the
liberties and welfare of the people in quite as great a degree as are
the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267,
270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No.
115543 does in arguing that we should enforce the public
accountability of legislators, that those who took part in passing the
law in question by voting for it in Congress should later thrust to the
courts the burden of reviewing measures in the flush of enactment.
This Court does not sit as a third branch of the legislature, much less
exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality

and the temporary restraining order previously issued is hereby lifted.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 204142 November 19, 2014
HONDA CARS PHILIPPINES, INC., Petitioner,
vs.
HONDA CARS TECHNICAL SPECIALIST AND SUPERVISORS UNION, Respondent.
DECISION
BRION, J.:
We resolve the present petition for review on certiorari1 seeking to nullify the
March 30, 2012 decision2 and October 25, 2012 resolution3 of the Court of
Appeals (CA) in CA-G.R. SP No. 109297. These rulings were penned by
Associate Justice Noel G. Tijam and concurred in by Associate Justices Romeo
F. Barza and Edwin D. Sorongon.
The Factual Antecedents
On December 8, 2006, petitioner Honda Cars Philippines, Inc., (company) and
respondent Honda Cars Technical Specialists and Supervisory Union (union),
the exclusive collective bargaining representative of the company’s
supervisors and technical specialists, entered into a collective bargaining
agreement (CBA) effective April 1, 2006 to March 31, 2011.4
Prior to April 1, 2005, the union members were receiving a transportation
allowance of 3,300.00 a month. On September 3, 2005, the company and the
union entered into a Memorandum of Agreement5 (MOA) converting the
transportation allowance into a monthly gasoline allowance starting at 125
liters effective April 1,2005. The allowance answers for the gasoline consumed
by the union members for official business purposes and for home to office
travel and vice-versa. The company claimed that the grant of the gasoline
allowance is tied up to a similar company policy for managers and assistant
vice-presidents (AVPs), which provides that in the event the amount of
gasoline is not fully consumed, the gasoline not used may be converted into
cash, subject to whatever tax may be applicable. Since the cash conversion is
paid in the monthly payroll as an excess gas allowance, the company considers
the amount as part of the managers’ and AVPs’ compensation that is subject
to income tax on compensation.
Accordingly, the company deducted from the union members’ salaries the
withholding tax corresponding to the conversion to cash of their unused
gasoline allowance.
The union, on the other hand, argued that the gasoline allowance for its
members is a "negotiated item" under Article XV, Section 15 of the new CBA
on fringe benefits. It thus opposed the company’s practice of treating the
gasoline allowance that, when converted into cash, is considered as
compensation income that is subject to withholding tax.
The disagreement between the company and the union on the matter resulted
in a grievance which they referred to the CBA grievance procedure for
resolution. As it remained unsettled there, they submitted the issue to a panel
of voluntary arbitrators as required by the CBA.
The Voluntary Arbitration Decision
On February 6, 2009, the Panel of Voluntary Arbitrators6 rendered a
decision/award7 declaring that the cash conversion of the unused gasoline
allowance enjoyed by the members of the union is a fringe benefit subject to
the fringe benefit tax, not to income tax. The panel held that the deductions
made by the company shall be considered as advances subject to refund in
future remittances of withholding taxes.
The company moved for partial reconsideration of the decision, but the panel
denied the motion in its June 3, 2009 order,8 prompting the company to appeal
to the CA through a Rule 43 petition for review. The core issue in this appeal
was whether the cash conversion of the unused gasoline allowance is a fringe
benefit subject to the fringe benefit tax, and not to a compensation income
subject to withholding tax.
The CA Ruling
The CA Eight Division denied the petition and upheld with modification the
voluntary arbitration decision. It agreed with the panel’s ruling that the cash
conversion of the unused gasoline allowance is a fringe benefit granted under
Section 15, Article XV of the CBA on "Fringe Benefits." Accordingly, the CA held
that the benefit is not compensation income subject to withholding tax.
This conclusion notwithstanding, the CA clarified that while the gasoline
allowance or the cash conversion of its unused portion is a fringe benefit, it is
"not necessarily subject to fringe benefit tax."9 It explained that Section 33 (A)
of the National Internal Revenue Code (NIRC) of 1997 imposed a fringe benefit
tax, effective January 1, 2000 and thereafter, on the grossed-up monetary
value of fringe benefit furnished or granted to the employee (except rank-and-
file employees) by the employer (unless the fringe benefit is required by the
nature of, or necessary to the trade, business or profession of the employer, or
when the fringe benefit is for the convenience or advantage of the employer).
According to the CA, "it is undisputed that the reason behind the grant of the
gasoline allowance to the union members is primarily for the convenience and
advantage of Honda, their employer."10 It thus declared that the gasoline
allowance or the cash conversion of the unused portion thereof is not subject
to fringe benefit tax.11
The Petition
Its motion for reconsideration denied, the company appeals to this Court to
set aside the CA’s dispositions, raising the very same issue it brought to the
appellate court — whether the cash conversion of the gasoline allowance of
the union members is a fringe benefit or compensation income, for taxation
purposes.
The company reiterates its position that the cash conversion of the union
members’ gasoline allowance is compensation income subject to income tax,
and not to a fringe benefit tax. It argues that the tax treatment of a benefit
extended by the employer to the employees is governed by law and the
applicable tax regulations, and notby the nomenclature or definition provided
by the parties. The fact that the CBA erroneously classified the gasoline
allowance as a fringe benefit is immaterial as it is the law – Section 33 of the
NIRC – that provides for the legal classification of the benefit.
It adds that there is no basis for the CA conclusion that the cash conversion of
the unused gasoline allowance redounds to the benefit of management.
Common sense dictates that it is the individual union members who solely
benefit from the cash conversion of the gasoline allowance as it goes into their
compensation income.
In any event, the company submits that even assuming that the cash
conversion of the unused gasoline allowance is a tax-exempt fringe benefit
and that it erred in withholding the income taxes due, still the union members
would have no cause of action against it for the refund of the amounts
withheld from them and remitted to the Bureau of Internal Revenue (BIR).
Citing Section 204 of the NIRC, the company contends that an action for the
refund of an erroneous withholding and payment of taxes should be in the
nature of a tax refund claim with the BIR. It further contends that when it
withheld the income tax due from the cash conversion of the unused gasoline
allowance of the union members, it was simply acting as an agent of the
government for the collection and payment of taxes due from the members.
The Union’s Position
In its Comment12 dated April 19, 2013, the union argues for the denial of the
petition for lack of merit. Itposits that its members’ gasoline allowance and its
unused gas equivalent are fringe benefits under the CBA and the law [Section
33 (A) of NIRC] and is therefore not subject to withholding tax on
compensation income. Moreover, under that law and BIR Revenue Regulations
2-98, the same benefit is not subject to the fringe benefit tax because it is
required by the nature of, or necessary to the trade or business of the
company.
The union further submits that in 2007, the BIR ruled that fixed and/or pre-
computed transportation allowance given to supervisory employees in pursuit
of the business of the company, shall not be taxable as compensation or fringe
benefits of the employees.13 It maintains that the gasoline allowance is already
pre-computed by the company as sufficient to cover the gasoline consumption
of the supervisors whenever they perform work for the company. The fact that
the company allowed its members to convert it to cash when not fully
consumed is no longer their problem because the benefit was already given.
Our Ruling
We partly grant the petition.
The Voluntary Arbitrator has no
jurisdiction to settle tax matters
The Labor Code vests the Voluntary Arbitrator original and exclusive
jurisdiction to hear and decide all unresolved grievances arising from the
interpretation or implementation of the Collective Bargaining Agreement and
those arising from the interpretation or enforcement of company personnel
policies.14 Upon agreement of the parties, the Voluntary Arbitrator shall also
hear and decide allother labor disputes, including unfair labor practices and
bargaining deadlocks.15
In short, the Voluntary Arbitrator’s jurisdiction is limited to labor disputes.
Labor dispute means "any controversy or matter concerning terms and
conditions of employment or the association or representation of persons in
negotiating, fixing, maintaining, changing, or arranging the terms and
conditions of employment, regardless of whether the disputants stand in the
proximate relation of employer and employee."16
The issues raised before the Panel of Voluntary Arbitrators are: (1) whether
the cash conversion of the gasoline allowance shall be subject to fringe benefit
tax or the graduated income tax rate on compensation; and (2) whether the
company wrongfully withheld income tax on the converted gas allowance.
The Voluntary Arbitrator has no competence to rule on the taxability of the
gas allowance and on the propriety of the withholding of tax. These issues are
clearly tax matters, and do not involve labor disputes. To be exact, they
involve tax issues within a labor relations setting as they pertain to questions
of law on the application of Section 33 (A) of the NIRC. They do not require the
application of the Labor Code or the interpretation of the MOA and/or
company personnel policies. Furthermore, the company and the union cannot
agree or compromise on the taxability of the gas allowance. Taxation is the
State’s inherent power; its imposition cannot be subject to the will of the
parties.

Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and
original jurisdiction to interpret the provisions of the NIRC and other tax laws,
subject to review by the Secretary of Finance. Consequently, if the company
and/or the union desire/s to seek clarification of these issues, it/they should
have requested for a tax ruling17 from the Bureau of Internal Revenue (BIR).
Any revocation, modification or reversal of the CIR’s ruling shall not be given
retroactive application if the revocation, modification or reversal will be
prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material

facts from his return or any document required of him by the BIR;

(b) Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.18

On the other hand, if the union disputes the withholding of tax and desires a
refund of the withheld tax, it should have filed an administrative claim for
refund with the CIR. Paragraph 2, Section 4 of the NIRC expressly vests the CIR
original jurisdiction over refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other tax matters. The union
has no cause of action against the company

Under the withholding tax system, the employer as the withholding agent acts
as both the government and the taxpayer’s agent. Except in the case of a
minimum wage earner, every employer has the duty to deduct and withhold
upon the employee’s wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon the CIR’s
recommendation.19 As the Government’s agent, the employer collects tax and
serves as the payee by fiction of law.20 As the employee’s agent, the employer
files the necessary income tax return and remits the tax to the Government.21

Based on these considerations, we hold that the union has no cause of action
against the company.1âwphi1 The company merely performed its statutory
duty to withhold tax based on its interpretation of the NIRC, albeit that
interpretation may later be found to be erroneous. The employer did not
violate the employee's right by the mere act of withholding the tax that may
be due the government.22

Moreover, the NIRC only holds the withholding agent personally liable for the
tax arising from the breach of his legal duty to withhold, as distinguished from
his duty to pay tax.23 Under Section 79 (B) of the NIRC, if the tax required to be
deducted and withheld is not collected from the employer, the employer shall
not be relieved from liability for any penalty or addition to the unwithheld tax.

Thus, if the BIR illegally or erroneously collected tax, the recourse of the
taxpayer, and in proper cases, the withholding agent, is against the BIR, and
not against the withholding agent.24 The union's cause of action for the refund
or non-withholding of tax is against the taxing authority, and not against the
employer. Section 229 of the NIRC provides:

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or
duress.

WHEREFORE, premises considered, we PARTLY GRANT the petition for review

on certiorari filed by Honda Cars Philippines, Inc. We REVERSE AND SET ASIDE
the March 30, 2012 decision and the October 25, 2012 resolution of the Court
of Appeals in CA-G.R. SP No. 109297. We declare NULL AND VOID the February
6, 2009 decision and June 3, 2009 resolution of the Panel of Voluntary
Arbitrators. No costs.

SO ORDERED.

ARTURO D. BRION
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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)."33The 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.45RCBC 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.65On 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.88They 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."108Petitioners-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[.]"118CODE-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 Council; all
actively taking part in the regular and special debt issuances of the
BTr and indeed regularly proposing products for issue by BTr — had
actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly, "the
sudden and drastic drop — 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. 007-04
on July 16, 2004 tend to indicate that market participants, including
the Petitioners herein, were aware of the ruling and its consequences
for the PEACe Bonds."138
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 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
lenders/purchasers;140 and the word "any" in Section 22(Y) of the
National 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
Respondents further argue that a retroactive application of the 2011
BIR Ruling will not unjustifiably prejudice petitioners.142 "[W]ith or
without the 2011 BIR 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 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
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 the fact that the regulation is erroneous or
contrary to law, such revocation shall have retroactive operation as to
affect past transactions, because a wrong construction of the law
cannot give rise to a vested right that can be invoked by a
taxpayer."145
Finally, respondents submit that "there are a number of variables and
factors affecting a capital market."146 "[C]apital market itself is
inherently unstable."147 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 justiciable issue."148
On the prayer for the temporary restraining order, respondents argue
that this order "could no longer be implemented [because] the acts
sought to be enjoined are already fait accompli."149 They add that "to
disburse the funds withheld to the Petitioners at this time would
violate Section 29[,] Article VI of the Constitution prohibiting ‘money
being paid out of the Treasury except in pursuance of an
appropriation made by law[.]’"150 "The remedy of petitioners is to
claim a tax refund under Section 204(c) of the Tax Code should their
position be upheld by the Honorable Court."151
Respondents also argue that "the implementation of the TRO would
violate Section 218 of the Tax Code in relation to Section 11 of
Republic Act No. 1125 (as amended by Section 9 of Republic Act No.
9282) which prohibits courts, except the Court of Tax Appeals, from
issuing injunctions to restrain the collection of any national internal
revenue tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC
Capital, and CODE-NGO argue that:
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 debt instruments are deposit
substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively
because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a
material term (tax exempt status) in the Bonds,
represented by the government as an inducement
and important consideration for the purchase of
the Bonds;
b) It constitutes deprivation ofproperty without
due process because there was no prior notice to
bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under
the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on
supporting activities of non-government
organizations and development of the capital
market; and
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. 9282,160such 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. 1739 168 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
In semidirect financing, a securities broker or dealer brings surplus
and deficit units together, thereby reducing information costs. 184 A
Broker185 is "an individual or financial institution who provides
information concerning possible 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 dealer187 "also
serves as a middleman between buyers and sellers, but the dealer
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 primary securities into smaller units affordable by .
. . buyers . . . and thereby 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 lender
must be willing to accept the risk, liquidity, and maturity
characteristics of the borrower’s [debt security]. There still must be a
fundamental coincidence of wants and needs between [lenders and
borrowers] for semidirect financial transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the
development of indirect financial transactions, carried out with the
help of financial intermediaries"191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and
mutual funds.192 Financial intermediaries accept funds from surplus
units and channel the funds to deficit units.193 "Depository
institutions [such as banks] accept deposits from surplus units and
provide credit to deficit units through loans and purchase of [debt]
securities."194 Nondepository institutions, like mutual funds, issue
securities of their own (usually in smaller and affordable
denominations) to surplus units and at the same time purchase debt
securities of deficit units.195 "By pooling the resources of[small savers,
a financial intermediary] can service the credit needs of large firms
simultaneously."196
The financial market, therefore, is an agglomeration of financial
transactions in 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).
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.
For example, where the financial assets involved are government
securities like bonds, the reckoning of "20 or more lenders/investors"
is made at any transaction in connection with the purchase or sale of
the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the
primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the
secondary market;
3. Subsequent sale or trading by a bondholder to another
lender/investor in the secondary market usually through a broker or
dealer; or
4. Sale by a financial intermediary-bondholder of its participation
interests in the bonds to individual or corporate lenders in the
secondary market.
When, through any of the foregoing transactions, funds are
simultaneously obtained from 20 or morelenders/investors, there is
deemed to be a public borrowing and the bonds at that point intime
are deemed deposit substitutes. Consequently, the seller is required
to withhold the 20% final withholding tax on the imputed interest
income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
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 regular income tax.
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 sheet222reveals 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. - that it may be placed in escrow as directed by this court constitutes a
Except as provided in Section 222, internal revenue taxes shall be defiance of this court’s temporary restraining order.231
assessed within three (3) years after the last day prescribed by law for
the filing of the return, and no proceeding in court without The temporary restraining order is not moot. The acts sought to be
assessment for the collection of such taxes shall be begun after the enjoined are not fait accompli. For an act to be considered fait
expiration of such period: Provided, That in a case where a return is accompli, the act must have already been fully accomplished and
filed beyond the period prescribed by law, the three (3)-year period consummated.232 It must be irreversible, e.g., demolition of
shall be counted from the day the return was filed. For purposes of properties,233 service of the penalty of imprisonment,234 and hearings
this Section, a return filed before the last day prescribed by law for on cases.235When the act sought to be enjoined has not yet been fully
the filing thereof shall be considered as filed on such last day. satisfied, and/or is still continuing in nature,236 the defense of fait
(Emphasis supplied) accomplicannot prosper.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and
The temporary restraining order enjoins the entire implementation of
Collection of Taxes.
the 2011 BIR Ruling that constitutes both the withholding and
remittance of the 20% final withholding tax to the Bureau of Internal
(a) In the case of a false or fraudulent return with intent to evade tax Revenue. Even though the Bureau of Treasury had already withheld
or of failure to file a return, the tax may be assessed, or a proceeding the 20% final withholding tax237 when it received the temporary
in court for the collection of such tax may be filed without restraining order, it had yet to remit the monies it withheld to the
assessment, at any time within ten (10) years after the discovery of Bureau of Internal Revenue, a remittance which was due only on
the falsity, fraud or omission: Provided, That in a fraud assessment November 10, 2011.238 The act enjoined by the temporary restraining
which has become final and executory, the fact of fraud shall be order had not yet been fully satisfied and was still continuing.
judicially taken cognizance of in the civil or criminal action for the
collection thereof.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001
which prescribes to national government agencies such as the Bureau
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe of Treasury the procedure for the remittance of all taxes it withheld
Bonds to 20 or more lenders/investors, the Bureau of Internal to the Bureau of Internal Revenue, a national agency shall file before
Revenue may still collect the unpaid tax from RCBC Capital/CODE- the Bureau of Internal Revenue a Tax Remittance Advice (TRA)
NGO within 10 years after the discovery of the omission. supported by withholding tax returns on or before the 10th day of the
following month after the said taxes had been withheld.240 The
In view of the foregoing, there is no need to pass upon the other Bureau of Internal Revenue shall transmit an original copy of the TRA
issues raised by petitioners and petitioners-intervenors. to the Bureau of Treasury,241which shall be the basis for recording the
remittance of the tax collection.242 The Bureau of Internal Revenue
Reiterative motion on the temporary restraining order 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
Respondents’ withholding of the
withholding tax return or TRA to provethat the 20% final withholding
20% final withholding tax on
tax was indeed remitted by the Bureau of Treasury to the Bureau of
October 18, 2011 was justified
Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-
Under the Rules of Court, court orders are required to be "served 10395244 dated October 18, 2011 submitted to this court shows:
upon the parties affected."224 Moreover, service may be made
personally or by mail.225 And, "[p]ersonal service is complete upon Account Debit Amount Credit
actual delivery [of the order.]"226This court’s temporary restraining Code Amount
order was received only on October 19, 2011, or a day after the PEACe
Bonds 442-360 35,000,000,000.00
Bonds had matured and the 20% final withholding tax on the interest
Payable-L/T,
income from the same was withheld.
Dom-Zero
Coupon
Publication of news reports in the print and broadcast media, as well T/Bonds
as on the internet, is not a recognized mode of service of pleadings,
court orders, or processes. Moreover, the news reports227 cited by (Peace
petitioners were posted minutes before the close of office hours or Bonds) – 10
late in the evening of October 18, 2011, and they did not givethe yr
exact contents of the temporary restraining order.
Sinking Fund- 198-001 30,033,792,203.59
Cash (BSF)
"[O]ne cannot be punished for violating an injunction or an order for
an injunction unless it is shown that suchinjunction or order was Due to BIR 412-002 4,966,207,796.41
served on him personally or that he had notice of the issuance or
making of such injunction or order."228 To record
redemption
At any rate, "[i]n case of doubt, a withholding agent may always of 10yr Zero
protect himself or herself by withholding the tax due"229 and return coupon
the amount of the tax withheld should it be finally determined that (Peace Bond)
the income paid is not subject to withholding.230 Hence, respondent net of the
Bureau of Treasury was justified in withholding the amount 20% final
corresponding to the 20% final withholding tax from the proceeds of withholding
the PEACe Bonds, as it received this court’s temporary restraining tax pursuant
order only on October 19, 2011, or the day after this tax had been to BIR Ruling
withheld. No.
378-2011,
Respondents’ retention of the value date,
amounts withheld is a defiance October 18,
of the temporary restraining 2011 per
order BTr letter
authority
and BSP
Nonetheless, respondents’ continued failure to release to petitioners Bank
the amount corresponding to the 20% final withholding tax in order

Statements.
The foregoing journal entry, however, does not prove that the
amount of ₱4,966,207,796.41, representing the 20% final withholding
tax on the PEACe 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 Revenue.
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: provided, that no
obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular
budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the
National Treasury not otherwise appropriated, such amounts as may
be necessary to effect payments on foreign or domestic loans, or
foreign or domestic loans whereon creditors make a call on the direct
and indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent
to government-owned or controlled corporations and/or government
financial institutions;
b. government-owned or controlled corporations and/or government
financial institutions the proceeds of which were relent to public or
private institutions;
c. government-owned or controlled corporations and/or financial
institutions and guaranteed by the Republic of the Philippines;
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.
Thus, DOF Department Order No. 141-95, as amended, states that
payment for Treasury bills and bonds shall be made through the
National Treasury’s account with the Bangko Sentral ng Pilipinas, to
wit:
Section 38. Demand Deposit Account.– The Treasurer of the
Philippines maintains a Demand Deposit Account with the Bangko
Sentral ng Pilipinas to which all 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)
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.

Respondent Bureau of Treasury is hereby ORDERED to immediately

·release and pay to the bondholders the amount corresponding-to the
20% final withholding tax that it withheld on October 18, 2011.

MARVIC M.V.F. LEONEN

Associate Justice
 EN BANC
G.R. No. 213446, July 03, 2018
CONFEDERATION FOR UNITY, RECOGNITION AND
ADVANCEMENT OF GOVERNMENT EMPLOYEES
(COURAGE); JUDICIARY EMPLOYEES ASSOCIATION OF
THE PHILIPPINES (JUDEA-PHILS); SANDIGANBAYAN
EMPLOYEES ASSOCIATION (SEA); SANDIGAN NG MGA
EMPLEYADONG NAGKAKAISA SA ADHIKAIN NG
DEMOKRATIKONG ORGANISASYON (S.E.N.A.D.O.);
ASSOCIATION OF COURT OF APPEALS EMPLOYEES
(ACAE); DEPARTMENT OF AGRARIAN REFORM
EMPLOYEES ASSOCIATION (DAREA); SOCIAL
WELFARE EMPLOYEES ASSOCIATION OF THE
PHILIPPINES-DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT (SWEAP-DSWD); DEPARTMENT OF
TRADE AND INDUSTRY EMPLOYEES UNION (DTI-EU);
KAPISANAN PARA SA KAGALINGAN NG MGA KAWANI
NG METRO MANILA DEVELOPMENT AUTHORITY (KKK-
MMDA); WATER SYSTEM EMPLOYEES RESPONSE
(WATER); CONSOLIDATED UNION OF EMPLOYEES OF
THE NATIONAL HOUSING AUTHORITIES (CUE-NHA);
AND KAPISANAN NG MGA MANGGAGAWA AT KAWANI
NG QUEZON CITY (KASAMA KA-
QC), Petitioners, v. COMMISSIONER, BUREAU OF
INTERNAL REVENUE AND THE SECRETARY,
DEPARTMENT OF FINANCE, Respondents.
NATIONAL FEDERATION OF EMPLOYEES
ASSOCIATIONS OF THE DEPARTMENT OF
AGRICULTURE (NAFEDA), REPRESENTED BY ITS
EXECUTIVE VICE PRESIDENT ROMAN M. SANCHEZ,
DEPARTMENT OF AGRICULTURE EMPLOYEES
ASSOCIATION OFFICE OF THE SECRETARY (DAEA-
OSEC), REPRESENTED BY ITS ACTING PRESIDENT
ROWENA GENETE, NATIONAL AGRICULTURAL AND
FISHERIES COUNCIL EMPLOYEES ASSOCIATION
(NAFCEA), REPRESENTED BY ITS PRESIDENT SOLIDAD
B. BERNARDO, COMMISSION ON ELECTIONS
EMPLOYEES UNION (COMELEC EU), REPRESENTED BY
ITS PRESIDENT MARK CHRISTOPHER D. RAMIREZ,
MINES AND GEOSCIENCES BUREAU EMPLOYEES
ASSOCIATION CENTRAL OFFICE (MGBEA CO),
REPRESENTED BY ITS PRESIDENT MAYBELLYN A.
ZEPEDA, LIVESTOCK DEVELOPMENT COUNCIL
EMPLOYEES ASSOCIATION (LDCEA), REPRESENTED BY
ITS PRESIDENT JOVITA M. GONZALES, ASSOCIATION
OF CONCERNED EMPLOYEES OF PHILIPPINE
FISHERIES DEVELOPMENT AUTHORITY (ACE OF
PFDA), REPRESENTED BY ITS PRESIDENT ROSARIO
DEBLOIS, Intervenors.
G.R. No. 213658, July 3, 2018
JUDGE ARMANDO A. YANGA, IN HIS PERSONAL
CAPACITY AND IN HIS CAPACITY AS PRESIDENT OF
THE RTC JUDGES ASSOCIATION OF MANILA, AND MA.
CRISTINA CARMELA I. JAPZON, IN HER PERSONAL
CAPACITY AND IN HER CAPACITY AS PRESIDENT OF
THE PHILIPPINE ASSOCIATION OF COURT
EMPLOYEES-MANILA CHAPTER, Petitioners, v. HON.
COMMISSIONER KIM S. JACINTO-HENARES, IN HER
CAPACITY AS COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondent.
THE MEMBERS OF THE ASSOCIATION OF REGIONAL
TRIAL COURT JUDGES IN ILOILO CITY,Intervenors.
DECISION
CAGUIOA, J.:
G.R. Nos. 213446 and 213658 are petitions for
Certiorari, Prohibition and/or Mandamus under Rule
65 of the Rules of Court, with Application for Issuance
of Temporary Restraining Order and/or Writ of
Preliminary Injunction, uniformly seeking to: (a) issue
a Temporary Restraining Order to enjoin the
implementation of Revenue Memorandum Order
(RMO) No. 23- 2014 dated June 20, 2014 issued by
the Commissioner of Internal Revenue (CIR); and (b)
declare null, void and unconstitutional paragraphs A,
B, C, and D of Section III, and Sections IV, VI and VII
of RMO No. 23-2014. The petition in G.R. No. 213446
also prays for the issuance of a Writ of Mandamus to
compel respondents to upgrade the P30,000.00 non-
taxable ceiling of the 13th month pay and other
benefits for the concerned officials and employees of
the government.
The Antecedents
On June 20, 2014, respondent CIR issued the assailed
RMO No. 23-2014, in furtherance of Revenue
Memorandum Circular (RMC) No. 23-2012 dated
February 14, 2012 on the "Reiteration of the
Responsibilities of the Officials and Employees of
Government Offices for the Withholding of Applicable
Taxes on Certain Income Payments and the
Imposition of Penalties for Non-Compliance Thereof,"
in order to clarify and consolidate the responsibilities
of the public sector to withhold taxes on its
transactions as a customer (on its purchases of goods
and services) and as an employer (on compensation
paid to its officials and employees) under the National
Internal Revenue Code (NIRC or Tax Code) of 1997, as
amended, and other special laws.
The Petitions
G.R. No. 213446
On August 6, 2014, petitioners Confederation for
Unity, Recognition and Advancement of Government
Employees (COURAGE), et al., organizations/unions of
government employees from the Sandiganbayan,
Senate of the Philippines, Court of Appeals,
Department of Agrarian Reform, Department of Social
Welfare and Development, Department of Trade and
Industry, Metro Manila Development Authority,
National Housing Authority and local government of
Quezon City, filed a Petition for Prohibition and
Mandamus,1 imputing grave abuse of discretion on the
part of respondent CIR in issuing RMO No. 23-2014.
According to petitioners, RMO No. 23-2014 classified
as taxable compensation, the following allowances,
bonuses, compensation for services granted to
government employees, which they alleged to be
considered by law as non-taxable fringe and de
minimis benefits, to wit:
I. Legislative Fringe Benefits
a. Anniversary Bonus
b. Additional Food Subsidy
c. 13th Month Pay
d. Food Subsidy
e. Cash Gift
f. Cost of Living Assistance
g. Efficiency Incentive Bonus
h. Financial Relief Assistance
i. Grocery Allowance
j. Hospitalization
k. Inflationary Assistance Allowance
l. Longevity Service Pay
m. Medical Allowance
n. Mid-Year Eco. Assistance
o. Productivity Incentive Benefit
p. Transition Allowance
q. Uniform Allowance
II. Judiciary Benefits
a. Additional Compensation Income
b. Extraordinary & Miscellaneous
Expenses
c. Monthly Special Allowance
d. Additional Cost of Living Allowance
(from Judiciary Development Fund)
e. Productivity Incentive Benefit
f. Grocery Allowance
g. Clothing Allowance
h. Emergency Economic Assistance
i. Year-End Bonus (13th Month Pay)
j. Cash Gift
k. Loyalty Cash Award (Milestone Bonus)
l. Christmas Allowance m. Anniversary
Bonus2
Petitioners further assert that the imposition of
withholding tax on these allowances, bonuses and
benefits, which have been allotted by the Government
to its employees free of tax for a long time, violates
the prohibition on non-diminution of benefits under
Article 100 of the Labor Code;3 and infringes upon the
fiscal autonomy of the Legislature, Judiciary,
Constitutional Commissions and Office of the
Ombudsman granted by the Constitution.4
Petitioners also claim that RMO No. 23-2014 (1)
constitutes a usurpation of legislative power and
diminishes the delegated power of local government
units inasmuch as it defines new offenses and
prescribes penalty therefor, particularly upon local
government officials;5 and (2) violates the equal
protection clause of the Constitution as it
discriminates against government officials and
employees by imposing fringe benefit tax upon their
allowances and benefits, as opposed to the allowances
and benefits of employees of the private sector, the
fringe benefit tax of which is borne and paid by their
employers.6
Further, the petition also prays for the issuance of a
writ of mandamus ordering respondent CIR to perform
its duty under Section 32(B)(7)(e)(iv) of the NIRC of
1997, as amended, to upgrade the ceiling of the 13th
month pay and other benefits for the concerned
officials and employees of the government, including
petitioners.7
G.R. No. 213658
On August 19, 2014, petitioners Armando A. Yanga,
President of the Regional Trial Court (RTC) Judges
Association of Manila, and Ma. Cristina Carmela I.
Japzon, President of the Philippine Association of
Court Employees – Manila Chapter, filed a Petition for
Certiorari and Prohibition8 as duly authorized
representatives of said associations, seeking to nullify
RMO No. 23-2014 on the following grounds: (1)
respondent CIR is bereft of any authority to issue the
assailed RMO. The NIRC of 1997, as amended,
expressly vests to the Secretary of Finance the
authority to promulgate all needful rules and
regulations for the effective enforcement of tax
provisions;9 and (2) respondent CIR committed grave
abuse of discretion amounting to lack or excess of
jurisdiction in the issuance of RMO No. 23-2014 when
it subjected to withholding tax benefits and
allowances of court employees which are tax-exempt
such as: (a) Special Allowance for Judiciary (SAJ)
under Republic Act (RA) No. 9227 and additional cost
of living allowance (AdCOLA) granted under
Presidential Decree (PD) No. 1949 which are
considered as non-taxable fringe benefits under
Section 33(A) of the NIRC of 1997, as amended; (b)
cash gift, loyalty awards, uniform and clothing
allowance and additional compensation (ADCOM)
granted to court employees which are considered de
minimis under Section 33(C)(4) of the same Code; (c)
allowances and benefits granted by the Judiciary
which are not taxable pursuant to Section 32(7)(E) of
the NIRC of 1997, as amended; and (d) expenses for
the Judiciary provided under Commission on Audit
(COA) Circular 2012-001.10
Petitioners further assert that RMO No. 23-2014
violates their right to due process of law because
while it is ostensibly denominated as a mere revenue
issuance, it is an illegal and unwarranted legislative
action which sharply increased the tax burden of
officials and employees of the Judiciary without the
benefit of being heard.11
On October 21, 2014, the Court resolved to
consolidate the foregoing cases.12
Respondents, through the Office of the Solicitor
General (OSG), filed their Consolidated Comment13 on
December 23, 2014. They argue that the petitions are
barred by the doctrine of hierarchy of courts and
petitioners failed to present any special and important
reasons or exceptional and compelling circumstance
to justify direct recourse to this Court.14
Maintaining that RMO No. 23-2014 was validly issued
in accordance with the power of the CIR to make
rulings and opinion in connection with the
implementation of internal revenue laws, respondents
aver that unlike Revenue Regulations (RRs), RMOs do
not require the approval or signature of the Secretary
of Finance, as these merely provide directives or
instructions in the implementation of stated policies,
goals, objectives, plans and programs of the
Bureau.15 According to them, RMO No. 23-2014 is in
fact a mere reiteration of the Tax Code and previous
RMOs, and can be traced back to RR No. 01-87 dated
April 2, 1987 implementing Executive Order No. 651
which was promulgated by then Secretary of Finance
Jaime V. Ongpin upon recommendation of then CIR
Bienvenido A. Tan, Jr. Thus, the CIR never usurped the
power and authority of the legislature in the issuance
of the assailed RMO.16 Also, contrary to petitioners'
assertion, the due process requirements of hearing
and publication are not applicable to RMO No. 23-
2014.17
Respondents further argue that petitioners' claim that
RMO No. 23-2014 is unconstitutional has no leg to
stand on. They explain that the constitutional
guarantee of fiscal autonomy to Judiciary and
Constitutional Commissions does not include
exemption from payment of taxes, which is the
lifeblood of the nation.18 They also aver that RMO No.
23-2014 never intended to diminish the powers of
local government units. It merely reiterates the
obligation of the government as an employer to
withhold taxes, which has long been provided by the
Tax Code.19
Moreover, respondents assert that the allowances and
benefits enumerated in Section III A, B, C, and D, are
not fringe benefits which are exempt from taxation
under Section 33 of the Tax Code, nor de
minimis benefits excluded from employees' taxable
basic salary. They explain that the SAJ under RA No.
9227 and AdCOLA under PD No. 1949 are additional
allowances which form part of the employee's basic
salary; thus, subject to withholding taxes.20
Respondents also claim that RMO No. 23-2014 does
not violate petitioners' right to equal protection of
laws as it covers all employees and officials of the
government. It does not create a new category of
taxable income nor make taxable those which are not
taxable but merely reflect those incomes which are
deemed taxable under existing laws.21
Lastly, respondents aver that mandamus will not lie to
compel respondents to increase the ceiling for tax
exemptions because the Tax Code does not impose a
mandatory duty on the part of respondents to do the
same.22
The Petitions-in-Intervention
Meanwhile, on September 11, 2014, the National
Federation of Employees Associations of the
Department of Agriculture (NAFEDA) et al., duly
registered union/association of employees of the
Department of Agriculture, National Agricultural and
Fisheries Council, Commission on Elections, Mines and
Geosciences Bureau, and Philippine Fisheries
Development Authority, claiming similar interest as
petitioners in G.R. No. 213446, filed a Petition-in-
Intervention23 seeking the nullification of items III, VI
and VII of RMO No. 23-2014 based on the following
grounds: (1) that respondent CIR acted with grave
abuse of discretion and usurped the power of the
Legislature in issuing RMO No. 23-2014 which imposes
additional taxes on government employees and
prescribes penalties for government official's failure
to withhold and remit the same;24 (2) that RMO No.
23-2014 violates the equal protection clause because
the Commission on Human Rights (CHR) was not
included among the constitutional commissions
covered by the issuance and the ADCOM of employees
of the Judiciary was subjected to withholding tax but
those received by employees of the Legislative and
Executive branches are not;25 and (3) that respondent
CIR failed to upgrade the tax exemption ceiling for
benefits under Section 32(B)(7) of the NIRC of 1997,
as amended.26
In its Comment,27 respondents, through the OSG,
sought the denial of the Petition-in-Intervention for
failure of the intervenors to seek prior leave of Court
and to demonstrate that the existing consolidated
petitions are not sufficient to protect their interest as
parties affected by the assailed RMO.28 They further
contend that, contrary to the intervenors' position, the
CHR is not exempt from the applicability of RMO No.
23-2014.29 They explain that the enumeration of
government offices and constitutional bodies covered
by RMO No. 23-2014 is not exclusive; Section III
thereof in fact states that RMO No. 23-2014 covers all
employees of the public sector.30 They also allege that
the ADCOM referred to in Section III(B) of the
assailed RMO is unique to the Judiciary; employees
and officials in the executive and legislative do not
receive this specific type of ADCOM enjoyed by the
employees and officials of the Judicial branch.31
On October 10, 2014, a Motion for Intervention with
attached Complaint in Intervention32 was filed, in G.R.
No. 213658, by the Members of the Association of
Regional Trial Court Judges in Iloilo City. Claiming that
they are similarly situated with petitioners, said
intervenors pray that the Court declare null and void
RMO No. 23-2014 and direct the Bureau of Internal
Revenue (BIR) to refund the amount illegally exacted
from the salaries/compensations of the judges by
virtue of the implementation of RMO No. 23-
2014.33The intervenors claim that RMO No. 23-2014
violates their right to due process as it takes away a
portion of their salaries and compensation without
giving them the opportunity to be heard.34 They also
aver that the implementation of RMO No. 23-2014
resulted in the diminution of their
salaries/compensation in violation of Sections 3 and
10, Article VIII of the Constitution.35
In their Comment36 to the Motion, respondents
adopted the arguments in their Consolidated Comment
and further stated that: (1) RMO No. 23-2014 does not
diminish the salaries and compensation of members of
the judiciary as it has been judicially settled that the
imposition of taxes on salaries and compensation of
judges and justices is not equivalent to diminution of
the same;37 (2) the allowances and benefits
enumerated under Section III(B) of RMO No. 23-2014
are not fringe benefits exempt from taxation;38 (3) the
AdCOLA and SAJ are not fringe benefits as these are
considered part of the basic salary of government
employees subject to income tax;39 and (4) there is no
valid ground for the refund of the taxes withheld
pursuant to RMO No. 23-2014.40
In sum, petitioners and intervenors (collectively
referred to as petitioners) argue that:
1. RMO No. 23-2014 is ultra vires insofar as:
a. Sections III and IV of RMO No. 23-
2014, for subjecting to withholding
taxes non-taxable allowances, bonuses
and benefits received by government
employees;
b. Sections VI and VII, for defining new
offenses and prescribing penalties
therefor, particularly upon government
officials;
2. RMO No. 23-2014 violates the equal protection
clause as it discriminates against government
employees;
3. RMO No. 23-2014 violates fiscal autonomy
enjoyed by government agencies;
4. The implementation of RMO No. 23-2014
results in diminution of benefits of government
employees, a violation of Article 100 of the
Labor Code; and
5. Respondents may be compelled through a writ
of mandamus to increase the tax-exempt
ceiling for 13th month pay and other benefits.
On the other hand, respondents counter that:
1. The instant consolidated petitions are barred
by the doctrine of hierarchy of courts;
2. The CIR did not abuse its discretion in the
issuance of RMO No. 23-2014 because:
a. It was issued pursuant to the CIR's
power to interpret the NIRC of 1997, as
amended, and other tax laws, under
Section 4 of the NIRC of 1997, as
amended;
b. RMO No. 23-2014 does not discriminate
against government employees. It does
not create a new category of taxable
income nor make taxable those which
are exempt;
c. RMO No. 23-2014 does not result in
diminution of benefits;
d. The allowances, bonuses or benefits
listed under Section III of the assailed
RMO are not fringe benefits;
e. The fiscal autonomy granted by the
Constitution does not include tax
exemption; and
3. Mandamus does not lie against respondents
because the NIRC of 1997, as amended, does
not impose a mandatory duty upon them to
increase the tax-exempt ceiling for 13th month
pay and other benefits.
Incidentally, in a related case docketed as A.M. No.
16-12-04-SC, the Court, on July 11, 2017, issued a
Resolution directing the Fiscal Management and
Budget Office of the Court to maintain the status
quo by the non-withholding of taxes from the benefits
authorized to be granted to judiciary officials and
personnel, namely, the Mid-year Economic Assistance,
the Year-end Economic Assistance, the Yuletide
Assistance, the Special Welfare Assistance (SWA) and
the Additional SWA, until such time that a decision is
rendered in the instant consolidated cases.
The Court's Ruling
I.
Procedural
Non-exhaustion of administrative remedies.
It is an unquestioned rule in this jurisdiction that
certiorari under Rule 65 will only lie if there is no
appeal, or any other plain, speedy and adequate
remedy in the ordinary course of law against the
assailed issuance of the CIR.41 The plain, speedy and
adequate remedy expressly provided by law is an
appeal of the assailed RMO with the Secretary of
Finance under Section 4 of the NIRC of 1997, as
amended, to wit:
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.
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 or other 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.42
The CIR's exercise of its power to interpret tax laws
comes in the form of revenue issuances, which include
RMOs that provide "directives or instructions;
prescribe guidelines; and outline processes,
operations, activities, workflows, methods and
procedures necessary in the implementation of stated
policies, goals, objectives, plans and programs of the
Bureau in all areas of operations, except
auditing."43 These revenue issuances are subject to
the review of the Secretary of Finance. In relation
thereto, Department of Finance Department Order No.
007-0244 issued by the Secretary of Finance laid down
the procedure and requirements for filing an appeal
from the adverse ruling of the CIR to the said office. A
taxpayer is granted a period of thirty (30) days from
receipt of the adverse ruling of the CIR to file with the
Office of the Secretary of Finance a request for review
in writing and under oath.45
In Asia International Auctioneers, Inc. v. Parayno,
Jr.,46 the Court dismissed the petition seeking the
nullification of RMC No. 31-2003 for failing to exhaust
administrative remedies. The Court held:
x x x It is settled that the premature invocation of the
court's intervention is fatal to one's cause of action. If
a remedy within the administrative machinery can still
be resorted to by giving the administrative officer
every opportunity to decide on a matter that comes
within his jurisdiction, then such remedy must first be
exhausted before the court's power of judicial review
can be sought. The party with an administrative
remedy must not only initiate the prescribed
administrative procedure to obtain relief but also
pursue it to its appropriate conclusion before seeking
judicial intervention in order to give the
administrative agency an opportunity to decide the
matter itself correctly and prevent unnecessary and
premature resort to the court.47
The doctrine of exhaustion of administrative remedies
is not without practical and legal reasons. For one
thing, availment of administrative remedy entails
lesser expenses and provides for a speedier
disposition of controversies. It is no less true to state
that courts of justice for reasons of comity and
convenience will shy away from a dispute until the
system of administrative redress has been completed
and complied with so as to give the administrative
agency concerned every opportunity to correct its
error and to dispose of the case.48 While there are
recognized exceptions to this salutary rule, petitioners
have failed to prove the presence of any of those in
the instant case.
Violation of the rule on hierarchy of courts.
Moreover, petitioners violated the rule on hierarchy of
courts as the petitions should have been initially filed
with the CTA, having the exclusive appellate
jurisdiction to determine the constitutionality or
validity of revenue issuances.
In The Philippine American Life and General Insurance
Co. v. Secretary of Finance,49 the Court held that
rulings of the Secretary of Finance in its exercise of its
power of review under Section 4 of the NIRC of 1997,
as amended, are appealable to the CTA.50 The Court
explained that while there is no law which explicitly
provides where rulings of the Secretary of Finance
under the adverted to NIRC provision are appealable,
Section 7(a)51 of RA No. 1125, the law creating the
CTA, is nonetheless sufficient, albeit impliedly, to
include appeals from the Secretary's review under
Section 4 of the NIRC of 1997, as amended.
Moreover, echoing its pronouncements in City of
Manila v. Grecia-Cuerdo,52 that the CTA has the power
of certiorari within its appellate jurisdiction, the Court
declared that "it is now within the power of the CTA,
through its power of certiorari, to rule on the validity
of a particular administrative rule or 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."53
Subsequently, in Banco de Oro v. Republic,54 the
Court, sitting En Banc, further held that the CTA has
exclusive appellate jurisdiction to review, on
certiorari, the constitutionality or validity of revenue
issuances, even without a prior issuance of an
assessment. The Court En Banc reasoned:
We revert to the earlier rulings in Rodriguez, Leal,
and Asia International Auctioneers, Inc. The Court of
Tax Appeals has exclusive jurisdiction to determine
the constitutionality or validity of tax laws, rules and
regulations, and other administrative issuances of the
Commissioner of Internal Revenue.
Article VIII, Section 1 of the 1987 Constitution
provides the general definition of judicial power:
ARTICLE [VIII]
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one
Supreme Court and in such lower courts as may be
established by law.
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. (Emphasis
supplied)
Based on this constitutional provision, this Court
recognized, for the first time, in The City of Manila v.
Hon. Grecia-Cuerdo, the Court of Tax Appeals'
jurisdiction over petitions for certiorari assailing
interlocutory orders issued by the Regional Trial Court
in a local tax case. Thus:
[W]hile 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. (Emphasis in the original)
This Court further explained that the Court of Tax
Appeals' authority to issue writs of certiorari is
inherent in the exercise of its appellate jurisdiction:
A grant of appellate jurisdiction implies that there is
included in it the power necessary to exercise it
effectively, to make all orders that will preserve the
subject of the action, and to give effect to the final
determination of the appeal. It carries with it the
power to protect that jurisdiction and to make the
decisions of the court thereunder effective. The court,
in aid of its appellate jurisdiction, has authority to
control all auxiliary and incidental matters necessary
to the efficient and proper exercise of that
jurisdiction. For this purpose, it may, when necessary,
prohibit or restrain the performance of any act which
might interfere with the proper exercise of its rightful
jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court
which is endowed with a particular jurisdiction should
have powers which are necessary to enable it to act
effectively within such jurisdiction. These should be
regarded as powers which are inherent in its
jurisdiction and the court must possess them in order
to enforce its rules of practice and to suppress any
abuses of its process and to defeat any attempted
thwarting of such process.
In this regard, Section 1 of RA 9282 states that the
CTA shall be of the same level as the CA and shall
possess all the inherent powers of a court of justice.
Indeed, courts possess certain inherent powers which
may be said to be implied from a general grant of
jurisdiction, in addition to those expressly conferred
on them. These inherent powers are such powers as
are necessary for the ordinary and efficient exercise of
jurisdiction; or are essential to the existence, dignity
and functions of the courts, as well as to the due
administration of justice; or are directly appropriate,
convenient and suitable to the execution of their
granted powers; and include the power to maintain
the court's jurisdiction and render it effective in behalf
of the litigants.
Thus, this Court has held that "while a court may be
expressly granted the incidental powers necessary to
effectuate its jurisdiction, a grant of jurisdiction, in
the absence of prohibitive legislation, implies the
necessary and usual incidental powers essential to
effectuate it, and, subject to existing laws and
constitutional provisions, every regularly constituted
court has power to do all things that are reasonably
necessary for the administration of justice within the
scope of its jurisdiction and for the enforcement of its
judgments and mandates." Hence, demands, matters
or questions ancillary or incidental to, or growing out
of, the main action, and coming within the above
principles, may be taken cognizance of by the court
and determined, since such jurisdiction is in aid of its
authority over the principal matter, even though the
court may thus be called on to consider and decide
matters which, as original causes of action, would not
be within its cognizance. (Citations omitted)
Judicial power likewise authorizes lower courts to
determine the constitutionality or validity of a law or
regulation in the first instance. This is contemplated in
the Constitution when it speaks of appellate review of
final judgments of inferior courts in cases where such
constitutionality is in issue.
On June 16, 1954, Republic Act No. 1125 created the
Court of Tax Appeals not as another superior
administrative agency as was its predecessor — the
former Board of Tax Appeals — but as a part of the judicial
system with exclusive jurisdiction to act on appeals from:
(1) Decisions of the Collector 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 or part of law administered by the Bureau of Internal
Revenue;
(2) Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges;
seizure, detention or release of property affected fines,
forfeitures or other penalties imposed in relation thereto; or
other matters arising under the Customs Law or other law or
part of law administered by the Bureau of Customs; and
(3) Decisions of provincial or city Boards of Assessment Appeals in
cases involving the assessment and taxation of real property or
other matters arising under the Assessment Law, including rules
and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals
jurisdiction over all matters involving assessments that were
previously cognizable by the Regional Trial Courts (then courts of first
instance).
In 2004, Republic Act No. 9282 was enacted. It expanded the
jurisdiction of the Court of Tax Appeals and elevated its rank to the
level of a collegiate court with special jurisdiction. Section 1
specifically provides that the Court of Tax Appeals is of the same level
as the Court of Appeals and possesses "all the inherent powers of a
Court of Justice."
Section 7, as amended, grants the Court of Tax Appeals the exclusive
jurisdiction to resolve all tax-related issues:
Section 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 Code 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 relation
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;
3) Decisions, orders or resolutions of the Regional Trial Courts
in local tax cases originally decided or resolved by them in
the exercise of their original or appellate jurisdiction;
4) Decisions of the Commissioner of Customs in cases
involving liability for customs duties, fees or other money
charges, seizure, detention or release of property affected,
fines, forfeitures or other penalties in relation thereto, or
other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
5) Decisions of the Central Board of Assessment Appeals in
the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property
originally decided by the provincial or city board of
assessment appeals;
6) Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from decisions of
the Commissioner of Customs which are adverse to the
Government under Section 2315 of the Tariff and Customs

Code;
7) Decisions of the Secretary of Trade and Industry, in the
case of nonagricultural product, commodity or article, and
the Secretary of Agriculture in the case of agricultural
product, commodity or article, involving dumping and
countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800, where either party
may appeal the decision to impose or not to impose said
duties.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the
constitutionality or validity of a tax law or regulation when raised by
the taxpayer as a defense in disputing or contesting an assessment or
claiming a refund. It is only in the lawful exercise of its power to pass
upon all matters brought before it, as sanctioned by Section 7 of
Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals may
likewise take cognizance of cases directly challenging the
constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum
circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that,
except for local taxes, appeals from the decisions of quasi-judicial
agencies (Commissioner of Internal Revenue, Commissioner of
Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be
brought exclusively to the Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court
of Tax Appeals to have exclusive jurisdiction to resolve all tax
problems. Petitions for writs of certiorari against the acts and
omissions of the said quasi-judicial agencies should, thus, be filed
before the Court of Tax Appeals.
Republic Act No. 9282, a special and later law than Batas Pambansa
Blg. 129 provides an exception to the original jurisdiction of the
Regional Trial Courts over actions questioning the constitutionality or
validity of tax laws or regulations. Except for local tax cases, actions
directly challenging the constitutionality or validity of a tax law or
regulation or administrative issuance may be filed directly before the
Court of Tax Appeals.
Furthermore, with respect to administrative issuances (revenue
orders, revenue memorandum circulars, or rulings), these are issued
by the Commissioner under its power to make rulings or opinions in
connection with the implementation of the provisions of internal
revenue laws. Tax rulings, on the other hand, are official positions of
the Bureau on inquiries of taxpayers who request clarification on
certain provisions of the National Internal Revenue Code, other tax
laws, or their implementing regulations. Hence, the determination of
the validity of these issuances clearly falls within the exclusive
appellate jurisdiction of the Court of Tax Appeals under Section 7(1)
of Republic Act No. 1125, as amended, subject to prior review by the
Secretary of Finance, as required under Republic Act No. 8424.55
A direct invocation of this Court's jurisdiction should only be allowed
when there are special, important and compelling reasons clearly and
specifically spelled out in the petition.56
Nevertheless, despite the procedural infirmities of the petitions that
warrant their outright dismissal, the Court deems it prudent, if not
crucial, to take cognizance of, and accordingly act on, the petitions as
they assail the validity of the actions of the CIR that affect thousands
of employees in the different government agencies and
instrumentalities. The Court, following recent jurisprudence, avails
itself of its judicial prerogative in order not to delay the disposition of
the case at hand and to promote the vital interest of justice. As the
Court held in Bloomberry Resorts and Hotels, Inc. v. Bureau of Internal
Revenue:57
From the foregoing jurisprudential pronouncements, it would appear
that in questioning the validity of the subject revenue memorandum
circular, petitioner should not have resorted directly before this Court
considering that it appears to have failed to comply with the doctrine
of exhaustion of administrative remedies and the rule on hierarchy of
courts, a clear indication that the case was not yet ripe for judicial
remedy. Notably, however, in addition to the justifiable grounds
relied upon by petitioner for its immediate recourse (i.e., pure
question of law, patently illegal act by the BIR, national interest, and
prevention of multiplicity of suits), we intend to avail of our
jurisdictional prerogative in order not to further delay the disposition
of the issues at hand, and also to promote the vital interest of
substantial justice. To add, in recent years, this Court has consistently
acted on direct actions assailing the validity of various revenue
regulations, revenue memorandum circulars, and the likes, issued by
the CIR. The position we now take is more in accord with latest
jurisprudence. x x x 58
II.
Substantive
The petitions assert that the CIR's issuance of RMO No. 23-2014,
particularly Sections III, IV, VI and VII thereof, is tainted with grave
abuse of discretion. "By grave abuse of discretion is meant, such
capricious and whimsical exercise of judgment as is equivalent to lack
of jurisdiction."59 It is an evasion of a positive duty or a virtual refusal
to perform a duty enjoined by law or to act in contemplation of law as
when the judgment rendered is not based on law and evidence but on
caprice, whim and despotism.60
As earlier stated, Section 4 of the NIRC of 1997, as amended, grants
the CIR the power to issue rulings or opinions interpreting the
provisions of the NIRC or other tax laws. However, the CIR cannot, in
the exercise of such power, issue administrative rulings or circulars
inconsistent 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.61 The courts
will not countenance administrative issuances that override, instead
of remaining consistent and in harmony with the law they seek to
apply and implement.62 Thus, in Philippine Bank of Communications v.
Commissioner of Internal Revenue,63the Court upheld the nullification
of 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 NIRC of 1977.
Also, in Banco de Oro v. Republic,64 the Court nullified BIR Ruling Nos.
370-2011 and DA 378-2011 because they completely disregarded the
20 or more-lender rule added by Congress in the NIRC of 1997, as
amended, and created a distinction for government debt instruments
as against those issued by private corporations when there was none
in the law.65
Conversely, if the assailed administrative rule conforms with the law
sought to be implemented, the validity of said issuance must be
upheld. Thus, in The Philippine American Life and General Insurance
Co. v. Secretary of Finance,66 the Court declared valid Section 7 (c.2.2)
of RR No. 06-08 and RMC No. 25-11, because they merely echoed
Section 100 of the NIRC that the amount by which the fair market
value of the property exceeded the value of the consideration shall be
deemed a gift; thus, subject to donor's tax.67
In this case, the Court finds the petitions partly meritorious only
insofar as Section VI of the assailed RMO is concerned. On the other
hand, the Court upholds the validity of Sections III, IV and VII thereof
as these are in fealty to the provisions of the NIRC of 1997, as
amended, and its implementing rules.
Sections III and IV of RMO No. 23-2014 are valid.
Compensation income is the income of the individual taxpayer arising
from services rendered pursuant to an employer-employee
relationship.68 Under the NIRC of 1997, as amended, every form of
compensation for services, whether paid in cash or in kind, is
generally subject to income tax and consequently to withholding
tax.69 The name designated to the compensation income received by
an employee is immaterial.70 Thus, salaries, wages, emoluments and
honoraria, allowances, commissions, fees, (including director's fees, if
the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject
to the fringe benefits tax under Section 33 of the Tax Code), pensions,
retirement pay, and other income of a similar nature, constitute
compensation income71that are taxable and subject to withholding.
The withholding tax system was devised for three primary reasons,
namely: (1) to provide the taxpayer a convenient manner to meet his
probable income tax liability; (2) to ensure the collection of income
tax which can otherwise be lost or substantially reduced through
failure to file the corresponding returns; and (3) to improve the
government's cash flow.72 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.73
Section 79(A) of the NIRC of 1997, as amended, states:
SEC. 79. Income Tax Collected at Source. –
(A) Requirement of Withholding - Except in the case of a minimum
wage earner as defined in Section 22(HH) of this Code, every
employer making payment of wages shall deduct and withhold upon
such wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.74
In relation to the foregoing, Section 2.78 of RR No. 2-98,75 as
amended, issued by the Secretary of Finance to implement the
withholding tax system under the NIRC of 1997, as amended,
provides:
SECTION 2.78. Withholding Tax on Compensation. — The withholding
of tax on compensation income is a method of collecting the income
tax at source upon receipt of the income. It applies to all employed
individuals whether citizens or aliens, deriving income from
compensation for services rendered in the Philippines. The employer
is constituted as the withholding agent.76
Section 2.78.3 of RR No. 2-98 further states that the term employee
"covers all employees, including officers and employees, whether
elected or appointed, of the Government of the Philippines, or any
political subdivision thereof or any agency or instrumentality"; while
an employer, as Section 2.78.4 of the same regulation provides,
"embraces not only an individual and an organization engaged in
trade or business, but also includes an organization exempt from
income tax, such as charitable and religious organizations, clubs,
social organizations and societies, as well as the Government of the
Philippines, including its agencies, instrumentalities, and political
subdivisions."
The law is therefore clear that withholding tax on compensation
applies to the Government of the Philippines, including its agencies,
instrumentalities, and political subdivisions. The Government, as an
employer, is constituted as the withholding agent, mandated to
deduct, withhold and remit the corresponding tax on compensation
income paid to all its employees.
However, not all income payments to employees are subject to
withholding tax. The following allowances, bonuses or benefits,
excluded by the NIRC of 1997, as amended, from the employee's
compensation income, are exempt from withholding tax on
compensation:
1. Retirement benefits received under RA No. 7641 and those
received by officials and employees of private firms,
whether individual or corporate, under a reasonable private
benefit plan maintained by the employer subject to the
requirements provided by the Code [Section 32(B)(6)(a) of
the NIRC of 1997, as amended and Section 2.78.1(B)(1)(a) of
RR No. 2-98];
2. Any amount received by an official or employee or by his
heirs from the employer due to death, sickness or other
physical disability or for any cause beyond the control of the
said official or employee, such as retrenchment,
redundancy, or cessation of business [Section 32(B)(6)(b) of
the NIRC of 1997, as amended and Section 2.78.1(B)(1)(b) of
RR No. 2-98];
3. Social security benefits, retirement gratuities, pensions and
other similar benefits received by residents or non-resident
citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government
agencies and other institutions private or public [Section
32(B)(6)(c) of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(c) of RR No. 2-98];
4. Payments of benefits due or to become due to any person
residing in the Philippines under the law of the United
States administered by the United States Veterans
Administration [Section 32(B)(6)(d) of the NIRC of 1997, as
amended and Section 2.78.1(B)(1)(d) of RR No. 2-98];
5. Payments of benefits made under the Social Security System
Act of 1954 as amended [Section 32(B)(6)(e) of the NIRC of
1997, as amended and Section 2.78.1(B)(1)(e) of RR No. 2-
98];
6. Benefits received from the GSIS Act of 1937, as amended,
and the retirement gratuity received by government officials
and employees [Section 32(B)(6)(f) of the NIRC of 1997, as
amended and Section 2.78.1(B)(1)(f) of RR No.2- 98];
7. Thirteenth (13th) month pay and other benefits received by
officials and employees of public and private entities not
exceeding P82,000.00 [Section 32(B)(7)(e) of the NIRC of
1997, as amended, and Section 2.78.1(8)(11) of RR No. 2-98,
as amended by RR No. 03-15];
8. GSIS, SSS, Medicare and Pag-Ibig contributions, and union
dues of individual employees [Section 32(B)(7)(f) of the NIRC
of 1997, as amended and Section 2.78.1(8)(12) of RR No. 2-
98];
9. Remuneration paid for agricultural labor [Section 2.78.1
(B)(2) of RR No. 2-98];
10. Remuneration for domestic services [Section 28, RA No.
10361 and Section 2.78.1 (B)(3) of RR No. 2-98];
11. Remuneration for casual labor not in the course of an
employer's trade or business [Section 2.78.1(8)(4) of RR No.
2-98];
12. Remuneration not more than the statutory minimum wage
and the holiday pay, overtime pay, night shift differential
pay and hazard pay received by Minimum Wage Earners
[Section 24(A)(2) of the NIRC of 1997, as amended];
13. Compensation for services by a citizen or resident of the
Philippines for a foreign government or an international
organization [Section 2.78.1(8)(5) of RR No. 2-98];
14. Actual, moral, exemplary and nominal damages received by
an employee or his heirs pursuant to a final judgment or
compromise agreement arising out of or related to an
employer-employee relationship [Section 32(B)(4) of the
NIRC of 1997, as amended and Section 2.78.1 (B)(6) of RR
No. 2-98];
15. The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a
single sum or otherwise, provided however, that interest
payments agreed under the policy for the amounts which
are held by the insured under such an agreement shall be
included in the gross income [Section 32(B)(1) of the NIRC of
1997, as amended and Section 2.78.1 (B)(7) of RR No. 2-98];
 16. The amount received by the insured, as a return of premium
or premiums paid by him under life insurance, endowment,
or annuity contracts either during the term or at the
maturity of the term mentioned in the contract or upon
surrender of the contract [Section 32(8)(2) of the NIRC of
1997, as amended and Section 2.78.1(B)(8) of RR No. 2-98];
17. Amounts received through Accident or Health Insurance or
under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amount of any
damages received whether by suit or agreement on account
of such injuries or sickness [Section 32(8)(4) of the NIRC of
1997, as amended and Section 2.78.1(8)(9) of RR No. 2-98];
18. Income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines
[Section 32(8)(5) of the NIRC of 1997, as amended and
Section 2.78.1(B)(10) of RR No. 2-98];
19. Fringe and De minimis Benefits. [Section 33(C) of the NIRC of
1997, as amended); and
20. Other income received by employees which are exempt
under special laws (RATA granted to public officers and
employees under the General Appropriations Act and
Personnel Economic Relief Allowance granted to
government personnel).
Petitioners assert that RMO No. 23-2014 went beyond the provisions
of the NIRC of 1997, as amended, insofar as Sections III and IV thereof
impose new or additional taxes to allowances, benefits or bonuses
granted to government employees. A closer look at the assailed
Sections, however, reveals otherwise.
For reference, Sections III and IV of RMO No. 23-2014 read, as follows:
III. OBLIGATION TO WITHHOLD ON COMPENSATION PAID TO
GOVERNMENT OFFICIALS AND EMPLOYEES
As an employer, government offices including government-owned or
controlled corporations (such as but not limited to the Bangko Sentral
ng Pilipinas, Metropolitan Waterworks and Sewerage System,
Philippine Deposit Insurance Corporation, Government Service
Insurance System, Social Security System), as well as provincial, city
and municipal governments are constituted as withholding agents for
purposes of the creditable tax required to be withheld from
compensation paid for services of its employees.
Under Section 32(A) of the NIRC of 1997, as amended, compensation
for services, in whatever form paid and no matter how called, form
part of gross income. Compensation income includes, among others,
salaries, fees, wages, emoluments and honoraria, allowances,
commissions (e.g. transportation, representation, entertainment and
the like); fees including director's fees, if the director is, at the same
time, an employee of the employer/corporation; taxable bonuses and
fringe benefits except those which are subject to the fringe benefits
tax under Section 33 of the NIRC; taxable pensions and retirement
pay; and other income of a similar nature.
The foregoing also includes allowances, bonuses, and other benefits
of similar nature received by officials and employees of the
Government of the Republic of the Philippines or any of its branches,
agencies and instrumentalities, its political subdivisions, including
government-owned and/or controlled corporations (herein referred
to as officials and employees in the public sector) which are composed
of (but are not limited to) the following:
A. Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Legislative Branch, such as anniversary bonus,
Special Technical Assistance Allowance, Efficiency
Incentive Benefits, Additional Food Subsidy,
Eight[h] (8th) Salary Range Level Allowance,
Hospitalization Benefits, Medical Allowance,
Clothing Allowance, Longevity Pay, Food Subsidy,
Transition Allowance, Cost of Living Allowance,
Inflationary Adjustment Assistance, Mid-Year
Economic Assistance, Financial Relief Assistance,
Grocery Allowance, Thirteenth (13th Month Pay,
Cash Gift and Productivity Incentive Benefit and
other allowances, bonuses and benefits given by
the Philippine Senate and House of
Representatives to their officials and
employees, subject to the exemptions enumerated
herein.
B. Allowances, bonuses, honoraria or benefits
received by employees and officials in the Judicial
Branch, such as the Additional Compensation
(ADCOM), Extraordinary and Miscellaneous
Expenses (EME), Monthly Special Allowance from
the Special Allowance for the Judiciary, Additional
Cost of Living Allowance from the Judiciary
Development Fund, Productivity Incentive Benefit,
Grocery Allowance, Clothing Allowance,
Emergency Economic Allowance, Year-End Bonus,
Cash Gift, Loyalty Cash Award (Milestone Bonus),
SC Christmas Allowance, anniversary bonuses and
other allowances, bonuses and benefits given by
the Supreme Court of the Philippines and all other
courts and offices under the Judicial Branch to
their officials and employees, subject to the
exemptions enumerated herein.
C. Compensation for services in whatever form paid,
including, but not limited to allowances, bonuses,
honoraria or benefits received by employees and
officials in the Constitutional bodies (Commission
on Election, Commission on Audit, Civil Service
Commission) and the Office of the
Ombudsman, subject to the exemptions
enumerated herein.
D. Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Executive Branch, such as the Productivity
Enhancement Incentive (PEI), Performance-Based
Bonus, anniversary bonus and other allowances,
bonuses and benefits given by the departments,
agencies and other offices under the Executive
Branch to their officials and employees, subject to
the exemptions enumerated herein.
Any amount paid either as advances or reimbursements for expenses
incurred or reasonably expected to be incurred by the official and
employee in the performance of his/her duties are not compensation
subject to withholding, if the following conditions are satisfied:
1. The employee was duly authorized to incur such
expenses on behalf of the government; and
2. Compliance with pertinent laws and regulations
on accounting and liquidation of advances and
reimbursements, including, but not limited to
withholding tax rules. The expenses should be duly
receipted for and in the name of the government
office concerned.
Other than those pertaining to intelligence funds duly appropriated
and liquidated, any amount not in compliance with the foregoing
requirements shall be considered as part of the gross taxable
compensation income of the taxpayer. Intelligence funds not duly
appropriated and not properly liquidated shall form part of the
compensation of the government officials/personnel concerned,
unless returned.
IV. NON-TAXABLE COMPENSATION INCOME – Subject to existing laws
and issuances, the following income received by the officials and
employees in the public sector are not subject to income tax and
withholding tax on compensation:
A.
A. Thirteenth (13th Month Pay and Other Benefits not
exceeding Thirty Thousand Pesos
(P30,000.00) paid or accrued during the year. Any
amount exceeding Thirty Thousand Pesos
(P30,000.00) are taxable compensation. This
includes:
1. Benefits received by officials and
employees of the national and local
government pursuant to Republic Act no.
6686 ("An Act Authorizing Annual
Christmas Bonus to National and Local
Government Officials and Employees
Starting CY 1998");
2. Benefits received by employees pursuant
to Presidential Decree No. 851
("Requiring All Employers to Pay Their
Employees a 13th Month Pay"), as
amended by Memorandum Order No.
28, dated August 13, 1986;
3. Benefits received by officials and
employees not covered by Presidential
Decree No. 851, as amended by
Memorandum Order No. 28, dated
August 19, 1986;
4. Other benefits such as Christmas bonus,
productivity incentive bonus, loyalty
award, gift in cash or in kind and other
benefits of similar nature actually
received by officials and employees of
government offices, including the
additional compensation allowance
(ACA) granted and paid to all officials
and employees of the National
Government Agencies (NGAs) including
state universities and colleges (SUCs),
government-owned and/or controlled
corporations (GOCCs), government
financial institutions (GFIs) and Local
Government Units (LGUs).
B. Facilities and privileges of relatively small value or
"De Minimis Benefits" as defined in existing
issuances and conforming to the ceilings
prescribed therein;
C. Fringe benefits which are subject to the fringe
benefits tax under Section 33 of the NIRC, as
amended;
D. Representation and Transportation Allowance
(RATA) granted to public officers and employees
under the General Appropriations Act;
E. Personnel Economic Relief Allowance (PERA)
granted to government personnel;
F. The monetized value of leave credits paid to
government officials and employees;
G. Mandatory/compulsory GSIS, Medicare and Pag-
Ibig Contributions, provided that, voluntary
contributions to these institutions in excess of the
amount considered mandatory/compulsory are
not excludible from the gross income of the
taxpayer and hence, not exempt from Income Tax
and Withholding Tax;
H. Union dues of individual employees;
I. Compensation income of employees in the public
sector with compensation income of not more
than the Statutory Minimum Wage (SMW) in the
non-agricultural sector applicable to the place
where he/she is assigned;
J. Holiday pay, overtime pay, night shift differential
pay, and hazard pay received by Minimum Wage
Earners (MWEs);
K. Benefits received from the GSIS Act of 1937, as
amended, and the retirement gratuity/benefits
received by government officials and employees
under pertinent retirement laws;
L. All other benefits given which are not included in
the above enumeration but are exempted from
income tax as well as withholding tax on
compensation under existing laws, as confirmed
by BIR.77
Clearly, Sections III and IV of the assailed RMO do not charge any new
or additional tax. On the contrary, they merely mirror the relevant
provisions of the NIRC of 1997, as amended, and its implementing
rules on the withholding tax on compensation income as discussed
above. The assailed Sections simply reinforce the rule that every form
of compensation for personal services received by all employees
arising from employer-employee relationship is deemed subject to
income tax and, consequently, to withholding tax,78 unless specifically
exempted or excluded by the Tax Code; and the duty of the
Government, as an employer, to withhold and remit the correct
amount of withholding taxes due thereon.
While Section III enumerates certain allowances which may be subject
to withholding tax, it does not exclude the possibility that these
allowances may fall under the exemptions identified under Section IV
– thus, the phrase, "subject to the exemptions enumerated herein."
In other words, Sections III and IV articulate in a general and broad
language the provisions of the NIRC of 1997, as amended, on the
forms of compensation income deemed subject to withholding tax
and the allowances, bonuses and benefits exempted therefrom. Thus,
Sections III and IV cannot be said to have been issued by the CIR with
grave abuse of discretion as these are fully in accordance with the
provisions of the NIRC of 1997, as amended, and its implementing
rules.
Furthermore, the Court finds untenable petitioners' contention that
the assailed provisions of RMO No. 23-2014 contravene the equal
protection clause, fiscal autonomy, and the rule on non-diminution of
benefits.
The constitutional guarantee of equal protection is not violated by an
executive issuance which was issued to simply reinforce existing taxes
applicable to both the private and public sector. As discussed, the
withholding tax system embraces not only private individuals,
organizations and corporations, but also covers organizations exempt
from income tax, including the Government of the Philippines, its
agencies, instrumentalities, and political subdivisions. While the
assailed RMO is a directive to the Government, as a reminder of its
obligation as a withholding agent, it did not, in any manner or form,
alter or amend the provisions of the Tax Code, for or against the
Government or its employees.
Moreover, the fiscal autonomy enjoyed by the Judiciary,
Ombudsman, and Constitutional Commissions, as envisioned in the
Constitution, does not grant immunity or exemption from the
common burden of paying taxes imposed by law. To borrow former
Chief Justice Corona's words in his Separate Opinion in Francisco, Jr. v.
House of Representatives,79 "fiscal autonomy entails freedom from
outside control and limitations, other than those provided by law. It is
the freedom to allocate and utilize funds granted by law, in
accordance with law and pursuant to the wisdom and dispatch its
needs may require from time to time."80
It bears to emphasize the Court's ruling in Nitafan v. Commissioner of
Internal Revenue81 that the imposition of taxes on salaries of Judges
does not result in diminution of benefits. This applies to all
government employees because the intent of the framers of the
Organic Law and of the people adopting it is "that all citizens should
bear their aliquot part of the cost of maintaining the government and
should share the burden of general income taxation equitably."82
Determination of existence of fringe benefits is a question of fact.
Petitioners, nonetheless, insist that the allowances, bonuses and
benefits enumerated in Section III of the assailed RMO are, in fact,
fringe and de minimis benefits exempt from withholding tax on
compensation. The Court cannot, however, rule on this issue as it is
essentially a question of fact that cannot be determined in this
petition questioning the constitutionality of the RMO.
To be sure, settled is the rule that exemptions from tax are
construed strictissimi juris against the taxpayer and liberally in favor
of the taxing authority.83 One who claims tax exemption must point
to a specific provision of law conferring, in clear and plain terms,
exemption from the common burden84 and prove, through substantial
evidence, that it is, in fact, covered by the exemption so
claimed.85 The determination, therefore, of the merits of petitioners'
claim for tax exemption would necessarily require the resolution of
both legal and factual issues, which this Court, not being a trier of
facts, has no jurisdiction to do; more so, in a petition filed at first
instance.
Among the factual issues that need to be resolved, at the first
instance, is the nature of the fringe benefits granted to employees.
The NIRC of 1997, as amended, does not impose income tax, and
consequently a withholding tax, on payments to employees which are
either (a) required by the nature of, or necessary to, the business of
the employer; or (b) for the convenience or advantage of the
employer.86 This, however, requires proper documentation. Without
any documentary proof that the payment ultimately redounded to
the benefit of the employer, the same shall be considered as a taxable
benefit to the employee, and hence subject to withholding taxes.87
Another factual issue that needs to be confirmed is the recipient of
the alleged fringe benefit. Fringe benefits furnished or granted, in
cash or in kind, by an employer to its managerial or supervisory
employees, are not considered part of compensation income; thus,
exempt from withholding tax on compensation.88 Instead, these
fringe benefits are subject to a fringe benefit tax equivalent to 32% of
the grossed-up monetary value of the benefit, which the employer is
legally required to pay.89 On the other hand, fringe benefits given to
rank and file employees, while exempt from fringe benefit tax,90form
part of compensation income taxable under the regular income tax
rates provided in Section 24(A)(2) of the NIRC, of 1997, as
amended;91 and consequently, subject to withholding tax on
compensation.
Furthermore, fringe benefits of relatively small value furnished by the
employer to his employees (both managerial/supervisory and rank
and file) as a means of promoting health, goodwill, contentment, or
efficiency, otherwise known as de minimis benefits, that are exempt
from both income tax on compensation and fringe benefit tax; hence,
not subject to withholding tax,92 are limited and exclusive only to
those enumerated under RR No. 3-98, as amended.93 All other
benefits given by the employer which are not included in the said list,
although of relatively small value, shall not be considered as de
minimis benefits; hence, shall be subject to income tax as well as
withholding tax on compensation income, for rank and file
employees, or fringe benefits tax for managerial and supervisory
employees, as the case may be.94
Based on the foregoing, it is clear that to completely determine the
merits of petitioners' claimed exemption from withholding tax on
compensation, under Section 33 of the NIRC of 1997, there is a need
to confirm several factual issues. As such, petitioners cannot but first
resort to the proper courts and administrative agencies which are
better equipped for said task.
All told, the Court finds Sections III and IV of the assailed RMO valid.
The NIRC of 1997, as amended, is clear that all forms of compensation
income received by the employee from his employer are presumed
taxable and subject to withholding taxes. The Government of the
Philippines, its agencies, instrumentalities, and political subdivisions,
as an employer, is required by law to withhold and remit to the BIR
the appropriate taxes due thereon. Any claims of exemption from
withholding taxes by an employee, as in the case of petitioners, must
be brought and resolved in the appropriate administrative and
judicial proceeding, with the employee having the burden to prove
the factual and legal bases thereof.
Section VII of RMO No. 23-2014 is valid; Section VI contravenes, in
part, the provisions of the NIRC of 1997, as amended, and its
implementing rules.
Petitioners claim that RMO No. 23-2014 is ultra vires insofar as
Sections VI and VII thereof define new offenses and prescribe
penalties therefor, particularly upon government officials.
The NIRC of 1997, as amended, clearly provides the offenses and
penalties relevant to the obligation of the withholding agent to
deduct, withhold and remit the correct amount of withholding taxes
on compensation income, to wit:
TITLE X
Statutory Offenses and Penalties
CHAPTER I
Additions to the Tax
SEC. 247. General Provisions. –
(a) The additions to the tax or deficiency tax prescribed in this
Chapter shall apply to all taxes, fees and charges imposed in this
Code. The amount so added to the tax shall be collected at the same
time, in the same manner and as part of the tax.
(b) If the withholding agent is the Government or any of its agencies,
political subdivisions or instrumentalities, or a government owned or
-controlled corporation, the employee thereof responsible for the
withholding and remittance of the tax shall be personally liable for
the additions to the tax prescribed herein.
(c) The term "person", as used in this Chapter, includes an officer or
employee of a corporation who as such officer, employee or member
is under a duty to perform the act in respect of which the violation
occurs.
SEC. 248. Civil Penalties. — x x x95
SEC. 249. Interest. – x x x96
xxxx
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. –
Any person required to withhold, account for, and remit any tax
imposed by this Code or who willfully fails to withhold such tax, or
account for and remit such tax, or aids or abets in any manner to
evade any such tax or the payment thereof, shall, in addition to other
penalties provided for under this Chapter, be liable upon conviction
to a penalty equal to the total amount of the tax not withheld, or not
accounted for and remitted.97
SEC. 252. Failure of a Withholding Agent to Refund Excess
Withholding Tax. – Any employer/withholding agent who fails or
refuses to refund excess withholding tax shall, in addition to the
penalties provided in this Title, be liable to a penalty equal to the
total amount of refunds which was not refunded to the employee
resulting from any excess of the amount withheld over the tax
actually due on their return.
CHAPTER II
Crimes, Other Offenses and Forfeitures
xxxx
SEC. 255. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax, Withhold and Remit Tax and Refund Excess
Taxes Withheld on Compensation. – Any person required under this
Code or by rules and regulations promulgated thereunder to pay any
tax, make a return, keep any record, or supply correct and accurate
information, who willfully fails to pay such tax, make such return,
keep such record, or supply such correct and accurate information, or
withhold or remit taxes withheld, or refund excess taxes withheld on
compensation, at the time or times required by law or rules and
regulations shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Ten
thousand pesos (P10,000) and suffer imprisonment of not less than
one (l) year but not more than ten (10) years.
CHAPTER III
Penalties Imposed on Public Officers
xxxx
SEC. 272. Violation of Withholding Tax Provision. – Every officer or
employee of the Government of the Republic of the Philippines or any
of its agencies and instrumentalities, its political subdivisions, as well
as government-owned or -controlled corporations, including
the Bangko Sentral ng Pilipinas (BSP), who, under the provisions of
this Code or rules and regulations promulgated thereunder, is charged
with the duty to deduct and withhold any internal revenue tax and to
remit the same in accordance with the provisions of this Code and
other laws is guilty of any offense hereinbelow specified shall, upon
conviction for each act or omission be punished by a fine of not less
than Five thousand pesos (P5,000) but not more than Fifty thousand
pesos (P50,000) or suffer imprisonment of not less than six (6) months
and one day (1) but not more than two (2) years, or both:
(a) Failing or causing the failure to deduct and withhold any internal
revenue tax under any of the withholding tax laws and implementing
rules and regulations;
(b) Failing or causing the failure to remit taxes deducted and withheld
within the time prescribed by law, and implementing rules and
regulations; and
(c) Failing or causing the failure to file return or statement within the
time prescribed, o rendering or furnishing a false or fraudulent return
or statement required under the withholding tax laws and rules and
regulations.98
Based on the foregoing, and similar to Sections III and IV of the
assailed RMO, the Court finds that Section VII thereof was issued in
accordance with the provisions of the NIRC of 1997, as amended, and
RR No. 2-98. For easy reference, Section VII of RMO No. 23-2014
states:
VII. PENALTY PROVISION
In case of non-compliance with their obligation as withholding agents,
the abovementioned persons shall be liable for the following
sanctions:
A. Failure to Collect and Remit Taxes (Section 251,
NIRC) "Any person required to withhold, account
for, and remit any tax imposed by this Code or
who willfully fails to withhold such tax, or account
for and remit such tax, or aids or abets in any
manner to evade any such tax or the payment
thereof, shall, in addition to other penalties
provided for under this Chapter, be liable upon
conviction to a penalty equal to the total amount
of the tax not withheld, or not accounted for and
remitted."
B. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax Withhold and Remit Tax and
Refund Excess Taxes Withheld on Compensation
(Section 255, NIRC) "Any person required under
this Code or by rules and regulations promulgated
thereunder to pay any tax make a return, keep any
record, or supply correct the accurate information,
who willfully fails to pay such tax, make such
return, keep such record, or supply correct and
accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on
compensation, at the time or times required by
law or rules and regulations shall, in addition to
other penalties provided by law, upon conviction
thereof, be punished by a fine of not less than Ten
thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but not
more than ten (10) years.
Any person who attempts to make it appear for
any reason that he or another has in fact filed a
return or statement, or actually files a return or
statement and subsequently withdraws the same
return or statement after securing the official
receiving seal or stamp of receipt of internal
revenue office wherein the same was actually filed
shall, upon conviction therefor, be punished by a
fine of not less than Ten thousand pesos (P10,000)
but not more than Twenty thousand pesos
(P20,000) and suffer imprisonment of not less than
one (1) year but not more than three (3) years."
C. Violation of Withholding Tax Provisions (Section
272, NIRC)
"Every officer or employee of the Government of the Republic of the
Philippines or any of its agencies and instrumentalities, its political
subdivisions, as well as government-owned or controlled
corporations, including the Bangko Sentral ng Pilipinas (BSP), who is
charged with the duty to deduct and withhold any internal revenue
tax and to remit the same is guilty of any offense herein below
specified shall, upon conviction for each act or omission be punished
by a fine of not less than Five thousand pesos (P5,000) but not more
than Fifty thousand pesos (P50,000) or suffer imprisonment of not
less than six (6) months and one (1) day but not more than two (2)
years, or both:
1. Failing or causing the failure to deduct
and withhold any internal revenue tax
under any of the withholding tax laws
and implementing rules and regulations;
or
2. Failing or causing the failure to remit
taxes deducted and withheld within the
time prescribed by law, and
implementing rules and regulations; or
3. Failing or causing the failure to file return
or statement within the time prescribed,
or rendering or furnishing a false or
fraudulent return or statement required
under the withholding tax laws and rules
and regulations."
All revenue officials and employees concerned shall take measures to
ensure the full enforcement of the provisions of this Order and in case
of any violation thereof, shall commence the appropriate legal action
against the erring withholding agent.
Verily, tested against the provisions of the NIRC of 1997, as amended,
Section VII of RMO No. 23-2014 does not define a crime and prescribe
a penalty therefor. Section VII simply mirrors the relevant provisions
of the NIRC of 1997, as amended, on the penalties for the failure of
the withholding agent to withhold and remit the correct amount of
taxes, as implemented by RR No. 2-98.
However, with respect to Section VI of the assailed RMO, the Court
finds that the CIR overstepped the boundaries of its authority to
interpret existing provisions of the NIRC of 1997, as amended.
Section VI of RMO No. 23-2014 reads:
VI. PERSONS RESPONSIBLE FOR WITHHOLDING
The following officials are duty bound to deduct, withhold and remit
taxes:
a) For Office of the Provincial Government-province- the Chief
Accountant, Provincial Treasurer and the Governor;
b) For Office of the City Government-cities- the Chief Accountant,

City Treasurer and the City Mayor;
c) For Office of the Municipal Government-municipalities- the Chief
Accountant, Municipal Treasurer and the Mayor;
d) Office of the Barangay-Barangay Treasurer and Barangay Captain
e) For NGAs, GOCCs and other Government Offices, the Chief
Accountant and the Head of Office or the Official holding the
highest position (such as the President, Chief Executive Officer,
Governor, General Manager).
To recall, the Government of the Philippines, or any political
subdivision or agency thereof, or any GOCC, as an employer, is
constituted by law as the withholding agent, mandated to deduct,
withhold and remit the correct amount of taxes on the compensation
income received by its employees. In relation thereto, Section 82 of
the NIRC of 1997, as amended, states that the return of the amount
deducted and withheld upon any wage paid to government
employees shall be made by the officer or employee having control of
the payments or by any officer or employee duly designated for such
purpose.99 Consequently, RR No. 2-98 identifies the Provincial
Treasurer in provinces, the City Treasurer in cities, the Municipal
Treasurer in municipalities, Barangay Treasurer in barangays,
Treasurers of government-owned or -controlled corporations (GOCCs),
and the Chief Accountant or any person holding similar position and
performing similar function in national government offices, as persons
required to deduct and withhold the appropriate taxes on the income
payments made by the government.100
However, nowhere in the NIRC of 1997, as amended, or in RR No. 2-
98, as amended, would one find the Provincial Governor, Mayor,
Barangay Captain and the Head of Government Office or the "Official
holding the highest position (such as the President, Chief Executive
Officer, Governor, General Manager)" in an Agency or GOCC as one of
the officials required to deduct, withhold and remit the correct
amount of withholding taxes. The CIR, in imposing upon these
officials the obligation not found in law nor in the implementing rules,
did not merely issue an interpretative rule designed to provide
guidelines to the law which it is in charge of enforcing; but instead,
supplanted details thereon — a power duly vested by law only to
respondent Secretary of Finance under Section 244 of the NIRC of
1997, as amended.
Moreover, respondents' allusion to previous issuances of the
Secretary of Finance designating the Governor in provinces, the City
Mayor in cities, the Municipal Mayor in municipalities, the Barangay
Captain in barangays, and the Head of Office (official holding the
highest position) in departments, bureaus, agencies,
instrumentalities, government-owned or -controlled corporations,
and other government offices, as officers required to deduct and
withhold,101 is bereft of legal basis. Since the 1977 NIRC and Executive
Order No. 651, which allegedly breathed life to these issuances, have
already been repealed with the enactment of the NIRC of 1997, as
amended, and RR No. 2-98, these previous issuances of the Secretary
of Finance have ceased to have the force and effect of law.
Accordingly, the Court finds that the CIR gravely abused its discretion
in issuing Section VI of RMO No. 23-2014 insofar as it includes the
Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads
of Office in agencies, GOCCs, and other government offices, as
persons required to withhold and remit withholding taxes, as they are
not among those officials designated by the 1997 NIRC, as amended,
and its implementing rules.
Petition for Mandamus is moot and academic.
As regards the prayer for the issuance of a writ of mandamus to
compel respondents to increase the P30,000.00 non-taxable income
ceiling, the same has already been rendered moot and academic due
to the enactment of RA No. 10653.102
The Court takes judicial notice of RA No. 10653, which was signed into
law on February 12, 2015, which increased the income tax exemption
for 13th month pay and other benefits, under Section 32(B)(7)(e) of
the NIRC of 1997, as amended, from P30,000.00 to P82,000.00.103 Said
law also states that every three (3) years after the effectivity of said
Act, the President of the Philippines shall adjust the amount stated
therein to its present value using the Consumer Price Index, as
published by the National Statistics Office.104
Recently, RA No. 10963,105 otherwise known as the "Tax Reform for
Acceleration and Inclusion (TRAIN)" Act, further increased the income
tax exemption for 13th month pay and other benefits to P90,000.00.106
A case is considered moot and academic if it ceases to present a
justiciable controversy by virtue of supervening events, so that an
adjudication of the case or a declaration on the issue would be of no
practical value or use. Courts generally decline jurisdiction over such
case or dismiss it on the ground of mootness.107
With the enactment of RA Nos. 10653 and 10963, which not only
increased the tax exemption ceiling for 13th month pay and other
benefits, as petitioners prayed, but also conferred upon the President
the power to adjust said amount, a supervening event has transpired
that rendered the resolution of the issue on whether mandamus lies
against respondents, of no practical value. Accordingly, the petition
for mandamus should be dismissed for being moot and academic.
As a final point, the Court cannot turn a blind eye to the adverse
effects of this Decision on ordinary government employees, including
petitioners herein, who relied in good faith on the belief that the
appropriate taxes on all the income they receive from their respective
employers are withheld and paid. Nor does the Court ignore the
situation of the relevant officers of the different departments of
government that had believed, in good faith, that there was no need
to withhold the taxes due on the compensation received by said
ordinary government employees. Thus, as a measure of equity and
compassionate social justice, the Court deems it proper to clarify and
declare, pro hac vice, that its ruling on the validity of Sections III and
IV of the assailed RMO is to be given only prospective effect.108
WHEREFORE, premises considered, the Petitions and Petitions-in
Interventions are PARTIALLY GRANTED. Section VI of Revenue
Memorandum Order No. 23-2014 is DECLARED null and void insofar
as it names the Governor, City Mayor, Municipal Mayor, Barangay
Captain, and Heads of Office in government agencies, government-
owned or -controlled corporations, and other government offices, as
persons required to withhold and remit withholding taxes.
Sections III, IV and VII of RMO No. 23-2014 are DECLARED valid
inasmuch as they merely mirror the provisions of the National
Internal Revenue Code of 1997, as amended. However, the Court
cannot rule on petitioners' claims of exemption from withholding tax
on compensation income because these involve issues that are
essentially factual or evidentiary in nature, which must be raised in
the appropriate administrative and/or judicial proceeding.
The Court's Decision upholding the validity of Sections III and IV of the
assailed RMO is to be applied only prospectively.
Finally, the Petition for Mandamus in G.R. No. 213446 is
hereby DENIED on the ground of mootness.
SO ORDERED.
Carpio, Velasco, Jr., Leonardo-De Castro, Peralta, Bersamin, Del
Castillo, Perlas-Bernabe, Leonen, Martires, Tijam, Reyes, Jr.,
and Gesmundo, JJ., concur.
Jardeleza, J., no part prior OSG action.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 168129 April 24, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari
under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
seeking to reverse the Decision1 dated February 18, 2005 and
Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth
Division) in CA-G.R. SP No. 76449.
The factual antecedents of this case, as culled from the records, are:
The Philippine Health Care Providers, Inc., herein respondent, is a
corporation organized and existing under the laws of the Republic of
the Philippines. Pursuant to its Articles of Incorporation,2 its primary
purpose is "To establish, maintain, conduct and operate a prepaid
group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in
the health care plan and to provide for the administrative, legal, and
financial responsibilities of the organization."1^vvphi1.net
On July 25, 1987, President Corazon C. Aquino issued Executive Order
(E.O.) No. 273, amending the National Internal Revenue Code of 1977
(Presidential Decree No. 1158) by imposing Value-Added Tax (VAT) on
the sale of goods and services. This E.O. took effect on January 1,
1988.
Before the effectivity of E.O. No. 273, or on December 10, 1987,
respondent wrote the Commissioner of Internal Revenue (CIR),
petitioner, inquiring whether the services it provides to the
participants in its health care program are exempt from the payment
of the VAT.
On June 8, 1988, petitioner CIR, through the VAT Review Committee
of the Bureau of Internal Revenue (BIR), issued VAT Ruling No. 231-88
stating that respondent, as a provider of medical services, is exempt
from the VAT coverage. This Ruling was subsequently confirmed by
Regional Director Osmundo G. Umali of Revenue Region No. 8 in a
letter dated April 22, 1994.
Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716
(Expanded VAT or E-VAT Law) took effect, amending further the
National Internal Revenue Code of 1977. Then on January 1, 1998,
R.A. No. 8424 (National Internal Revenue Code of 1997) became
effective. This new Tax Code substantially adopted and reproduced
the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT.
In the interim, on October 1, 1999, the BIR sent respondent a
Preliminary Assessment Notice for deficiency in its payment of the
VAT and documentary stamp taxes (DST) for taxable years 1996 and
1997.
On October 20, 1999, respondent filed a protest with the BIR.
On January 27, 2000, petitioner CIR sent respondent a letter
demanding payment of "deficiency VAT" in the amount of
₱100,505,030.26 and DST in the amount of ₱124,196,610.92, or a
total of ₱224,702,641.18 for taxable years 1996 and 1997. Attached to
the demand letter were four (4) assessment notices.
On February 23, 2000, respondent filed another protest questioning
the assessment notices.
Petitioner CIR did not take any action on respondent's protests.
Hence, on September 21, 2000, respondent filed with the Court of Tax
Appeals (CTA) a petition for review, docketed as CTA Case No. 6166.
On April 5, 2002, the CTA rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, the instant Petition for Review
is PARTIALLY GRANTED. Petitioner is hereby ORDERED TO PAY the
deficiency VAT amounting to ₱22,054,831.75 inclusive of 25%
surcharge plus 20% interest from January 20, 1997 until fully paid for
the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until paid for the
1997 VAT deficiency.1awphi1.nét Accordingly, VAT Ruling No. 231-88
is declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the
said DST deficiency tax.
SO ORDERED.
Respondent filed a motion for partial reconsideration of the above
judgment concerning its liability to pay the deficiency VAT.
In its Resolution3 dated March 23, 2003, the CTA granted respondent's
motion, thus:
WHEREFORE, in view of the foregoing, the instant Motion for Partial
Reconsideration is GRANTED. Accordingly, the VAT assessment issued
by herein respondent against petitioner for the taxable years 1996
and 1997 is hereby WITHDRAWN and SET ASIDE.
SO ORDERED.
The CTA held:
Moreover, this court adheres to its conclusion that petitioner is
a service contractor subject to VAT since it does not actually render
medical service but merely acts as a conduit between the members
and petitioner's accredited and recognized hospitals and clinics.
However, after a careful review of the facts of the case as well as the
Law and jurisprudence applicable, this court resolves to grant
petitioner's "Motion for Partial Reconsideration." We are in accord
with the view of petitioner that it is entitled to the benefit of non-
retroactivity of rulings guaranteed under Section 246 of the Tax Code,
in the absence of showing of bad faith on its part. Section 246 of the
Tax Code provides:
Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification
or reversal of any of the rules and regulations promulgated in
accordance with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will
be prejudicial to the taxpayers, x x x.
Clearly, undue prejudice will be caused to petitioner if the revocation
of VAT Ruling No. 231-88 will be retroactively applied to its case. VAT
Ruling No. 231-88 issued by no less than the respondent itself has
confirmed petitioner's entitlement to VAT exemption under Section
103 of the Tax Code. In saying so, respondent has actually broadened
the scope of "medical services" to include the case of the petitioner.
This VAT ruling was even confirmed subsequently by Regional
Director Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit
M). Exhibit P, which served as basis for the issuance of the said VAT
ruling in favor of the petitioner sufficiently described the business of
petitioner and there is no way BIR could be misled by the said
representation as to the real nature of petitioner's business. Such
being the case, this court is convinced that petitioner's reliance on the
said ruling is premised on good faith. The facts of the case do not
show that petitioner deliberately committed mistakes or omitted
material facts when it obtained the said ruling from the Bureau of
Internal Revenue. Thus, in the absence of such proof, this court
upholds the application of Section 246 of the Tax Code. Consequently,
the pronouncement made by the BIR in VAT Ruling No. 231-88 as to
the VAT exemption of petitioner should be upheld.
Petitioner seasonably filed with the Court of Appeals a petition for
review, docketed as CA-G.R. SP No. 76449.
In its Decision dated February 18, 2005, the Court of Appeals affirmed
the CTA Resolution.
Petitioner CIR filed a motion for reconsideration, but it was denied by
the appellate court in its Resolution4 dated May 9, 2005.
Hence, the instant petition for review on certiorari raising these two
issues: (1) whether respondent's services are subject to VAT; and (2)
whether VAT Ruling No. 231-88 exempting respondent from payment
of VAT has retroactive application.
On the first issue, respondent is contesting petitioner's assessment of
its VAT liabilities for taxable years 1996 and 1997.
Section 1025 of the National Internal Revenue Code of 1977, as
amended by E.O. No. 273 (VAT Law) and R.A. No. 7716 (E-VAT Law),
provides:
SEC. 102. Value-added tax on sale of services and use or lease of
properties. - (a) Rate and base of tax. - There shall be levied, assessed
and collected, a value-added tax equivalent to 10% of gross receipts
derived from the sale or exchange of services, including the use or
lease of properties.
The phrase "sale or exchange of service" means the performance of
all kinds of services in the Philippines for a fee, remuneration or
consideration, including those performed or rendered by construction
and service contractors x x x.
Section 1036 of the same Code specifies the exempt transactions from
the provision of Section 102, thus:
SEC. 103. Exempt Transactions. - The following shall be exempt from
the value-added tax:
xxx
(l) Medical, dental, hospital and veterinary services except those
rendered by professionals
xxx
The import of the above provision is plain. It requires no
interpretation. It contemplates the exemption from VAT of taxpayers
engaged in the performance of medical, dental, hospital, and
veterinary services. In Commissioner of International Revenue v.
Seagate Technology (Philippines),7 we defined an exempt transaction
as one involving goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT, under the
Tax Code, without regard to the tax status of the party in the
transaction. In Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.) Inc.,8 we reiterated this definition.
In its letter to the BIR requesting confirmation of its VAT-exempt
status, respondent described its services as follows:
Under the prepaid group practice health care delivery system adopted
by Health Care, individuals enrolled in Health Care's health care
program are entitled to preventive, diagnostic, and corrective medical
services to be dispensed by Health Care's duly licensed physicians,
specialists, and other professional technical staff participating in said
group practice health care delivery system established and operated
by Health Care. Such medical services will be dispensed in a hospital
or clinic owned, operated, or accredited by Health Care. To be entitled
to receive such medical services from Health Care, an individual must
enroll in Health Care's health care program and pay an annual fee.
Enrollment in Health Care's health care program is on a year-to-year
basis and enrollees are issued identification cards.
From the foregoing, the CTA made the following conclusions:
a) Respondent "is not actually rendering medical service but
merely acting as a conduit between the members and their
accredited and recognized hospitals and clinics."
b) It merely "provides and arranges for the provision of pre-
need health care services to its members for a fixed prepaid
fee for a specified period of time."
c) It then "contracts the services of physicians, medical and
dental practitioners, clinics and hospitals to perform such
services to its enrolled members;" and
d) Respondent "also enters into contract with clinics,
hospitals, medical professionals and then negotiates with
them regarding payment schemes, financing and other
procedures in the delivery of health services."
We note that these factual findings of the CTA were neither modified
nor reversed by the Court of Appeals. It is a doctrine that findings of
fact of the CTA, a special court exercising particular expertise on the
subject of tax, are generally regarded as final, binding, and conclusive
upon this Court, more so where these do not conflict with the findings
of the Court of Appeals.9 Perforce, as respondent does not actually
provide medical and/or hospital services, as provided under Section
103 on exempt transactions, but merely arranges for the same, its
services are not VAT-exempt.
Relative to the second issue, Section 246 of the 1997 Tax Code, as
amended, provides that rulings, circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue have no
retroactive application if to apply them would prejudice the taxpayer.
The exceptions to this rule are: (1) where the taxpayer deliberately
misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue; (2) where the
facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based, or (3)
where the taxpayer acted in bad faith.
We must now determine whether VAT Ruling No. 231-88 exempting
respondent from paying its VAT liabilities has retroactive application.
In its Resolution dated March 23, 2003, the CTA found that there is no
showing that respondent "deliberately committed mistakes or
omitted material facts" when it obtained VAT Ruling No. 231-88 from
the BIR. The CTA held that respondent's letter which served as the
basis for the VAT ruling "sufficiently described" its business and
"there is no way the BIR could be misled by the said representation as
to the real nature" of said business.
In sustaining the CTA, the Court of Appeals found that "the failure of
respondent to refer to itself as a health maintenance organization is
not an indication of bad faith or a deliberate attempt to make false
representations." As "the term health maintenance organization did
not as yet have any particular significance for tax purposes,"
respondent's failure "to include a term that has yet to acquire its
present definition and significance cannot be equated with bad faith."
We agree with both the Tax Court and the Court of Appeals that
respondent acted in good faith. In Civil Service Commission v.
Maala,10 we described good faith as "that state of mind denoting
honesty of intention and freedom from knowledge of circumstances
which ought to put the holder upon inquiry; an honest intention to
abstain from taking any unconscientious advantage of another, even
through technicalities of law, together with absence of all
information, notice, or benefit or belief of facts which render
transaction unconscientious."
According to the Court of Appeals, respondent's failure to describe
itself as a "health maintenance organization," which is subject to VAT,
is not tantamount to bad faith. We note that the term "health
maintenance organization" was first recorded in the Philippine
statute books only upon the passage of "The National Health
Insurance Act of 1995" (Republic Act No. 7875). Section 4 (o) (3)
thereof defines a health maintenance organization as "an entity that
provides, offers, or arranges for coverage of designated health
services needed by plan members for a fixed prepaid premium."
Under this law, a health maintenance organization is one of the
classes of a "health care provider."
It is thus apparent that when VAT Ruling No. 231-88 was issued in
respondent's favor, the term "health maintenance organization" was
yet unknown or had no significance for taxation purposes.
Respondent, therefore, believed in good faith that it was VAT exempt
for the taxable years 1996 and 1997 on the basis of VAT Ruling No.
231-88.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11 this Court
held that under Section 246 of the 1997 Tax Code, the Commissioner
of Internal Revenue is precluded from adopting a position contrary to
one previously taken where injustice would result to the
taxpayer. Hence, where an assessment for deficiency withholding
income taxes was made, three years after a new BIR Circular reversed
a previous one upon which the taxpayer had relied upon, such an
assessment was prejudicial to the taxpayer. To rule otherwise, opined
the Court, would be contrary to the tenets of good faith, equity, and
fair play. This Court has consistently reaffirmed its ruling in ABS-CBN
Broadcasting Corp. in the later cases of Commissioner of Internal
Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue v.
Mega Gen. Mdsg. Corp.13Commissioner of Internal Revenue v.
Telefunken Semiconductor (Phils.) Inc.,14 and Commissioner of Internal
Revenue v. Court of Appeals.15 The rule is that the BIR rulings have no
retroactive effect where a grossly unfair deal would result to the
prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet
Corporation,16 wherein the taxpayer was entitled to tax refunds or
credits based on the BIR's own issuances but later was suddenly
saddled with deficiency taxes due to its subsequent ruling changing
the category of the taxpayer's transactions for the purpose of paying
its VAT, this Court ruled that applying such ruling retroactively would
be prejudicial to the taxpayer.
WHEREFORE, we DENY the petition and AFFIRM the assailed
Decision and Resolution of the Court of Appeals in CA-G.R. SP No.
76449. No costs.SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO,
INC., Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the
Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001
Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as
follows:
[Respondent] is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines with principal address located at
Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and Wain
Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the
National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as
its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the actual
operation and maintenance of NAPOCOR’s two power barges as well as the
performance of other duties and acts which necessarily have to be done in the
Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of
currencies (Mark, Yen, and Peso). The freely convertible non-Peso component
is deposited directly to the Consortium’s bank accounts in Denmark and Japan,
while the Peso-denominated component is deposited in a separate and special
designated bank account in the Philippines. On the other hand, the
Consortium pays [respondent] in foreign currency inwardly remitted to the
Philippines through the banking system.
In order to ascertain the tax implications of the above transactions,
[respondent] sought a ruling from the BIR which responded with BIR Ruling
No. 023-95 dated February 14, 1995, declaring therein that if [respondent]
chooses to register as a VAT person and the consideration for its services is
paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid
services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the
Certificate of Registration bearing RDO Control No. 95-113-007556 was issued
in favor of [respondent] by the Revenue District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax
Returns reflecting, among others, a total zero-rated sales of P147,317,189.62
with VAT input taxes of P3,361,174.14, detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14
On December 29, 1997, [respondent] availed of the Voluntary Assessment
Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No.
5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations
No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are
hereby amended to read as follows:
Section 4.102-2(b)(2) – "Services other than processing, manufacturing or
repacking for other persons doing business outside the Philippines for goods
which are subsequently exported, as well as services by a resident to a non-
resident foreign client such as project studies, information services,
engineering and architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent]
subjected its sale of services to the Consortium to the 10% VAT in the total
amount of P103,558,338.11 representing April to December 1996 sales since
said Revenue Regulations No. 5-96 became effective only on April 1996. The
sum of P43,893,951.07, representing January to March 1996 sales was
subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT
return consolidating therein the VAT output and input taxes for the four
calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s
collecting agent, PCIBank, as its output tax liability for the year 1996,
computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99
from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95
"insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April 22,1999,
filed a claim for the issuance of a tax credit certificate with Revenue District
No. 113 of the BIR. [Respondent] believed that it erroneously paid the output
VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP)
of the BIR.4
On 27 December 1999, respondent filed a petition for review with the CTA in
order to toll the running of the two-year prescriptive period under the Tax
Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit
certificate for P6,994,659.67 in favor of respondent. The CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in
accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These
were established by various BPI Credit Memos showing remittances in Danish
Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were further certified
by the Branch Manager x x x of BPI-Davao Lanang Branch to represent
payments for sub-contract fees that came from Den Danske Aktieselskab Bank-
Denmark for the account of [respondent]. Clearly, [respondent’s] sale of
services to the Consortium is subject to VAT at 0% pursuant to Section
108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to the Consortium was even
confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15,
1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment Program by paying output tax
for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the return of
what has been delivered by mistake, the [petitioner] is obligated to issue the
tax credit certificate prayed for by [respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals, which
dismissed the petition for lack of merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s view that since
respondent’s services are not destined for consumption abroad, they are not
of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according
to petitioner, respondent’s services cannot legally qualify for 0% VAT but are
subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioner’s contention that under VAT
Ruling No. 040-98, respondent’s services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioner’s interpretation, there are
two kinds of transactions or services subject to zero percent VAT under VAT
Ruling No. 040-98. These are (a) services other than repacking goods for other
persons doing business outside the Philippines which goods are subsequently
exported; and (b) services by a resident to a non-resident foreign client, such
as project studies, information services, engineering and architectural designs
and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is required by the
provision to be consumed abroad in order to be taxed at zero rate. In x x x the
absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad."10
The Court of Appeals further held that assuming petitioner’s interpretation of
Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment to the Tax Code.
Petitioner went beyond merely providing the implementing details by adding
another requirement to zero-rating. "This is indicated by the additional phrase
‘as well as services by a resident to a non-resident foreign client, such as
project studies, information services and engineering and architectural designs
and other similar services.’ In effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a resident to a non-resident; and
(b) these must be in the nature of project studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of the Tax
Code,12 for services which were performed in the Philippines to enjoy zero-
rating, these must comply only with two requisites, to wit: (1) payment in
acceptable foreign currency and (2) accounted for in accordance with the rules
of the BSP. Section 108(b)(2) of the Tax Code does not provide that services
must be "destined for consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioner’s argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed the ‘destination
principle’ underlies and is the basis of the VAT laws, then petitioner’s proper
remedy would be to recommend an amendment of Section 108(b)(2) to
Congress. Without such amendment, however, petitioner should apply the
terms of the basic law. Petitioner could not resort to administrative legislation,
as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not
on the ground that respondent’s services are subject to 0% VAT. Rather, it is
based on the non-retroactivity of the prejudicial revocation of BIR Ruling No.
023-9517 and VAT Ruling No. 003-99,18 which held that respondent’s services
are subject to 0% VAT and which respondent invoked in applying for refund of
the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996 when
respondent rendered the services and paid the VAT in question, enumerates
which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services performed in
the Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas(BSP);
(2) Services other than those mentioned in the preceding sub-
paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is
a signatory effectively subjects the supply of such services to zero
rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it
complied with the requirements of the Tax Code for zero rating under the
second paragraph of Section 102(b). Respondent asserts that (1) the payment
of its service fees was in acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the Philippines, and (3) accounting of
such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which "constitute the actual operation and
management of two (2) power barges in Mindanao" are not "even remotely
similar to project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No.
5-96." As such, respondent’s services need not be "destined to be consumed
abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules.
Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of
Section 102(b) where the listed services must be "for other persons doing
business outside the Philippines." The phrase "for other persons doing
business outside the Philippines" not only refers to the services enumerated in
the first paragraph of Section 102(b), but also pertains to the general term
"services" appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must
likewise be performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider
and recipient of the "other services" are both doing business in the
Philippines, the payment of foreign currency is irrelevant. Otherwise, those
subject to the regular VAT under Section 102(a) can avoid paying the VAT by
simply stipulating payment in foreign currency inwardly remitted by the
recipient of services. To interpret Section 102(b)(2) to apply to a payer-
recipient of services doing business in the Philippines is to make the payment
of the regular VAT under Section 102(a) dependent on the generosity of the
taxpayer. The provider of services can choose to pay the regular VAT or avoid
it by stipulating payment in foreign currency inwardly remitted by the payer-
recipient. Such interpretation removes Section 102(a) as a tax measure in the
Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency"
under BSP rules, the law clearly envisions the payer-recipient of services to be
doing business outside the Philippines. Only those not doing business in the
Philippines can be required under BSP rules20 to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party to make
payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales
since the payer-recipient of services is doing business outside the Philippines.
Under BSP rules,21 the proceeds of export sales must be reported to the
Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency
proceeds to the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines since their
transaction is not in the nature of an export sale even if payment is
denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in
the Philippines, their transaction falls squarely under Section 102(a) governing
domestic sale or exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).
102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing business
outside the Philippines. Thus, to be exempt from the destination principle
under Section 102(b)(1) and (2), the services must be (a) performed in the
Philippines; (b) for a person doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted for in accordance with BSP
rules.
Respondent’s reliance on the ruling in American Express26 is misplaced. That
case involved a recipient of services, specifically American Express
International, Inc. (Hongkong Branch), doing business outside the Philippines.
There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-
registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client [American Express International,
Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in accordance with BSP rules and
regulations. x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the Consortium – which
is doing business in the Philippines. Hence, American Express’ services were
subject to 0% VAT, while respondent’s services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned
VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as
in the preceding subparagraph," the legislative intent is that only the services
it held that the services being rendered by BWSCMI is subject to VAT at zero
are different between subparagraphs 1 and 2. The requirements for zero-
percent (0%)." Respondent’s reliance on these BIR rulings binds petitioner.
rating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs.
Petitioner’s filing of his Answer before the CTA challenging respondent’s claim
for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR
Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the
Ruling No. 023-95. However, such revocation cannot be given retroactive
present Tax Code clarifies this legislative intent. Expressly included among the
effect since it will prejudice respondent. Changing respondent’s status will
transactions subject to 0% VAT are "[s]ervices other than those mentioned in
deprive respondent of a refund of a substantial amount representing excess
the [first] paragraph [of Section 108(b)] rendered to a person engaged in
output tax.30 Section 246 of the Tax Code provides that any revocation of a
business conducted outside the Philippines or to a nonresident person not
ruling by the Commissioner of Internal Revenue shall not be given retroactive
engaged in business who is outside the Philippines when the services are
application if the revocation will prejudice the taxpayer. Further, there is no
performed, the consideration for which is paid for in acceptable foreign
showing of the existence of any of the exceptions enumerated in Section 246
currency and accounted for in accordance with the rules and regulations of the
of the Tax Code for the retroactive application of such revocation.
BSP."

However, upon the filing of petitioner’s Answer dated 2 March 2000 before
In this case, the payer-recipient of respondent’s services is the Consortium
the CTA contesting respondent’s claim for refund, respondent’s services shall
which is a joint-venture doing business in the Philippines. While the
be subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT
Consortium’s principal members are non-resident foreign corporations, the
Ruling No. 003-99 and BIR Ruling No. 023-95.
Consortium itself is doing business in the Philippines. This is shown clearly in
BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus: WHEREFORE, the Court DENIES the petition.

This refers to your letter dated January 14, 1994 requesting for a clarification SO ORDERED.
of the tax implications of a contract between a consortium composed of
Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering ANTONIO T. CARPIO
& Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to Associate Justice
hereinafter as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-Megawatt power
barges ("Power Barges") acquired by NAPOCOR for a 15-year
term.23 (Emphasis supplied)

Considering this length of time, the Consortium’s operation and maintenance

of NAPOCOR’s power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which
requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium,
not being supplied to a person doing business outside the Philippines, cannot
legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains

NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency
inwardly remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch),24 the place of payment is immaterial, much less is the
place where the output of the service is ultimately used. An essential condition
for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient
of the services is a person doing business outside the Philippines. In this case,
the recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to operate
and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
However, as the Court stated in American Express, there is an exception to this
rule.25 This exception refers to the 0% VAT on services enumerated in Section
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117982 February 6, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA
INDUSTRIES, INC., respondents.
BELLOSILLO, J.:
ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in
the manufacture and sale of cigar and cigarette products. On 7 May
1991 private respondent received a letter dated 26 April 1991 from
the Commissioner of Internal Revenue assessing it deficiency Ad
Valorem Tax (AVT) in the total amount of Four Hundred Eighty-Eight
Thousand Three Hundred Ninety-Six Pesos and Sixty-Two Centavos
(P488,396.62), inclusive of increments, on the removals of cigarette
products from their place of production during the period 2
November 1990 to 22 January 1991.1 Petitioner computes the
deficiency thus —
Total AVT due per manufacturer's declaration P 4,279,042.33
Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85
——————
Deficiency AVT 373,693.48
Add: Penalties:
25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37
20% Interest (P467,116.85 x 82/360 days) 21,279.27
——————
Total Amount Due P 488,396.62
In a letter dated 22 May 1991 received by petitioner on even date,
private respondent thru counsel filed a protest against the proposed
assessment with a request that the same be withdrawn and
cancelled. On 31 May 1991 private respondent received petitioner's
reply dated 27 May 1991 denying its protest and request for
cancellation stating that the decision was final, and at the same time
requesting payment of the revised amount of Five Hundred Twenty
Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos
(P520,835.29), with interest updated, within ten (10) days from
receipt thereof. In a letter dated 10 June 1991 which petitioner
received on the same day, private respondent requested for the
reconsideration of petitioner's denial of its protest. Without waiting
for petitioner's reply to its request for reconsideration, private
respondent filed on 19 June 1991 a petition for review with the Court
of Tax Appeals. On 25 June 1991 private respondent received from
petitioner a letter dated 21 June 1991 denying its request for
reconsideration declaring again that its decision was final. On 8 July
1991 private respondent paid under protest the disputed ad valorem
tax in the sum of P520,835.29.2
In its Decision3 of 1 December 1993 the Court of Tax Appeals ordered
petitioner to refund to private respondent the amount of Five
Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and
Twenty-Nine Centavos (P520,835.29) representing erroneously paid
ad valorem tax for the period 2 November 1990 to 22 January 1991.
The Court of Tax Appeals explained that the subject deficiency excise
tax assessment resulted from private respondent's use of the
computation mandated by BIR Ruling 473-88 dated 4 October 1988 as
basis for computing the fifteen percent (15%) ad valorem tax due on
its removals of cigarettes from 2 November 1990 to 22 January 1991.
BIR Circular 473-88 was issued by Deputy Commissioner Eufracio D.
Santos to Insular-Yebana Tobacco Corporation allowing the latter to
exclude the value-added tax (VAT) in the determination of the gross
selling price for purposes of computing the ad valorem tax of its cigar
and cigarette products in accordance with Sec. 127 of the Tax Code as
amended by Executive Order No. 273 which provides as follows:
Sec. 127. Payment of excise taxes on domestic products. — . . . . (b)
Determination of gross selling price of goods subject to ad valorem
tax. — Unless otherwise provided, the price, excluding the value-
added tax, at which the goods are sold at wholesale in the place of
production or through their sales agents to the public shall constitute
the gross selling price.
The computation, pursuant to the ruling, is illustrated by way of
example thus —
P 44.00x1/1 = P 4.00 VAT
P 44.00 - P 4.00 = P 40.00 price without VAT
P 40.00 x 15% = P 6.00 Ad Valorem Tax
For the period 2 November 1990 to 22 January 1991 private
respondent paid P3,905,348.85 ad valorem tax, applying Sec. 127 (b)
of the NIRC as interpreted by BIR Ruling 473-88 by excluding the VAT
in the determination of the gross selling price.
Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91
to Insular-Yebana Tobacco Corporation revoking BIR Ruling 473-88 for
being violative of Sec. 142 of the Tax Code. It included back the VAT to
the gross selling price in determining the tax base for computing the
ad valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of
the Tax Code, as amended by E.O. No. 273 —
Sec. 142. Cigar and cigarettes — . . . For purposes of this section,
manufacturer's or importer's registered. wholesale price shall include
the ad valorem tax imposed in paragraphs (a), (b), (c) or (d) hereof
and the amount intended to cover the value added tax imposed
under Title IV of this Code.
Petitioner sought to apply the revocation retroactively to private
respondent's removals of cigarettes for the period starting 2
November 1990 to 22 January 1991 on the ground that private
respondent allegedly acted in bad faith which is an exception to the
rule on non-retroactivity of BIR Rulings. 4
On appeal, the Court of Appeals affirmed the Court of Tax Appeals
holding that the retroactive application of BIR Ruling 017-91 cannot
be allowed since private respondent did not act in bad faith; private
respondent's computation under BIR Ruling 473-88 was not shown to
be motivated by ill will or dishonesty partaking the nature of fraud;
hence, this petition.
Petitioner imputes error to the Court of Appeals: (1) in failing to
consider that private respondent's reliance on BIR Ruling 473-88 being
contrary to Sec. 142 of the Tax Code does not confer vested rights to
private respondent in the computation of its ad valorem tax; (2) in
failing to consider that good faith and prejudice to the taxpayer in
cases of reliance on a void BIR Ruling is immaterial and irrelevant and
does not place the government in estoppel in collecting taxes legally
due; (3) in holding that private respondent acted in good faith in
applying BIR Ruling 473-88; and, (4) in failing to consider that the
assessment of petitioner is presumed to be regular and the claim for
tax refund must be strictly construed against private respondent for
being in derogation of sovereign authority.
Petitioner claims that the main issue before us is whether private
respondent's reliance on a void BIR ruling conferred upon the latter a
vested right to apply the same in the computation of its ad valorem
tax and claim for tax refund. Sec. 142 (d) of the Tax Code, which
provides for the inclusion of the VAT in the tax base for purposes of
computing the 15% ad valorem tax, is the applicable law in the instant
case as it specifically applies to the manufacturer's wholesale price of
cigar and cigarette products and not Sec. 127 (b) of the Tax Code
which applies in general to the wholesale of goods or domestic
products. Sec. 142 being a specific provision applicable to cigar and
cigarettes must perforce prevail over Sec. 127 (b), a general provision
of law insofar as the imposition of the ad valorem tax on cigar and
cigarettes is concerned.5 Consequently, the application of Sec. 127 (b)
to the wholesale price of cigar and cigarette products for purposes of
computing the ad valorem tax is patently erroneous. Accordingly, BIR
Ruling 473-88 is void ab initio as it contravenes the express provisions
of Sec. 142 (d) of the Tax Code.6
Petitioner contends that BIR Ruling 473-88 being an erroneous
interpretation of Sec. 142 (b) of the Tax Code does not confer any
vested right to private respondent as to exempt it from the
retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the
New Civil Code is explicit that "(n)o vested or acquired right can arise
from acts or omissions which are against the law . . . "7 It is argued
that the Court of Appeals erred in ruling that retroactive application
cannot be made since private respondent acted in good faith. The
following circumstances would show that private respondent's
reliance on BIR Ruling 473-88 was induced by ill will: first, private
respondent despite knowledge that Sec. 142 of the Tax Code was the
specific provision applicable still shifted its accounting method
pursuant to Sec. 127 (b) of the Tax Code; and, second, the shift in
accounting method was made without any prior consultation with the
BIR.8
It is further contended by petitioner that claims for tax refund must
be construed against private respondent. A tax refund being in the
nature of a tax exemption is regarded as in derogation of the
sovereign authority and is strictly construed against private
respondent as the same partakes the nature of a tax exemption. Tax
exemptions cannot merely be implied but must be categorically and
unmistakably expressed.9
We cannot sustain petitioner. The deficiency tax assessment issued by
petitioner against private respondent is without legal basis because of
the prohibition against the retroactive application of the revocation
of BIR rulings in the absence of bad faith on the part of private
respondent.
The present dispute arose from the discrepancy in the taxable base on
which the excise tax is to apply on account of two incongruous BIR
Rulings: (1) BIR Ruling 473-88 dated 4 October 1988
which excluded the VAT from the tax base in computing the fifteen
percent (15%) excise tax due; and, (2) BIR Ruling 017-91 dated 11
February 1991 which included back the VAT in computing the tax base
for purposes of the fifteen percent (15%) ad valorem tax.
The question as to the correct computation of the excise tax on
cigarettes in the case at bar has been sufficiently addressed by BIR
Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-
88 dated 4 October 1988 —
It is to be noted that Section 127 (b) of the Tax Code as amended
applies in general to domestic products and excludes the value-added
tax in the determination of the gross selling price, which is the tax
base for purposes of the imposition of ad valorem tax. On the other
hand, the last paragraph of Section 142 of the same Code which
includes the value-added tax in the computation of the ad valorem
tax, refers specifically to cigar and cigarettes only. It does not
include/apply to any other articles or goods subject to the ad valorem
tax. Accordingly, Section 142 must perforce prevail over Section 127
(b) which is a general provision of law insofar as the imposition of the
ad valorem tax on cigar and cigarettes is concerned.
Moreover, the phrase unless otherwise provided in Section 127 (b)
purports of exceptions to the general rule contained therein, such as
that of Section 142, last paragraph thereof which explicitly provides
that in the case of cigarettes, the tax base for purposes of the ad
valorem tax shall include, among others, the value-added tax.
Private respondent did not question the correctness of the above BIR
ruling. In fact, upon knowledge of the effectivity of BIR Ruling No.
017-91, private respondent immediately implemented the method of
computation mandated therein by restoring the VAT in computing the
tax base for purposes of the 15% ad valorem tax.
However, well-entrenched is the rule that rulings and circulars, rules
and regulations promulgated by the Commissioner of Internal
Revenue would have no retroactive application if to so apply them
would be prejudicial to the taxpayers. 10
The applicable law is Sec. 246 of the Tax Code which provides —
Sec. 246. Non-retroactivity of rulings. — Any revocation, modification,
or reversal of any rules and regulations promulgated in accordance
with the preceding section or any of the rulings or circulars
promulgated by the Commissioner of Internal Revenue shall not be
given retroactive application if the revocation, modification, or
reversal will be prejudicial to the taxpayers except in the following
cases: a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue; b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or c) where the taxpayer
acted in bad faith.
Without doubt, private respondent would be prejudiced by the
retroactive application of the revocation as it would be assessed
deficiency excise tax.
What is left to be resolved is petitioner's claim that private
respondent falls under the third exception in Sec. 246, i.e., that the
taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It partakes of the nature of fraud; a breach
of a known duty through some motive of interest or ill will. 11 We find
no convincing evidence that private respondent's implementation of
the computation mandated by BIR Ruling 473-88 was ill-motivated or
attended with a dishonest purpose. To the contrary, as a sign of good
faith, private respondent immediately reverted to the computation
mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11
February 1991.
As regards petitioner's argument that private respondent should have
made consultations with it before private respondent used the
computation mandated by BIR Ruling 473-88, suffice it to state that
the aforesaid BIR Ruling was clear and categorical thus leaving no
room for interpretation. The failure of private respondent to consult
petitioner does not imply bad faith on the part of the former.
Admittedly the government is not estopped from collecting taxes
legally due because of mistakes or errors of its agents. But like other
principles of law, this admits of exceptions in the interest of justice
and fair play, as where injustice will result to the taxpayer. 12
WHEREFORE, there being no reversible error committed by
respondent Court of Appeals, the petition is DENIED and petitioner
COMMISSIONER OF INTERNAL REVENUE is ordered to refund private
respondent ALHAMBRA INDUSTRIES, INC., the amount of P520,835.29
upon finality of this Decision.
SO ORDERED.
Padilla, Kapunan and Hermosisima, Jr., JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 187485 February 12, 2013
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SAN ROQUE POWER CORPORATION, Respondent.
X----------------------------X
G.R. No. 196113
TAGANITO MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x----------------------------x
G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
The Cases
G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated
on 25 March 2009 as well as the Resolution3 promulgated on 24 April 2009 by
the Court of Tax Appeals En Banc (CTA EB) in CTA EB No. 408. The CTA EB
affirmed the 29 November 2007 Amended Decision4 as well as the 11 July 2008
Resolution5 of the Second Division of the Court of Tax Appeals (CTA Second
Division) in CTA Case No. 6647. The CTA Second Division ordered the
Commissioner of Internal Revenue (Commissioner) to refund or issue a tax
credit for P483,797,599.65 to San Roque Power Corporation (San Roque) for
unutilized input value-added tax (VAT) on purchases of capital goods and
services for the taxable year 2001.
G.R. No. 196113 is a petition forreview6 assailing theDecision7 promulgated
on 8 December 2010 as well as the Resolution8 promulgated on 14 March 2011
by the CTA EB in CTA EB No. 624. In its Decision, the CTA EB reversed the 8
January 2010 Decision9 as well as the 7 April 2010 Resolution10of the CTA
Second Division and granted the CIR’s petition for review in CTA Case No.
7574. The CTA EB dismissed, for having been prematurely filed, Taganito
Mining Corporation’s (Taganito) judicial claim for P8,365,664.38 tax refund or
credit.
G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated
on 3 December 2010 as well as the Resolution13 promulgated on 17 May 2011
by the CTA EB in CTA EB No. 569. The CTA EB affirmed the 20 July 2009
Decision as well as the 10 November 2009 Resolution of the CTA Second
Division in CTA Case No. 7687. The CTA Second Division denied, due to
prescription, Philex Mining Corporation’s (Philex) judicial claim for
P23,956,732.44 tax refund or credit.
On 3 August 2011, the Second Division of this Court resolved14 to consolidate
G.R. No. 197156 with G.R. No. 196113, which were pending in the same
Division, and with G.R. No. 187485, which was assigned to the Court En Banc.
The Second Division also resolved to refer G.R. Nos. 197156 and 196113 to the
Court En Banc, where G.R. No. 187485, the lower-numbered case, was
assigned.
G.R. No. 187485
CIR v. San Roque Power Corporation
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[CIR] is the duly appointed Commissioner of Internal Revenue, empowered,
among others, to act upon and approve claims for refund or tax credit, with
office at the Bureau of Internal Revenue ("BIR") National Office Building,
Diliman, Quezon City.
[San Roque] is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines with principal office at Barangay San
Roque, San Manuel, Pangasinan. It was incorporated in October 1997 to
design, construct, erect, assemble, own, commission and operate power-
generating plants and related facilities pursuant to and under contract with
the Government of the Republic of the Philippines, or any subdivision,
instrumentality or agency thereof, or any governmentowned or controlled
corporation, or other entity engaged in the development, supply, or
distribution of energy.
As a seller of services, [San Roque] is duly registered with the BIR with
TIN/VAT No. 005-017-501. It is likewise registered with the Board of
Investments ("BOI") on a preferred pioneer status, to engage in the design,
construction, erection, assembly, as well as to own, commission, and operate
electric power-generating plants and related activities, for which it was issued
Certificate of Registration No. 97-356 on February 11, 1998.
On October 11, 1997, [San Roque] entered into a Power Purchase Agreement
("PPA") with the National Power Corporation ("NPC") to develop hydro-
potential of the Lower Agno River and generate additional power and energy
for the Luzon Power Grid, by building the San Roque Multi-Purpose Project
located in San Manuel, Pangasinan. The PPA provides, among others, that [San
Roque] shall be responsible for the design, construction, installation,
completion, testing and commissioning of the Power Station and shall operate
and maintain the same, subject to NPC instructions. During the cooperation
period of twenty-five (25) years commencing from the completion date of the
Power Station, NPC will take and pay for all electricity available from the
Power Station.
On the construction and development of the San Roque Multi- Purpose Project
which comprises of the dam, spillway and power plant, [San Roque] allegedly
incurred, excess input VAT in the amount of ₱559,709,337.54 for taxable year
2001 which it declared in its Quarterly VAT Returns filed for the same year.
[San Roque] duly filed with the BIR separate claims for refund, in the total
amount of ₱559,709,337.54, representing unutilized input taxes as declared in
its VAT returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended Quarterly VAT
Returns for the year 2001 since it increased its unutilized input VAT to the
amount of ₱560,200,283.14. Consequently, [San Roque] filed with the BIR on
even date, separate amended claims for refund in the aggregate amount of
₱560,200,283.14.
[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the
Petition for Review with the Court [of Tax Appeals] in Division on April 10,
2003.
Trial of the case ensued and on July 20, 2005, the case was submitted for
decision.15
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division initially denied San Roque’s claim. In its
Decision16 dated 8 March 2006, it cited the following as bases for the denial of
San Roque’s claim: lack of recorded zero-rated or effectively zero-rated sales;
failure to submit documents specifically identifying the purchased
goods/services related to the claimed input VAT which were included in its
Property, Plant and Equipment account; and failure to prove that the related
construction costs were capitalized in its books of account and subjected to
depreciation.
The CTA Second Division required San Roque to show that it complied with the
following requirements of Section 112(B) of Republic Act No. 8424 (RA
8424)17 to be entitled to a tax refund or credit of input VAT attributable to
capital goods imported or locally purchased: (1) it is a VAT-registered entity;
(2) its input taxes claimed were paid on capital goods duly supported by VAT
invoices and/or official receipts; (3) it did not offset or apply the claimed input
VAT payments on capital goods against any output VAT liability; and (4) its
claim for refund was filed within the two-year prescriptive period both in the
administrative and judicial levels.
The CTA Second Division found that San Roque complied with the first, third,
and fourth requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts
Admitted, Joint Stipulation of Facts, Records, p. 157). It was also established
that the instant claim of ₱560,200,823.14 is already net of the ₱11,509.09
output tax declared by [San Roque] in its amended VAT return for the first
quarter of 2001. Moreover, the entire amount of ₱560,200,823.14 was
deducted by [San Roque] from the total available input tax reflected in its
amended VAT returns for the last two quarters of 2001 and first two quarters
of 2002 (Exhibits M-6, O-6, OO-1 & QQ-1). This means that the claimed input
taxes of ₱560,200,823.14 did not form part of the excess input taxes of
₱83,692,257.83, as of the second quarter of 2002 that was to be carried-over
to the succeeding quarters. Further, [San Roque’s] claim for refund/tax credit
certificate of excess input VAT was filed within the two-year prescriptive
period reckoned from the dates of filing of the corresponding quarterly VAT
returns.
For the first, second, third, and fourth quarters of 2001, [San Roque] filed its
VAT returns on April 25, 2001, July 25, 2001, October 23, 2001 and January 24,
2002, respectively (Exhibits "H, J, L, and N"). These returns were all
subsequently amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the
other hand, [San Roque] originally filed its separate claims for refund on July
10, 2001, October 10, 2001, February 21, 2002, and May 9, 2002 for the first,
second, third, and fourth quarters of 2001, respectively, (Exhibits "EE, FF, GG,
and HH") and subsequently filed amended claims for all quarters on March 28,
2003 (Exhibits "II, JJ, KK, and LL"). Moreover, the Petition for Review was filed
on April 10, 2003. Counting from the respective dates when [San Roque]
originally filed its VAT returns for the first, second, third and fourth quarters of
2001, the administrative claims for refund (original and amended) and the
Petition for Review fall within the two-year prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration on 7 April
2006. In its 29 November 2007 Amended Decision,19 the CTA Second Division
found legal basis to partially grant San Roque’s claim. The CTA Second Division
ordered the Commissioner to refund or issue a tax credit in favor of San Roque
in the amount of ₱483,797,599.65, which represents San Roque’s unutilized
input VAT on its purchases of capital goods and services for the taxable year
2001. The CTA based the adjustment in the amount on the findings of the
independent certified public accountant. The following reasons were cited for
the disallowed claims: erroneous computation; failure to ascertain whether
the related purchases are in the nature of capital goods; and the purchases
pertain to capital goods. Moreover, the reduction of claims was based on the
following: the difference between San Roque’s claim and that appearing on its
books; the official receipts covering the claimed input VAT on purchases of
local services are not within the period of the claim; and the amount of VAT
cannot be determined from the submitted official receipts and invoices. The
CTA Second Division denied San Roque’s claim for refund or tax credit of its
unutilized input VAT attributable to its zero-rated or effectively zero-rated
sales because San Roque had no record of such sales for the four quarters of
2001.
The dispositive portion of the CTA Second Division’s 29 November 2007
Amended Decision reads:
WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is
hereby PARTIALLY GRANTED and this Court’s Decision promulgated on March
8, 2006 in the instant case is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to
ISSUE A TAX CREDIT CERTIFICATE in favor of [San Roque] in the reduced
amount of Four Hundred Eighty Three Million Seven Hundred Ninety Seven
Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos
(₱483,797,599.65) representing unutilized input VAT on purchases of capital
goods and services for the taxable year 2001.
SO ORDERED.20
The Commissioner filed a Motion for Partial Reconsideration on 20 December
2007. The CTA Second Division issued a Resolution dated 11 July 2008 which
denied the CIR’s motion for lack of merit.
The Court of Tax Appeals’ Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB praying for the
denial of San Roque’s claim for refund or tax credit in its entirety as well as for
the setting aside of the 29 November 2007 Amended Decision and the 11 July
2008 Resolution in CTA Case No. 6647.
The CTA EB dismissed the CIR’s petition for review and affirmed the challenged
decision and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and
Revenue Memorandum Circular No. 49-03,22 as its bases for ruling that San
Roque’s judicial claim was not prematurely filed. The pertinent portions of the
Decision state:
More importantly, the Court En Banc has squarely and exhaustively ruled on
this issue in this wise:
It is true that Section 112(D) of the abovementioned provision applies to the
present case. However, what the petitioner failed to consider is Section 112(A)
of the same provision. The respondent is also covered by the two (2) year
prescriptive period. We have repeatedly held that the claim for refund with
the BIR and the subsequent appeal to the Court of Tax Appeals must be filed
within the two-year period.
Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining
and Development Corporation vs. Commissioner of Internal Revenue that the
two-year prescriptive period for filing a claim for input tax is reckoned from
the date of the filing of the quarterly VAT return and payment of the tax due. If
the said period is about to expire but the BIR has not yet acted on the
application for refund, the taxpayer may interpose a petition for review with
this Court within the two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the
Collector (now Commissioner) takes time in deciding the claim, and the period
of two years is about to end, the suit or proceeding must be started in the
Court of Tax Appeals before the end of the two-year period without awaiting
the decision of the Collector.
Furthermore, in the case of Commissioner of Customs and Commissioner of
Internal Revenue vs. The Honorable Court of Tax Appeals and Planters
Products, Inc., the Supreme Court held that the taxpayer need not wait
indefinitely for a decision or ruling which may or may not be forthcoming and
which he has no legal right to expect. It is disheartening enough to a taxpayer
to keep him waiting for an indefinite period of time for a ruling or decision of
the Collector (now Commissioner) of Internal Revenue on his claim for refund.
It would make matters more exasperating for the taxpayer if we were to close
the doors of the courts of justice for such a relief until after the Collector (now
Commissioner) of Internal Revenue, would have, at his personal convenience,
given his go signal.
This Court ruled in several cases that once the petition is filed, the Court has
already acquired jurisdiction over the claims and the Court is not bound to
wait indefinitely for no reason for whatever action respondent (herein
petitioner) may take. At stake are claims for refund and unlike disputed
assessments, no decision of respondent (herein petitioner) is required before
one can go to this Court. (Emphasis supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue Memorandum
Circular No. 49-03 dated August 18, 2003, that [the CIR] knows that claims for
VAT refund or tax credit filed with the Court [of Tax Appeals] can proceed
simultaneously with the ones filed with the BIR and that taxpayers need not
wait for the lapse of the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption of procedures
in handling refund cases that are aligned to the statutory requirements that
refund cases should be elevated to the Court of Tax Appeals before the lapse
of the period prescribed by law, certain provisions of RMC No. 42-2003 are
hereby amended and new provisions are added thereto.
In consonance therewith, the following amendments are being introduced to
RMC No. 42-2003, to wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to
read as follows:
In cases where the taxpayer has filed a "Petition for Review" with the Court of
Tax Appeals involving a claim for refund/TCC that is pending at the
administrative agency (Bureau of Internal Revenue or OSS-DOF), the
administrative agency and the tax court may act on the case separately. While
the case is pending in the tax court and at the same time is still under process
by the administrative agency, the litigation lawyer of the BIR, upon receipt of
the summons from the tax court, shall request from the head of the
investigating/processing office for the docket containing certified true copies
of all the documents pertinent to the claim. The docket shall be presented to
the court as evidence for the BIR in its defense on the tax credit/refund case
filed by the taxpayer. In the meantime, the investigating/processing office of
the administrative agency shall continue processing the refund/TCC case until
such time that a final decision has been reached by either the CTA or the
administrative agency.
If the CTA is able to release its decision ahead of the evaluation of the
administrative agency, the latter shall cease from processing the claim. On the
other hand, if the administrative agency is able to process the claim of the
taxpayer ahead of the CTA and the taxpayer is amenable to the findings
thereof, the concerned taxpayer must file a motion to withdraw the claim with
the CTA.23 (Emphasis supplied)
G.R. No. 196113
Taganito Mining Corporation v. CIR
The Facts
The CTA Second Division’s narration of the pertinent facts is as follows:
Petitioner, Taganito Mining Corporation, is a corporation duly organized and
existing under and by virtue of the laws of the Philippines, with principal office
at 4th Floor, Solid Mills Building, De La Rosa St., Lega[s]pi Village, Makati City.
It is duly registered with the Securities and Exchange Commission with
Certificate of Registration No. 138682 issued on March 4, 1987 with the
following primary purpose:
To carry on the business, for itself and for others, of mining lode and/or placer
mining, developing, exploiting, extracting, milling, concentrating, converting,
smelting, treating, refining, preparing for market, manufacturing, buying,
selling, exchanging, shipping, transporting, and otherwise producing and
dealing in nickel, chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron,
steel, limestone, and all kinds of ores, metals and their by-products and which
by-products thereof of every kind and description and by whatsoever process
the same can be or may hereafter be produced, and generally and without
limit as to amount, to buy, sell, locate, exchange, lease, acquire and deal in
lands, mines, and mineral rights and claims and to conduct all business
appertaining thereto, to purchase, locate, lease or otherwise acquire, mining
claims and rights, timber rights, water rights, concessions and mines, buildings,
dwellings, plants machinery, spare parts, tools and other properties
whatsoever which this corporation may from time to time find to be to its
advantage to mine lands, and to explore, work, exercise, develop or turn to
account the same, and to acquire, develop and utilize water rights in such
manner as may be authorized or permitted by law; to purchase, hire, make,
construct or otherwise, acquire, provide, maintain, equip, alter, erect,
improve, repair, manage, work and operate private roads, barges, vessels,
aircraft and vehicles, private telegraph and telephone lines, and other
communication media, as may be needed by the corporation for its own
purpose, and to purchase, import, construct, machine, fabricate, or otherwise
acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs,
plumes, watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, cook
ovens, crushing works, gasworks, electric lights and power plants and
compressed air plants, chemical works of all kinds, concentrators, smelters,
smelting plants, and refineries, matting plants, warehouses, workshops,
factories, dwelling houses, stores, hotels or other buildings, engines,
machinery, spare parts, tools, implements and other works, conveniences and
properties of any description in connection with or which may be directly or
indirectly conducive to any of the objects of the corporation, and to contribute
to, subsidize or otherwise aid or take part in any operations;
and is a VAT-registered entity, with Certificate of Registration (BIR Form No.
2303) No. OCN 8RC0000017494. Likewise, [Taganito] is registered with the
Board of Investments (BOI) as an exporter of beneficiated nickel silicate and
chromite ores, with BOI Certificate of Registration No. EP-88-306.
Respondent, on the other hand, is the duly appointed Commissioner of
Internal Revenue vested with authority to exercise the functions of the said
office, including inter alia, the power to decide refunds of internal revenue
taxes, fees and other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code (NIRC) or other laws
administered by Bureau of Internal Revenue (BIR) under Section 4 of the NIRC.
He holds office at the BIR National Office Building, Diliman, Quezon City.
[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for
the period January 1, 2005 to December 31, 2005. For easy reference, a
summary of the filing dates of the original and amended Quarterly VAT
Returns for taxable year 2005 of [Taganito] is as follows:
TOTAL P1,446,854,034.6 P2,314,730.4 P6,050,933.9 P8,365,664.3
8 3 5 8
On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large
Taxpayers Audit and Investigation Division II (LTAID II), a letter dated
November 13, 2006 claiming a tax credit/refund of its supposed input VAT
amounting to ₱8,365,664.38 for the period covering January 1, 2004 to
December 31, 2004. On the same date, [Taganito] likewise filed an Application
for Tax Credits/Refunds for the period covering January 1, 2005 to December
31, 2005 for the same amount.
On November 29, 2006, [Taganito] sent again another letter dated November
29, 2004 to [the CIR], to correct the period of the above claim for tax
credit/refund in the said amount of ₱8,365,664.38 as actually referring to the
period covering January 1, 2005 to December 31, 2005.
As the statutory period within which to file a claim for refund for said input
VAT is about to lapse without action on the part of the [CIR], [Taganito] filed
the instant Petition for Review on February 17, 2007.
In his Answer filed on March 28, 2007, [the CIR] interposes the following
defenses:
4. [Taganito’s] alleged claim for refund is subject to administrative
investigation/examination by the Bureau of Internal Revenue (BIR);
5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged
unutilized input VAT on domestic purchases of goods and services and on
importation of capital goods for the period January 1, 2005 to December 31,
2005 is not properly documented;

Exhibit(s) Quarter Nature of Mode of filing Filing Date

the Return 6. [Taganito] must prove that it has complied with the provisions of Sections
112 (A) and (D) and 229 of the National Internal Revenue Code of 1997 (1997
L to L-4 1st Original Electronic April 15, 2005 Tax Code) on the prescriptive period for claiming tax refund/credit;

M to M-3 Amended Electronic July 20, 2005

7. Proof of compliance with the prescribed checklist of requirements to be
N to N-4 Amended Electronic October 18, 2006 submitted involving claim for VAT refund pursuant to Revenue Memorandum
Order No. 53-98, otherwise there would be no sufficient compliance with the
Q to Q-3 2nd Original Electronic July 20, 2005 filing of administrative claim for refund, the administrative claim thereof being
mere proforma, which is a condition sine qua non prior to the filing of judicial
R to R-4 Amended Electronic October 18, 2006 claim in accordance with the provision of Section 229 of the 1997 Tax Code.
Further, Section 112 (D) of the Tax Code, as amended, requires the submission
U to U-4 3rd Original Electronic October 19, 2005
of complete documents in support of the application filed with the BIR before
V to V-4 Amended Electronic October 18, 2006 the 120-day audit period shall apply, and before the taxpayer could avail of
judicial remedies as provided for in the law. Hence, [Taganito’s] failure to
Y to Y-4 4th Original Electronic January 20, 2006 submit proof of compliance with the above-stated requirements warrants
immediate dismissal of the petition for review.
Z to Z-4 Amended Electronic October 18, 2006
8. [Taganito] must prove that it has complied with the invoicing requirements
As can be gleaned from its amended Quarterly VAT Returns, [Taganito] mentioned in Sections 110 and 113 of the 1997 Tax Code, as amended, in
reported zero-rated sales amounting to P1,446,854,034.68; input VAT on its relation to provisions of Revenue Regulations No. 7-95.
domestic purchases and importations of goods (other than capital goods) and
services amounting to P2,314,730.43; and input VAT on its domestic purchases 9. In an action for refund/credit, the burden of proof is on the taxpayer to
and importations of capital goods amounting to P6,050,933.95, the details of establish its right to refund, and failure to sustain the burden is fatal to the
which are summarized as follows: claim for refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466 cited in
Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670);
Period Zero-Rated Sales Input VAT on Input VAT on Total Input
Covered Domestic Domestic VAT 10. Claims for refund are construed strictly against the claimant for the same
Purchases Purchases partake the nature of exemption from taxation (Commissioner of Internal
and and Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with
Importations Importations disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124
of Goods and of Capital SCRA 1211).
Services Goods
SPECIAL AND AFFIRMATIVE DEFENSES
01/01/0 P551,179,871.58 P1,491,880.5 P239,803.22 P1,731,683.7
5- 6 8
03/31/0 11. The Court of Tax Appeals has no jurisdiction to entertain the instant
5 petition for review for failure on the part of [Taganito] to comply with the
provision of Section 112 (D) of the 1997 Tax Code which provides, thus:
04/01/0 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90 Section 112. Refunds or Tax Credits of Input Tax. –
5- xxx xxx xxx
06/30/0 (D) Period within which refund or Tax Credit of Input Taxes shall be Made. – In
5 proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred (120) days from the
07/01/0 480,784,287.30 144,887.67 - 144,887.67
date of submission of complete documents in support of the application filed
5-
in accordance with Subsections (A) and (B) hereof.
09/30/0
5
In cases of full or partial denial for tax refund or tax credit, or the failure on the
10/01/0 350,212,345.02 473,598.03 - 473,598.03 part of the Commissioner to act on the application within the period
5- prescribed above, the taxpayer affected may, within thirty (30) days from the
12/31/0 receipt of the decision denying the claim or after the expiration of the one
5
hundred twenty dayperiod, appeal the decision or the unacted claim with the
Court of Tax Appeals. (Emphasis supplied.)
12. As stated, [Taganito] filed the administrative claim for refund with the
Bureau of Internal Revenue on November 14, 2006. Subsequently on February
14, 2007, the instant petition was filed. Obviously the 120 days given to the
Commissioner to decide on the claim has not yet lapsed when the petition was
filed. The petition was prematurely filed, hence it must be dismissed for lack of
jurisdiction.
During trial, [Taganito] presented testimonial and documentary evidence
primarily aimed at proving its supposed entitlement to the refund in the
amount of ₱8,365,664.38, representing input taxes for the period covering
January 1, 2005 to December 31, 2005. [The CIR], on the other hand, opted not
to present evidence. Thus, in the Resolution promulgated on January 22, 2009,
this case was submitted for decision as of such date, considering [Taganito’s]
"Memorandum" filed on January 19, 2009 and [the CIR’s] "Memorandum"
filed on December 19, 2008.24
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division partially granted Taganito’s claim. In its
Decision25 dated 8 January 2010, the CTA Second Division found that Taganito
complied with the requirements of Section 112(A) of RA 8424, as amended, to
be entitled to a tax refund or credit of input VAT attributable to zero-rated or
effectively zero-rated sales.26
The pertinent portions of the CTA Second Division’s Decision read:
Finally, records show that [Taganito’s] administrative claim filed on November
14, 2006, which was amended on November 29, 2006, and the Petition for
Review filed with this Court on February 14, 2007 are well within the two-year
prescriptive period, reckoned from March 31, 2005, June 30, 2005, September
30, 2005, and December 31, 2005, respectively, the close of each taxable
quarter covering the period January 1, 2005 to December 31, 2005.
In fine, [Taganito] sufficiently proved that it is entitled to a tax credit
certificate in the amount of ₱8,249,883.33 representing unutilized input VAT
for the four taxable quarters of 2005.
WHEREFORE, premises considered, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, [the CIR] is hereby ORDERED to REFUND to
[Taganito] the amount of EIGHT MILLION TWO HUNDRED FORTY NINE
THOUSAND EIGHT HUNDRED EIGHTY THREE PESOS AND THIRTY THREE
CENTAVOS (P8,249,883.33) representing its unutilized input taxes attributable
to zero-rated sales from January 1, 2005 to December 31, 2005.
SO ORDERED.27
The Commissioner filed a Motion for Partial Reconsideration on 29 January
2010. Taganito, in turn, filed a Comment/Opposition on the Motion for Partial
Reconsideration on 15 February 2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s
motion. The CTA Second Division ruled that the legislature did not intend that
Section 112 (Refunds or Tax Credits of Input Tax) should be read in isolation
from Section 229 (Recovery of Tax Erroneously or Illegally Collected) or vice
versa. The CTA Second Division applied the mandatory statute of limitations in
seeking judicial recourse prescribed under Section 229 to claims for refund or
tax credit under Section 112.
The Court of Tax Appeals’ Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review before the CTA
EB assailing the 8 January 2010 Decision and the 7 April 2010 Resolution in CTA
Case No. 7574 and praying that Taganito’s entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for
review and reversed and set aside the challenged decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set
forth the reckoning of the two-year prescriptive period for filing a claim for tax
refund or credit over input VAT to be the close of the taxable quarter when the
sales were made. The CTA EB also relied on this Court’s rulings in the cases
of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.
(Aichi)30 and Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive period
to file a refund for input VAT arising from zero-rated sales should be reckoned
from the close of the taxable quarter when the sales were made. Aichi further
emphasized that the failure to await the decision of the Commissioner or the
lapse of 120-day period prescribed in Section 112(D) amounts to a premature
filing.
The CTA EB found that Taganito filed its administrative claim on 14 November
2006, which was well within the period prescribed under Section 112(A) and
(B) of the 1997 Tax Code. However, the CTA EB found that Taganito’s judicial
claim was prematurely filed. Taganito filed its Petition for Review before the
CTA Second Division on 14 February 2007. The judicial claim was filed after the
lapse of only 92 days from the filing of its administrative claim before the CIR,
in violation of the 120-day period prescribed in Section 112(D) of the 1997 Tax
Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed
Decision dated January 8, 2010 and Resolution dated April 7, 2010 of the
Special Second Division of this Court are hereby REVERSED and SET ASIDE.
Another one is hereby entered DISMISSING the Petition for Review filed in CTA
Case No. 7574 for having been prematurely filed.
SO ORDERED.32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito
timely filed its claim before the CTA. Justice Bautista read Section 112(C) of the
1997 Tax Code (Period within which Refund or Tax Credit of Input Taxes shall
be Made) in conjunction with Section 229 (Recovery of Tax Erroneously or
Illegally Collected). Justice Bautista also relied on this Court’s ruling in Atlas
Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue (Atlas),34 which stated that refundable or creditable input
VAT and illegally or erroneously collected national internal revenue tax are the
same, insofar as both are monetary amounts which are currently in the hands
of the government but must rightfully be returned to the taxpayer. Justice
Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of seeking judicial
redress for refund or tax credit of excess or unutilized input tax with this Court,
either within 30 days from receipt of the denial of its claim, or after the lapse
of the 120-day period in the event of inaction by the Commissioner, provided
that both administrative and judicial remedies must be undertaken within the
2-year period.35
Taganito filed its Motion for Reconsideration on 29 December 2010. The
Commissioner filed an Opposition on 26 January 2011. The CTA EB denied for
lack of merit Taganito’s motion in a Resolution36 dated 14 March 2011. The
CTA EB did not see any justifiable reason to depart from this Court’s rulings
in Aichi and Mirant.
G.R. No. 197156
Philex Mining Corporation v. CIR
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the laws of the
Republic of the Philippines, which is principally engaged in the mining
business, which includes the exploration and operation of mine properties and
commercial production and marketing of mine products, with office address at
27 Philex Building, Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of Internal Revenue
("BIR"), the government entity tasked with the duties/functions of assessing
and collecting all national internal revenue taxes, fees, and charges, and
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, where she can be served with
court processes at the BIR Head Office, BIR Road, Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter
of taxable year 2005 and Amended VAT Return for the same quarter on
December 1, 2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount
of ₱23,956,732.44 with the One Stop Shop Center of the Department of
Finance. However, due to [the CIR’s] failure to act on such claim, on October
17, 2007, pursuant to Sections 112 and 229 of the NIRC of 1997, as amended,
[Philex] filed a Petition for Review, docketed as C.T.A. Case No. 7687.
In [her] Answer, respondent CIR alleged the following special and affirmative
defenses:
4. Claims for refund are strictly construed against the taxpayer as
the same partake the nature of an exemption;
5. The taxpayer has the burden to show that the taxes were
erroneously or illegally paid. Failure on the part of [Philex] to prove
the same is fatal to its cause of action;
6. [Philex] should prove its legal basis for claiming for the amount
being refunded.37
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s
claim due to prescription. The CTA Second Division ruled that the two-year
prescriptive period specified in Section 112(A) of RA 8424, as amended, applies
not only to the filing of the administrative claim with the BIR, but also to the
filing of the judicial claim with the CTA. Since Philex’s claim covered the 3rd
quarter of 2005, its administrative claim filed on 20 March 2006 was timely
filed, while its judicial claim filed on 17 October 2007 was filed late and
therefore barred by prescription.
On 10 November 2009, the CTA Second Division denied Philex’s Motion for
Reconsideration.
The Court of Tax Appeals’ Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a reversal of
the 20 July 2009 Decision and the 10 November 2009 Resolution of the CTA
Second Division in CTA Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition
and affirmed the CTA Second Division’s Decision and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philex’s] administrative claim for
refund was filed within the two-year prescriptive period; however, as to its
judicial claim for refund/credit, records show that on March 20, 2006, [Philex]
applied the administrative claim for refund of unutilized input VAT in the
amount of ₱23,956,732.44 with the One Stop Shop Center of the Department
of Finance, per Application No. 52490. From March 20, 2006, which is also
presumably the date [Philex] submitted supporting documents, together with
the aforesaid application for refund, the CIR has 120 days, or until July 18,
2006, within which to decide the claim. Within 30 days from the lapse of the
120-day period, or from July 19, 2006 until August 17, 2006, [Philex] should
have elevated its claim for refund to the CTA. However, [Philex] filed its
Petition for Review only on October 17, 2007, which is 426 days way beyond
the 30- day period prescribed by law.
Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late.
Thus, the Petition for Review in CTA Case No. 7687 should have been
dismissed on the ground that the Petition for Review was filed way beyond the
30-day prescribed period; thus, no jurisdiction was acquired by the CTA in
Division; and not due to prescription.
WHEREFORE, premises considered, the instant Petition for Review is hereby
DENIED DUE COURSE, and accordingly, DISMISSED. The assailed Decision dated
July 20, 2009, dismissing the Petition for Review in CTA Case No. 7687 due to
prescription, and Resolution dated November 10, 2009 denying [Philex’s]
Motion for Reconsideration are hereby AFFIRMED, with modification that the
dismissal is based on the ground that the Petition for Review in CTA Case No.
7687 was filed way beyond the 30-day prescribed period to appeal.
SO ORDERED.39
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition for Review:
I. The Court of Tax Appeals En Banc erred in holding that [San
Roque’s] claim for refund was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming the amended
decision of the Court of Tax Appeals (Second Division) granting [San
Roque’s] claim for refund of alleged unutilized input VAT on its
purchases of capital goods and services for the taxable year 2001 in
the amount of P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious error and
acted with grave abuse of discretion tantamount to lack or excess of
jurisdiction in erroneously applying the Aichi doctrine in violation of
[Taganito’s] right to due process.
II. The Court of Tax Appeals committed serious error and acted with
grave abuse of discretion amounting to lack or excess of jurisdiction
in erroneously interpreting the provisions of Section 112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to alleged
prescription. The fact is that the petition was filed with the CTA
within the period set by prevailing court rulings at the time it was
filed.
II. The CTA En Banc erred in retroactively applying the Aichi ruling in
denying the petition in this instant case.42
The Court’s Ruling
For ready reference, the following are the provisions of the Tax Code
applicable to the present cases:
Section 105:
Persons Liable. — Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No.
7716.
xxxx
Section 110(B):
Sec. 110. Tax Credits. —
(B) Excess Output or Input Tax. — If at the end of any taxable quarter the
output tax exceeds the input tax, the excess shall be paid by the VAT-
registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: [Provided, That the input
tax inclusive of input VAT carried over from the previous quarter that may be
credited in every quarter shall not exceed seventy percent (70%) of the output
VAT:]43 Provided, however, That any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or credited against
other internal revenue taxes, subject to the provisions of Section 112.
Section 112:44
Sec. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-Rated or Effectively Zero-Rated Sales.— Any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may,
within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has
not been applied against output tax: Provided, however, That in the
case of zero-rated sales under Section 106(A)(2) (a)(1), (2) and (B)
and Section 108(B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.
(B) Capital Goods.- A VAT — registered person may apply for the
issuance of a tax credit certificate or refund of input taxes paid on
capital goods imported or locally purchased, to the extent that such
input taxes have not been applied against output taxes. The
application may be made only within two (2) years after the close of
the taxable quarter when the importation or purchase was made.
(C) Cancellation of VAT Registration. — A person whose registration
has been cancelled due to retirement from or cessation of business,
or due to changes in or cessation of status under Section 106(C) of
this Code may, within two (2) years from the date of cancellation,
apply for the issuance of a tax credit certificate for any unused input
tax which may be used in payment of his other internal revenue
taxes
(D) Period within which Refund or Tax Credit of Input Taxes shall be
Made. — In proper cases, the Commissioner shall grant a refund or
issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in
accordance with Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on the
application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
(E) Manner of Giving Refund. — Refunds shall be made upon
warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by the
Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding:
Provided, that refunds under this paragraph shall be subject to post
audit by the Commission on Audit.
Section 229:
Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding
shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority,
or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two
(2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended administrative
claim with the Commissioner on 28 March 2003, San Roque filed a Petition for
Review with the CTA docketed as CTA Case No. 6647. From this we gather two
crucial facts: first, San Roque did not wait for the 120-day period to lapse
before filing its judicial claim; second, San Roque filed its judicial claim more
than four (4) years before the Atlas45 doctrine, which was promulgated by the
Court on 8 June 2007.
Clearly, San Roque failed to comply with the 120-day waiting period, the time
expressly given by law to the Commissioner to decide whether to grant or
deny San Roque’s application for tax refund or credit. It is indisputable that
compliance with the 120-day waiting period is mandatory and jurisdictional.
The waiting period, originally fixed at 60 days only, was part of the provisions
of the first VAT law, Executive Order No. 273, which took effect on 1 January
1988. The waiting period was extended to 120 days effective 1 January 1998
under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has
been in our statute books for more than fifteen (15) years before San Roque
filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory
provision of law. It violates the doctrine of exhaustion of administrative
remedies and renders the petition premature and thus without a cause of
action, with the effect that the CTA does not acquire jurisdiction over the
taxpayer’s petition. Philippine jurisprudence is replete with cases upholding
and reiterating these doctrinal principles.46
The charter of the CTA expressly provides that its jurisdiction is to review on
appeal "decisions of the Commissioner of Internal Revenue in cases involving x
x x refunds of internal revenue taxes."47 When a taxpayer prematurely files a
judicial claim for tax refund or credit with the CTA without waiting for the
decision of the Commissioner, there is no "decision" of the Commissioner to
review and thus the CTA as a court of special jurisdiction has no jurisdiction
over the appeal. The charter of the CTA also expressly provides that if the
Commissioner fails to decide within "a specific period" required by law, such
"inaction shall be deemed a denial"48 of the application for tax refund or
credit. It is the Commissioner’s decision, or inaction "deemed a denial," that
the taxpayer can take to the CTA for review. Without a decision or an "inaction
x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a
petition for review.49
San Roque’s failure to comply with the 120-day mandatory period renders its
petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity." San Roque’s void petition
for review cannot be legitimized by the CTA or this Court because Article 5 of
the Civil Code states that such void petition cannot be legitimized "except
when the law itself authorizes [its] validity." There is no law authorizing the
petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a
mandatory provision of law cannot claim or acquire any right from his void act.
A right cannot spring in favor of a person from his own void or illegal act. This
doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested
or acquired right can arise from acts or omissions which are against the law or
which infringe upon the rights of others."50 For violating a mandatory provision
of law in filing its petition with the CTA, San Roque cannot claim any right
arising from such void petition. Thus, San Roque’s petition with the CTA is a
mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and
jurisdictional nature of the 120-day period just because the Commissioner
merely asserts that the case was prematurely filed with the CTA and does not
question the entitlement of San Roque to the refund. The mere fact that a
taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him as
a matter of right to a tax refund or credit. Strict compliance with the
mandatory and jurisdictional conditions prescribed by law to claim such tax
refund or credit is essential and necessary for such claim to prosper. Well-
settled is the rule that tax refunds or credits, just like tax exemptions, are
strictly construed against the taxpayer.51 The burden is on the taxpayer to
show that he has strictly complied with the conditions for the grant of the tax
refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated
by law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-
compliance with mandatory periods, non-observance of prescriptive periods,
and non-adherence to exhaustion of administrative remedies bar a taxpayer’s
claim for tax refund or credit, whether or not the Commissioner questions the
numerical correctness of the claim of the taxpayer. This Court should not
establish the precedent that non-compliance with mandatory and
jurisdictional conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent will render
meaningless compliance with mandatory and jurisdictional requirements, for
then every tax refund case will have to be decided on the numerical
correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by
the Atlas doctrine because San Roque filed its petition for review with the CTA
more than four years before Atlas was promulgated. The Atlas doctrine did not
exist at the time San Roque failed to comply with the 120- day period. Thus,
San Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait
for the 120-day period to lapse. In any event, the Atlas doctrine merely stated
that the two-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when
the sales involving the input VAT were made. The Atlas doctrine does not
interpret, expressly or impliedly, the 120+3052 day periods.
In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was
the law cited by the Court in Atlas as the applicable provision of the law did
not yet provide for the 30-day period for the taxpayer to appeal to the CTA
from the decision or inaction of the Commissioner.53 Thus, the Atlas doctrine
cannot be invoked by anyone to disregard compliance with the 30-day
mandatory and jurisdictional period. Also, the difference between
the Atlas doctrine on one hand, and the Mirant54 doctrine on the other hand,
is a mere 20 days. The Atlas doctrine counts the two-year prescriptive period
from the date of payment of the output VAT, which means within 20 days
after the close of the taxable quarter. The output VAT at that time must be
paid at the time of filing of the quarterly tax returns, which were to be filed
"within 20 days following the end of each quarter."
Thus, in Atlas, the three tax refund claims listed below were deemed timely
filed because the administrative claims filed with the Commissioner, and the
petitions for review filed with the CTA, were all filed within two years from the
Date of Filing
Date of Filing Date of Filing
Return
Period Covered Administrative Petition With
& Payment of
Claim CTA
Tax
2nd Quarter, 20 July 1990 21 August 1990 20 July 1992
1990
Close of Quarter
30 June 1990
3rd Quarter, 18 October 1990 21 November 1990 9 October
1990 1992
Close of Quarter
30 September
1990
4th Quarter, 20 January 1991 19 February 1991 14 January
1990 1993
Close of Quarter
31 December
1990
date of payment of the output VAT, following Section 229:
Atlas paid the output VAT at the time it filed the quarterly tax returns on the
20th, 18th, and 20th day after the close of the taxable quarter. Had the
twoyear prescriptive period been counted from the "close of the taxable
quarter" as expressly stated in the law, the tax refund claims of Atlas would
have already prescribed. In contrast, the Mirant doctrine counts the two-year
prescriptive period from the "close of the taxable quarter when the sales were
made" as expressly stated in the law, which means the last day of the taxable
quarter. The 20-day difference55 between the Atlas doctrine and the
later Mirant doctrine is not material to San Roque’s claim for tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is
immaterial because what is at issue in the present case is San Roque’s non-
compliance with the 120-day mandatory and jurisdictional period, which is
counted from the date it filed its administrative claim with the Commissioner.
The 120-day period may extend beyond the two-year prescriptive period, as
long as the administrative claim is filed within the two-year prescriptive
period. However, San Roque’s fatal mistake is that it did not wait for the
Commissioner to decide within the 120-day period, a mandatory period
whether the Atlas or the Mirant doctrine is applied.
At the time San Roque filed its petition for review with the CTA, the 120+30
day mandatory periods were already in the law. Section 112(C)56 expressly
grants the Commissioner 120 days within which to decide the taxpayer’s claim.
The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied
exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot
simply file a petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional period. The CTA will
have no jurisdiction because there will be no "decision" or "deemed a denial"
decision of the Commissioner for the CTA to review. In San Roque’s case, it
filed its petition with the CTA a mere 13 days after it filed its administrative
claim with the Commissioner. Indisputably, San Roque knowingly violated the
mandatory 120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to
the CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba
legis doctrine, this law should be applied exactly as worded since it is clear,
plain, and unequivocal. As this law states, the taxpayer may, if he wishes,
appeal the decision of the Commissioner to the CTA within 30 days from
receipt of the Commissioner’s decision, or if the Commissioner does not act on
the taxpayer’s claim within the 120-day period, the taxpayer may appeal to
the CTA within 30 days from the expiration of the 120-day period.
b. G.R. No. 196113 - Taganito Mining Corporation v. CIR
Like San Roque, Taganito also filed its petition for review with the CTA without
waiting for the 120-day period to lapse. Also, like San Roque, Taganito filed its
judicial claim before the promulgation of the Atlas doctrine. Taganito filed a
Petition for Review on 14 February 2007 with the CTA. This is almost four
months before the adoption of the Atlas doctrine on 8 June 2007. Taganito is
similarly situated as San Roque - both cannot claim being misled, misguided, or
confused by the Atlas doctrine.
However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December
2003, which expressly ruled that the "taxpayer-claimant need not wait for the
lapse of the 120-day period before it could seek judicial relief with the CTA by
way of Petition for Review." Taganito filed its judicial claim after the issuance
of BIR Ruling No. DA-489-03 but before the adoption of the Aichi doctrine.
Thus, as will be explained later, Taganito is deemed to have filed its judicial
claim with the CTA on time.
c. G.R. No. 197156 – Philex Mining Corporation v. CIR
Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter
of taxable year 2005; (2) filed on 20 March 2006 its administrative claim for
refund or credit; (3) filed on 17 October 2007 its Petition for Review with the
CTA. The close of the third taxable quarter in 2005 is 30 September 2005,
which is the reckoning date in computing the two-year prescriptive period
under Section 112(A).
Philex timely filed its administrative claim on 20 March 2006, within the two-
year prescriptive period. Even if the two-year prescriptive period is computed
from the date of payment of the output VAT under Section 229, Philex still
filed its administrative claim on time. Thus, the Atlas doctrine is immaterial in
this case. The Commissioner had until 17 July 2006, the last day of the 120-day
period, to decide Philex’s claim. Since the Commissioner did not act on Philex’s
claim on or before 17 July 2006, Philex had until 17 August 2006, the last day
of the 30-day period, to file its judicial claim. The CTA EB held that 17 August
2006 was indeed the last day for Philex to file its judicial claim. However,
Philex filed its Petition for Review with the CTA only on 17 October 2007, or
four hundred twenty-six (426) days after the last day of filing. In short, Philex
was late by one year and 61 days in filing its judicial claim. As the CTA EB
correctly found:
Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days
late. Thus, the Petition for Review in C.T.A. Case No. 7687 should have been
dismissed on the ground that the Petition for Review was filed way beyond the
30-day prescribed period; thus, no jurisdiction was acquired by the CTA
Division; x x x58 (Emphasis supplied)
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but
of late filing. Philex did not file any petition with the CTA within the 120-day
period. Philex did not also file any petition with the CTA within 30 days after
the expiration of the 120-day period. Philex filed its judicial claim long
after the expiration of the 120-day period, in fact 426 days after the lapse of
the 120-day period. In any event, whether governed by jurisprudence before,
during, or after the Atlas case, Philex’s judicial claim will have to be rejected
because of late filing. Whether the two-year prescriptive period is counted
from the date of payment of the output VAT following the Atlas doctrine, or
from the close of the taxable quarter when the sales attributable to the input
VAT were made following the Mirant and Aichi doctrines, Philex’s judicial
claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim.
The inaction of the Commissioner on Philex’s claim during the 120-day period
is, by express provision of law, "deemed a denial" of Philex’s claim. Philex had
30 days from the expiration of the 120-day period to file its judicial claim with
the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of
the Commissioner final and inappealable. The right to appeal to the CTA from
a decision or "deemed a denial" decision of the Commissioner is merely a
statutory privilege, not a constitutional right. The exercise of such statutory
privilege requires strict compliance with the conditions attached by the statute
for its exercise.59 Philex failed to comply with the statutory conditions and
must thus bear the consequences.
II. Prescriptive Periods under Section 112(A) and (C)
There are three compelling reasons why the 30-day period need not
necessarily fall within the two-year prescriptive period, as long as the
administrative claim is filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides
that the taxpayer "may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance
of a tax credit certificate or refund of the creditable input tax due or
paid to such sales." In short, the law states that the taxpayer may
apply with the Commissioner for a refund or credit "within two (2)
years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with
the Commissioner on the last day of the two-year prescriptive
period and it will still strictly comply with the law. The twoyear
prescriptive period is a grace period in favor of the taxpayer and he
can avail of the full period before his right to apply for a tax refund
or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide
the application for refund or credit "within one hundred twenty
(120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsection (A)."
The reference in Section 112(C) of the submission of documents "in
support of the application filed in accordance with Subsection A"
means that the application in Section 112(A) is the administrative
claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A)
refers to the period within which the taxpayer can file an
administrative claim for tax refund or credit. Stated otherwise, the
two-year prescriptive period does not refer to the filing of the
judicial claim with the CTA but to the filing of the administrative
claim with the Commissioner. As held in Aichi, the "phrase ‘within
two years x x x apply for the issuance of a tax credit or
refund’ refers to applications for refund/credit with the CIR and not
to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within
the two-year prescriptive period (equivalent to 730 days60), then
the taxpayer must file his administrative claim for refund or credit
within the first 610 days of the two-year prescriptive
period. Otherwise, the filing of the administrative claim beyond the
first 610 days will result in the appeal to the CTA being filed beyond
the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his
120-day period, will have until the 731st day to decide the claim. If
the Commissioner decides only on the 731st day, or does not decide
at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days)
has lapsed. The 30-day period granted by law to the taxpayer to file
 an appeal before the CTA becomes utterly useless, even if the
taxpayer complied with the law by filing his administrative claim
within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive
period adds a condition that is not found in the law. It results in truncating 120
days from the 730 days that the law grants the taxpayer for filing his
administrative claim with the Commissioner. This Court cannot interpret a law
to defeat, wholly or even partly, a remedy that the law expressly grants in
clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund
or credit at anytime within the two-year prescriptive period. If he files his
claim on the last day of the two-year prescriptive period, his claim is still filed
on time. The Commissioner will have 120 days from such filing to decide the
claim. If the Commissioner decides the claim on the 120th day, or does not
decide it on that day, the taxpayer still has 30 days to file his judicial claim with
the CTA. This is not only the plain meaning but also the only logical
interpretation of Section 112(A) and (C).
III. "Excess" Input VAT and "Excessively" Collected Tax
The input VAT is not "excessively" collected as understood under Section 229
because at the time the input VAT is collected the amount paid is correct and
proper. The input VAT is a tax liability of, and legally paid by, a VAT-registered
seller61 of goods, properties or services used as input by another VAT-
registered person in the sale of his own goods, properties, or services. This tax
liability is true even if the seller passes on the input VAT to the buyer as part of
the purchase price. The second VAT-registered person, who is not legally liable
for the input VAT, is the one who applies the input VAT as credit for his own
output VAT.62 If the input VAT is in fact "excessively" collected as understood
under Section 229, then it is the first VAT-registered person - the taxpayer who
is legally liable and who is deemed to have legally paid for the input VAT - who
can ask for a tax refund or credit under Section 229 as an ordinary refund or
credit outside of the VAT System. In such event, the second VAT-registered
taxpayer will have no input VAT to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section 110(B) and
Section 112(A), the input VAT is not "excessively" collected as understood
under Section 229. At the time of payment of the input VAT the amount paid is
the correct and proper amount. Under the VAT System, there is no claim or
issue that the input VAT is "excessively" collected, that is, that the input VAT
paid is more than what is legally due. The person legally liable for the input
VAT cannot claim that he overpaid the input VAT by the mere existence of an
"excess" input VAT. The term "excess" input VAT simply means that the input
VAT available as credit exceeds the output VAT, not that the input VAT is
excessively collected because it is more than what is legally due. Thus, the
taxpayer who legally paid the input VAT cannot claim for refund or credit of
the input VAT as "excessively" collected under Section 229.
Under Section 229, the prescriptive period for filing a judicial claim for refund
is two years from the date of payment of the tax "erroneously, x x x illegally, x
x x excessively or in any manner wrongfully collected." The prescriptive period
is reckoned from the date the person liable for the tax pays the tax. Thus, if
the input VAT is in fact "excessively" collected, that is, the person liable for the
tax actually pays more than what is legally due, the taxpayer must file a
judicial claim for refund within two years from his date of payment. Only the
person legally liable to pay the tax can file the judicial claim for refund. The
person to whom the tax is passed on as part of the purchase price has no
personality to file the judicial claim under Section 229.63
Under Section 110(B) and Section 112(A), the prescriptive period for filing a
judicial claim for "excess" input VAT is two years from the close of the taxable
quarter when the sale was made by the person legally liable to pay
the output VAT. This prescriptive period has no relation to the date of
payment of the "excess" input VAT. The "excess" input VAT may have been
paid for more than two years but this does not bar the filing of a judicial claim
for "excess" VAT under Section 112(A), which has a different reckoning period
from Section 229. Moreover, the person claiming the refund or credit of the
input VAT is not the person who legally paid the input VAT. Such person
seeking the VAT refund or credit does not claim that the input VAT was
"excessively" collected from him, or that he paid an input VAT that is more
than what is legally due. He is not the taxpayer who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added
by the taxpayer in the chain of transactions. For simplicity and efficiency in tax
collection, the VAT is imposed not just on the value added by the taxpayer, but
on the entire selling price of his goods, properties or services. However, the
taxpayer is allowed a refund or credit on the VAT previously paid by those who
sold him the inputs for his goods, properties, or services. The net effect is that
the taxpayer pays the VAT only on the value that he adds to the goods,
properties, or services that he actually sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his
output VAT. The only exception is when the taxpayer is expressly "zero-rated
or effectively zero-rated" under the law, like companies generating power
through renewable sources of energy.64 Thus, a non zero-rated VAT-registered
taxpayer who has no output VAT because he has no sales cannot claim a tax
refund or credit of his unused input VAT under the VAT System. Even if the
taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a
tax refund or credit of his "excess" input VAT under the VAT System. He can
only carry-over and apply his "excess" input VAT against his future output VAT.
If such "excess" input VAT is an "excessively" collected tax, the taxpayer
should be able to seek a refund or credit for such "excess" input VAT whether
or not he has output VAT. The VAT System does not allow such refund or
credit. Such "excess" input VAT is not an "excessively" collected tax under
Section 229. The "excess" input VAT is a correctly and properly collected tax.
However, such "excess" input VAT can be applied against the output VAT
because the VAT is a tax imposed only on the value added by the taxpayer. If
the input VAT is in fact "excessively" collected under Section 229, then it is the
person legally liable to pay the input VAT, not the person to whom the tax was
passed on as part of the purchase price and claiming credit for the input VAT
under the VAT System, who can file the judicial claim under Section 229.
Any suggestion that the "excess" input VAT under the VAT System is an
"excessively" collected tax under Section 229 may lead taxpayers to file a claim
for refund or credit for such "excess" input VAT under Section 229 as an
ordinary tax refund or credit outside of the VAT System. Under Section 229,
mere payment of a tax beyond what is legally due can be claimed as a refund
or credit. There is no requirement under Section 229 for an output VAT or
subsequent sale of goods, properties, or services using materials subject to
input VAT.
From the plain text of Section 229, it is clear that what can be refunded or
credited is a tax that is "erroneously, x x x illegally, x x x excessively or in any
manner wrongfully collected." In short, there must be a wrongful
payment because what is paid, or part of it, is not legally due. As the Court
held in Mirant, Section 229 should "apply only to instances of erroneous
payment or illegal collection of internal revenue taxes." Erroneous or wrongful
payment includes excessive payment because they all refer to payment of
taxes not legally due. Under the VAT System, there is no claim or issue that the
"excess" input VAT is "excessively or in any manner wrongfully collected." In
fact, if the "excess" input VAT is an "excessively" collected tax under Section
229, then the taxpayer claiming to apply such "excessively" collected input
VAT to offset his output VAT may have no legal basis to make such offsetting.
The person legally liable to pay the input VAT can claim a refund or credit for
such "excessively" collected tax, and thus there will no longer be any "excess"
input VAT. This will upend the present VAT System as we know it.
IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of input VAT
must comply with the two-year prescriptive period under Section 229, should
be effective only from its promulgation on 8 June 2007 until its abandonment
on 12 September 2008 in Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period from the date of payment of the
output VAT. Prior to the Atlas doctrine, the two-year prescriptive period for
claiming refund or credit of input VAT should be governed by Section 112(A)
following the verba legis rule. The Mirant ruling, which abandoned
the Atlas doctrine, adopted the verba legis rule, thus applying Section 112(A)
in computing the two-year prescriptive period in claiming refund or credit of
input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section
112(C) because the application of the 120+30 day periods was not in issue
in Atlas. The application of the 120+30 day periods was first raised in Aichi,
which adopted the verba legis rule in holding that the 120+30 day periods are
mandatory and jurisdictional. The language of Section 112(C) is plain, clear,
and unambiguous. When Section 112(C) states that "the Commissioner shall
grant a refund or issue the tax credit within one hundred twenty (120) days
from the date of submission of complete documents," the law clearly gives the
Commissioner 120 days within which to decide the taxpayer’s claim. Resort to
the courts prior to the expiration of the 120-day period is a patent violation of
the doctrine of exhaustion of administrative remedies, a ground for dismissing
the judicial suit due to prematurity. Philippine jurisprudence is awash with
cases affirming and reiterating the doctrine of exhaustion of administrative
remedies.65 Such doctrine is basic and elementary.
When Section 112(C) states that "the taxpayer affected may, within thirty (30)
days from receipt of the decision denying the claim or after the expiration of
the one hundred twenty-day period, appeal the decision or the unacted claim
with the Court of Tax Appeals," the law does not make the 120+30 day periods
optional just because the law uses the word "may." The word "may" simply
means that the taxpayer may or may not appeal the decision of the
Commissioner within 30 days from receipt of the decision, or within 30 days
from the expiration of the 120-day period. Certainly, by no stretch of the
imagination can the word "may" be construed as making the 120+30 day
periods optional, allowing the taxpayer to file a judicial claim one day after
filing the administrative claim with the Commissioner.
The old rule66 that the taxpayer may file the judicial claim, without waiting for
the Commissioner’s decision if the two-year prescriptive period is about to
expire, cannot apply because that rule was adopted before the enactment of
the 30-day period. The 30-day period was adopted precisely to do away with
the old rule, so that under the VAT System the taxpayer will always have 30
days to file the judicial claim even if the Commissioner acts only on the 120th
day, or does not act at all during the 120-day period. With the 30-day period
always available to the taxpayer, the taxpayer can no longer file a judicial
claim for refund or credit of input VAT without waiting for the Commissioner
to decide until the expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is
construed strictly against the taxpayer. One of the conditions for a judicial
claim of refund or credit under the VAT System is compliance with the 120+30
day mandatory and jurisdictional periods. Thus, strict compliance with the
120+30 day periods is necessary for such a claim to prosper, whether before,
during, or after the effectivity of the Atlas doctrine, except for the period from
the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October
2010 when the Aichi doctrine was adopted, which again reinstated the 120+30
day periods as mandatory and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the
taxpayer need not wait for the 120-day period to expire before filing a judicial
claim with the CTA. RMC 49-03 merely authorizes the BIR to continue
processing the administrative claim even after the taxpayer has filed its
judicial claim, without saying that the taxpayer can file its judicial claim before
the expiration of the 120-day period. RMC 49-03 states: "In cases where the
taxpayer has filed a ‘Petition for Review’ with the Court of Tax Appeals
involving a claim for refund/TCC that is pending at the administrative agency
(either the Bureau of Internal Revenue or the One- Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the Department of Finance), the
administrative agency and the court may act on the case separately." Thus, if
the taxpayer files its judicial claim before the expiration of the 120-day period,
the BIR will nevertheless continue to act on the administrative claim because
such premature filing cannot divest the Commissioner of his statutory power
and jurisdiction to decide the administrative claim within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the 120- day
period, the Commissioner can still continue to evaluate the administrative
claim. There is nothing new in this because even after the expiration of the
120-day period, the Commissioner should still evaluate internally the
administrative claim for purposes of opposing the taxpayer’s judicial claim, or
even for purposes of determining if the BIR should actually concede to the
taxpayer’s judicial claim. The internal administrative evaluation of the
taxpayer’s claim must necessarily continue to enable the BIR to oppose
intelligently the judicial claim or, if the facts and the law warrant otherwise,
for the BIR to concede to the judicial claim, resulting in the termination of the
judicial proceedings.
What is important, as far as the present cases are concerned, is that the mere
filing by a taxpayer of a judicial claim with the CTA before the expiration of the
120-day period cannot operate to divest the Commissioner of his jurisdiction
to decide an administrative claim within the 120-day mandatory
period, unless the Commissioner has clearly given cause for equitable estoppel
to apply as expressly recognized in Section 246 of the Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel
under Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states
that the "taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for Review."
Prior to this ruling, the BIR held, as shown by its position in the Court of
Appeals,68 that the expiration of the 120-day period is mandatory and
jurisdictional before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional,
and that the CTA does not acquire jurisdiction over a judicial claim that is filed
before the expiration of the 120-day period. There are, however, two
exceptions to this rule. The first exception is if the Commissioner, through a
specific ruling, misleads a particular taxpayer to prematurely file a judicial
claim with the CTA. Such specific ruling is applicable only to such particular
taxpayer. The second exception is where the Commissioner, through a general
interpretative rule issued under Section 4 of the Tax Code, misleads all
taxpayers into filing prematurely judicial claims with the CTA. In these cases,
the Commissioner cannot be allowed to later on question the CTA’s
assumption of jurisdiction over such claim since equitable estoppel has set in
as expressly authorized under Section 246 of the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly
grants to the Commissioner the power to interpret tax laws, thus:
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.
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 or other 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.
Since the Commissioner has exclusive and original jurisdiction to interpret tax
laws, taxpayers acting in good faith should not be made to suffer for adhering
to general interpretative rules of the Commissioner interpreting tax laws,
should such interpretation later turn out to be erroneous and be reversed by
the Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly
provides that a reversal of a BIR regulation or ruling cannot adversely
prejudice a taxpayer who in good faith relied on the BIR regulation or ruling
prior to its reversal. Section 246 provides as follows:
Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance with
the preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the
following cases:
(a) Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied
upon by taxpayers from the time the rule is issued up to its reversal by the
Commissioner or this Court. Section 246 is not limited to a reversal only by the
Commissioner because this Section expressly states, "Any revocation,
modification or reversal" without specifying who made the revocation,
modification or reversal. Hence, a reversal by this Court is covered under
Section 246.
Taxpayers should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi69 is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This
Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under
Section 246, should also apply prospectively. As held by this Court in CIR v.
Philippine Health Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that
under Section 246 of the 1997 Tax Code, the Commissioner of Internal
Revenue is precluded from adopting a position contrary to one previously
taken where injustice would result to the taxpayer. Hence, where an
assessment for deficiency withholding income taxes was made, three years
after a new BIR Circular reversed a previous one upon which the taxpayer had
relied upon, such an assessment was prejudicial to the taxpayer. To rule
otherwise, opined the Court, would be contrary to the tenets of good faith,
equity, and fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting
Corp.1âwphi1 in the later cases of Commissioner of Internal Revenue v.
Borroughs, Ltd., Commissioner of Internal Revenue v. Mega Gen. Mdsg.
Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.)
Inc., and Commissioner of Internal Revenue v. Court of Appeals. The rule is that
the BIR rulings have no retroactive effect where a grossly unfair deal would
result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation,
wherein the taxpayer was entitled to tax refunds or credits based on the BIR’s
own issuances but later was suddenly saddled with deficiency taxes due to its
subsequent ruling changing the category of the taxpayer’s transactions for the
purpose of paying its VAT, this Court ruled that applying such ruling
retroactively would be prejudicial to the taxpayer. (Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable
only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a
response to a query made, not by a particular taxpayer, but by a government
agency tasked with processing tax refunds and credits, that is, the One Stop
Shop Inter-Agency Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this government
agency mentions in its query to the Commissioner the administrative claim of
Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-
day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance
on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four
reasons: first, it is admittedly an erroneous interpretation of the law; second,
prior to its issuance, the BIR held that the 120-day period was mandatory and
jurisdictional, which is the correct interpretation of the law; third, prior to its
issuance, no taxpayer can claim that it was misled by the BIR into filing a
judicial claim prematurely; and fourth, a claim for tax refund or credit, like a
claim for tax exemption, is strictly construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it
filed its judicial claim prematurely on 10 April 2003, before the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. To repeat, San Roque cannot
claim that it was misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San Roque filed its
judicial claim. At the time San Roque filed its judicial claim, the law as applied
and administered by the BIR was that the Commissioner had 120 days to act
on administrative claims. This was in fact the position of the BIR prior to the
issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the
benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether in this Court, the
CTA, or before the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14 February
2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003.
Truly, Taganito can claim that in filing its judicial claim prematurely without
waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-
489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03,
which shields the filing of its judicial claim from the vice of prematurity.
Philex’s situation is not a case of premature filing of its judicial claim but of
late filing, indeed very late filing. BIR Ruling No. DA-489-03 allowed premature
filing of a judicial claim, which means non-exhaustion of the 120-day period for
the Commissioner to act on an administrative claim. Philex cannot claim the
benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim
prematurely but filed it long after the lapse of the 30-day period following the
expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days
after the lapse of the 30-day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this Court had
already made a ruling that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year
prescriptive period. The effect of the claim of the dissenting opinions is that
San Roque’s failure to wait for the 120-day mandatory period to lapse is
inconsequential, thus allowing San Roque to claim the tax refund or credit.
However, the five cases cited by the dissenting opinions do not support even
remotely the claim that this Court had already made such a ruling. None of
these five cases mention, cite, discuss, rule or even hint that compliance with
the 120-day mandatory period is inconsequential as long as the administrative
and judicial claims are filed within the two-year prescriptive period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether
any output VAT was actually passed on to Toshiba that it could claim as input
VAT subject to tax credit or refund. The Commissioner argued that "although
Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable
business." The Commissioner cited Section 4.106-1 of Revenue Regulations No.
75 that "refund of input taxes on capital goods shall be allowed only to the
extent that such capital goods are used in VAT-taxable business." In the words
of the Court, "Ultimately, however, the issue still to be resolved herein shall be
whether respondent Toshiba is entitled to the tax credit/refund of its input
VAT on its purchases of capital goods and services, to which this Court answers
in the affirmative." Nowhere in this case did the Court discuss, state, or rule
that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period.
In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be
resolved in the instant case are (1) whether the absence of the BIR authority to
print or the absence of the TIN-V in petitioner’s export sales invoices operates
to forfeit its entitlement to a tax refund/credit of its unutilized input VAT
attributable to its zero-rated sales; and (2) whether petitioner’s failure to
indicate "TIN-V" in its sales invoices automatically invalidates its claim for a tax
credit certification." Again, nowhere in this case did the Court discuss, state, or
rule that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x
x x the CTA First Division, conceding that petitioner’s transactions fall under
the classification of zero-rated sales, nevertheless denied petitioner’s claim
‘for lack of substantiation,’ x x x." The Court quoted the ruling of the First
Division that "valid VAT official receipts, and not mere sale invoices, should
have been submitted" by petitioner to substantiate its claim. The Court further
stated: "x x x the CTA En Banc, x x x affirmed x x x the CTA First Division," and
"petitioner’s motion for reconsideration having been denied x x x, the present
petition for review was filed." Clearly, the sole issue in this case is whether
petitioner complied with the substantiation requirements in claiming for tax
refund or credit. Again, nowhere in this case did the Court discuss, state, or
rule that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the Court put the
issue in this manner: "Simply put, the sole issue the petition raises is whether
or not the CTA erred in granting respondent Ironcon’s application for refund of
its excess creditable VAT withheld." The Commissioner argued that "since the
NIRC does not specifically grant taxpayers the option to
refund excess creditable VAT withheld, it follows that such refund cannot be
allowed." Thus, this case is solely about whether the taxpayer has the right
under the NIRC to ask for a cash refund of excess creditable VAT withheld.
Again, nowhere in this case did the Court discuss, state, or rule that the filing
dates of the administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was
exempt or subject to VAT. Compliance with the 120-day period was never an
issue in Cebu Toyo. As the Court explained:
Both the Commissioner of Internal Revenue and the Office of the Solicitor
General argue that respondent Cebu Toyo Corporation, as a PEZA-registered
enterprise, is exempt from national and local taxes, including VAT, under
Section 24 of Rep. Act No. 7916 and Section 109 of the NIRC. Thus, they
contend that respondent Cebu Toyo Corporation is not entitled to any refund
or credit on input taxes it previously paid as provided under Section 4.103-1 of
Revenue Regulations No. 7-95, notwithstanding its registration as a VAT
taxpayer. For petitioner claims that said registration was erroneous and did
not confer upon the respondent any right to claim recognition of the input tax
credit.
The respondent counters that it availed of the income tax holiday under E.O.
No. 226 for four years from August 7, 1995 making it exempt from income tax
but not from other taxes such as VAT. Hence, according to respondent, its
export sales are not exempt from VAT, contrary to petitioner’s claim, but its
export sales is subject to 0% VAT. Moreover, it argues that it was able to
establish through a report certified by an independent Certified Public
Accountant that the input taxes it incurred from April 1, 1996 to December 31,
1997 were directly attributable to its export sales. Since it did not have any
output tax against which said input taxes may be offset, it had the option to
file a claim for refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find
the petition bereft of merit.
Petitioner’s contention that respondent is not entitled to refund for being
exempt from VAT is untenable. This argument turns a blind eye to the fiscal
incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act
No. 7916. Note that under said statute, the respondent had two options with
respect to its tax burden. It could avail of an income tax holiday pursuant to
provisions of E.O. No. 226, thus exempt it from income taxes for a number of
years but not from other internal revenue taxes such as VAT; or it could avail
of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay
only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of
Appeals and the Court of Tax Appeals found that respondent availed of the
income tax holiday for four (4) years starting from August 7, 1995, as clearly
reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where
respondent specified that it was availing of the tax relief under E.O. No.
226. Hence, respondent is not exempt from VAT and it correctly registered
itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt
transactions. (Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from
VAT or subject to VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer
could claim a refund or credit of its input VAT. Again, nowhere in this case did
the Court discuss, state, or rule that the filing dates of the administrative and
judicial claims are inconsequential, as long as they are within the two-year
prescriptive period.
While this Court stated in the narration of facts in Cebu Toyo that the taxpayer
"did not bother to wait for the Resolution of its (administrative) claim by the
CIR" before filing its judicial claim with the CTA, this issue was not raised
before the Court. Certainly, this statement of the Court is not a binding
precedent that the taxpayer need not wait for the 120-day period to lapse.
Any issue, whether raised or not by the parties, but not passed upon by the
Court, does not have any value as precedent. As this Court has explained as
early as 1926:
It is contended, however, that the question before us was answered and
resolved against the contention of the appellant in the case of Bautista vs.
Fajardo (38 Phil. 624). In that case no question was raised nor was it even
suggested that said section 216 did not apply to a public officer. That question
was not discussed nor referred to by any of the parties interested in that case.
It has been frequently decided that the fact that a statute has been accepted
as valid, and invoked and applied for many years in cases where its validity
was not raised or passed on, does not prevent a court from later passing on its
validity, where that question is squarely and properly raised and
presented. Where a question passes the Court sub silentio, the case in which
the question was so passed is not binding on the Court (McGirr vs. Hamilton
and Abreu, 30 Phil. 563), nor should it be considered as a precedent. (U.S. vs.
Noriega and Tobias, 31 Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More,
3 Cranch [U.S.] 159, 172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke,
146 U.S. 82.) For the reasons given in the case of McGirr vs. Hamilton and
Abreu, supra, the decision in the case of Bautista vs. Fajardo, supra, can have
no binding force in the interpretation of the question presented
here.76 (Emphasis supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or
optional, was not even raised as an issue by any of the parties. The Court
never passed upon this issue. Thus, Cebu Toyo does not constitute binding
precedent on the nature of the 120-day period.
There is also the claim that there are numerous CTA decisions allegedly
supporting the argument that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year
prescriptive period. Suffice it to state that CTA decisions do not constitute
precedents, and do not bind this Court or the public. That is why CTA decisions
are appealable to this Court, which may affirm, reverse or modify the CTA
decisions as the facts and the law may warrant. Only decisions of this Court
constitute binding precedents, forming part of the Philippine legal system.77 As
held by this Court in The Philippine Veterans Affairs Office v. Segundo:78
x x x Let it be admonished that decisions of the Supreme Court "applying or
interpreting the laws or the Constitution . . . form part of the legal system of
the Philippines," and, as it were, "laws" by their own right because they
interpret what the laws say or mean. Unlike rulings of the lower courts, which
bind the parties to specific cases alone, our judgments are universal in their
scope and application, and equally mandatory in character. Let it be warned
that to defy our decisions is to court contempt. (Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola
Products Phils., Inc.:79
The principle of stare decisis et non quieta movere is entrenched in Article 8 of
the Civil Code, to wit:
ART. 8. Judicial decisions applying or interpreting the laws or the Constitution
shall form a part of the legal system of the Philippines.
It enjoins adherence to judicial precedents. It requires our courts to follow a
rule already established in a final decision of the Supreme Court. That decision
becomes a judicial precedent to be followed in subsequent cases by all courts
in the land. The doctrine of stare decisis is based on the principle that once a
question of law has been examined and decided, it should be deemed settled
and closed to further argument. (Emphasis supplied)
VIII. Revenue Regulations No. 7-95 Effective 1 January 1996
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms,
applies only if the taxpayer files the judicial claim "after" the lapse of the 60-
day period, a period with which San Roque failed to comply. Under Section
4.106-2(c), the 60-day period is still mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative regulation
can never prevail over a later contrary law, more so in this case where the later
law was enacted precisely to amend the prior administrative regulation and
the law it implements.
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax. —
(a) x x x x
(d) Period within which refund or tax credit of input tax shall be
made - In proper cases, the Commissioner shall grant a refund or
issue the tax credit for creditable input taxes within sixty (60)
days from the date of submission of complete documents in
support of the application filed in accordance with subparagraphs
(a) and (b) hereof. In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the Commissioner
to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from receipt of the
decision denying the claim or after the expiration of the sixty-day
period, appeal the decision or the unacted claim with the Court of
Tax Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits of input tax —
(a) x x x
xxxx
(c) Period within which refund or tax credit of input taxes shall be made. — In
proper cases, the Commissioner shall grant a tax credit/refund for creditable
input taxes within sixty (60) days from the date of submission of complete
documents in support of the application filed in accordance with
subparagraphs (a) and (b) above.
In case of full or partial denial of the claim for tax credit/refund as decided by
the Commissioner of Internal Revenue, the taxpayer may appeal to the Court
of Tax Appeals within thirty (30) days from the receipt of said denial,
otherwise the decision will become final. However, if no action on the claim
for tax credit/refund has been taken by the Commissioner of Internal
Revenue after the sixty (60) day period from the date of submission of the
application but before the lapse of the two (2) year period from the date of
filing of the VAT return for the taxable quarter, the taxpayer may appeal to the
Court of Tax Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax —
(A) x x x
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be made. —
In proper cases, the Commissioner shall grant the refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days
from the receipt of the decision denying the claim or after the expiration of
the hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977 Tax Code, as
amended by RA 7716, the Commissioner has a 60-day period to act on the
administrative claim. This 60-day period is mandatory and jurisdictional.
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the
60-day period is no longer mandatory and jurisdictional? The obvious answer
is no.
Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day
period," the Commissioner fails to act on the administrative claim, the
taxpayer may file the judicial claim even "before the lapse of the two (2) year
period." Thus, under Section 4.106-2(c) the 60-day period is still mandatory
and jurisdictional.
Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but
merely implemented it, for two reasons. First, Section 4.106-2(c) still expressly
requires compliance with the 60-day period. This cannot be disputed.1âwphi1
Second, under the novel amendment introduced by RA 7716, mere inaction by
the Commissioner during the 60-day period is deemed a denial of the claim.
Thus, Section 4.106-2(c) states that "if no action on the claim for tax
refund/credit has been taken by the Commissioner after the sixty (60) day
period," the taxpayer "may" already file the judicial claim even long before the
lapse of the two-year prescriptive period. Prior to the amendment by RA 7716,
the taxpayer had to wait until the two-year prescriptive period was about to
expire if the Commissioner did not act on the claim.80 With the amendment by
RA 7716, the taxpayer need not wait until the two-year prescriptive period is
about to expire before filing the judicial claim because mere inaction by the
Commissioner during the 60-day period is deemed a denial of the claim. This is
the meaning of the phrase "but before the lapse of the two (2) year period" in
Section 4.106-2(c). As Section 4.106- 2(c) reiterates that the judicial claim can
be filed only "after the sixty (60) day period," this period remains mandatory
and jurisdictional. Clearly, Section 4.106-2(c) did not amend Section 106(d) but
merely faithfully implemented it.

Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue
Regulations No. 7-95, an administrative issuance, amended Section 106(d) of
the Tax Code to make the period given to the Commissioner non-mandatory,
still the 1997 Tax Code, a much later law, reinstated the original intent and
provision of Section 106(d) by extending the 60-day period to 120 days and re-
adopting the original wordings of Section 106(d). Thus, Section 4.106-2(c), a
mere administrative issuance, becomes inconsistent with Section 112(D), a
later law. Obviously, the later law prevails over a prior inconsistent
administrative issuance.

Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that
the Commissioner has 120 days to act on an administrative claim. The taxpayer
can file the judicial claim (1) only within thirty days after the Commissioner
partially or fully denies the claim within the 120- day period, or (2) only within
thirty days from the expiration of the 120- day period if the Commissioner does
not act within the 120-day period.

There can be no dispute that upon effectivity of the 1997 Tax Code on 1
January 1998, or more than five years before San Roque filed its administrative
claim on 28 March 2003, the law has been clear: the 120- day period is
mandatory and jurisdictional. San Roque’s claim, having been filed
administratively on 28 March 2003, is governed by the 1997 Tax Code, not the
1977 Tax Code. Since San Roque filed its judicial claim before the expiration of
the 120-day mandatory and jurisdictional period, San Roque’s claim cannot
prosper.

San Roque cannot also invoke Section 4.106-2(c), which expressly provides
that the taxpayer can only file the judicial claim "after" the lapse of the 60-day
period from the filing of the administrative claim. San Roque filed its judicial
claim just 13 days after filing its administrative claim. To recall, San Roque filed
its judicial claim on 10 April 2003, a mere 13 days after it filed its
administrative claim.

Even if, contrary to all principles of statutory construction as well as plain

common sense, we gratuitously apply now Section 4.106-2(c) of Revenue
Regulations No. 7-95, still San Roque cannot recover any refund or credit
because San Roque did not wait for the 60-day period to lapse, contrary to the
express requirement in Section 4.106-2(c). In short, San Roque does not even
comply with Section 4.106-2(c). A claim for tax refund or credit is strictly
construed against the taxpayer, who must prove that his claim clearly complies
with all the conditions for granting the tax refund or credit. San Roque did not
comply with the express condition for such statutory grant.

A final word. Taxes are the lifeblood of the nation. The Philippines has been
struggling to improve its tax efficiency collection for the longest time with
minimal success. Consequently, the Philippines has suffered the economic
adversities arising from poor tax collections, forcing the government to
continue borrowing to fund the budget deficits. This Court cannot turn a blind
eye to this economic malaise by being unduly liberal to taxpayers who do not
comply with statutory requirements for tax refunds or credits. The tax refund
claims in the present cases are not a pittance. Many other companies stand to
gain if this Court were to rule otherwise. The dissenting opinions will turn on
its head the well-settled doctrine that tax refunds are strictly construed
against the taxpayer.

WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner
of Internal Revenue in G.R. No. 187485 to DENY the P483,797,599.65 tax
refund or credit claim of San Roque Power Corporation; (2) GRANTS the
petition of Taganito Mining Corporation in G.R. No. 196113 for a tax refund or
credit of P8,365,664.38; and (3) DENIES the petition of Philex Mining
Corporation in G.R. No. 197156 for a tax refund or credit of P23,956,732.44.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 207843 July 15, 2015
COMMISSION OF INTERNAL REVENUE, Petitioner,
vs.
COURT OF TAX APPEALS (SECOND DIVISION) and PETRON
CORPORATION,* Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for certiorari1 are the Resolutions dated
February 13, 20132 and May 8, 20133 of the Court of Tax Appeals,
Second Division (CTA) in CTA Case No. 8544 reversing and setting
aside the earlier dismissal of the petition for review filed by private
respondent Petron Corporation (Petron) in the said case on the bases
of prematurity and lack of jurisdiction.
The Facts
Petron, which is engaged in the manufacture and marketing of
petroleum products, imports alkylate as a raw material or blending
component for the manufacture of ethanol-blended motor
gasoline.4 For the period January 2009 to August 2011, as well as for
the month of April 2012, Petron transacted an aggregate of 22
separate importations for which petitioner the Commissioner of
Internal Revenue (CIR) issued Authorities to Release Imported Goods
(ATRIGs), categorically stating that Petron's importation of alkylate is
exempt from the payment of the excise tax because it was not among
those articles enumerated as subject to excise tax under Title VI of
Republic Act No. (RA) 8424,5 as amended, or the 1997 National
Internal Revenue Code (NIRC). With respect, however, to Petron's
alkylate importations covering the period September 2011 to June
2012 (excluding April 2012), the CIR inserted, without prior notice, a
reservation for all ATRIGs issued,6 stating that:
This is without prejudice to the collection of the corresponding excise
taxes, penalties and interest depending on the final resolution of the
Office of the Commissioner on the issue of whether this item is
subject to the excise taxes under the National Internal Revenue Code
of 1997, as amended.7
In June 2012, Petron imported 12,802,660 liters of alkylate and paid
value-added tax (VAT) in the total amount of ?41,657,533.00 as
evidenced by Import Entry and Internal Revenue Declaration (IEIRD)
No. SN 122406532. Based on the Final Computation, said importation
was subjected by the Collector of Customs of Port Limay, Bataan,
upon instructions of the Commissioner of Customs (COC), to excise
taxes of ₱4.35 per liter, or in the aggregate amount of
₱55,691,571.00, and consequently, to an additional VAT of 12% on
the imposed excise tax in the amount of ₱6,682,989.00.8 The
imposition of the excise tax was supposedly premised on Customs
Memorandum Circular (CMC) No. 164-2012 dated July 18, 2012,
implementing the Letter dated June 29, 2012 issued by the CIR, which
states that:
[A]lkylate which is a product of distillation similar to that of naphta, is
subject to excise tax under Section 148( e) of the National Internal
Revenue Code (NIRC) of 1997. 9
In view of the CIR's assessment, Petron filed before the CTA a petition
for review,10 docketed as CTA Case No. 8544, raising the issue of
whether its importation of alkylate as a blending component is
subject to excise tax as contemplated under Section 148 (e) of the
NIRC.
On October 5, 2012, the CIR filed a motion to dismiss on the grounds
of lack of jurisdiction and prematurity.11
Initially, in a Resolution12 dated November 15, 2012, the CTA granted
the CIR's motion and dismissed the case. However, on Petron's
motion for reconsideration,13 it reversed its earlier disposition in a
Resolution14 dated February 13, 2013, and eventually denied the CIR's
motion for reconsideration15 therefrom in a Resolution16 dated May 8,
2013. In effect, the CTA gave due course to Petron's petition, finding
that: (a) the controversy was not essentially for the determination of
the constitutionality, legality or validity of a law, rule or regulation
but a question on the propriety or soundness of the CIR's
interpretation of Section 148 (e) of the NIRC which falls within the
exclusive jurisdiction of the CTA under Section 4 thereof, particularly
under the phrase "other matters arising under [the NIRC]";17 and (b)
there are attending circumstances that exempt the case from the rule
on non-exhaustion of administrative remedies, such as the great
irreparable damage that may be suffered by Petron from the CIR's
final assessment of excise tax on its importation.18
Aggrieved, the CIR sought immediate recourse to the Court, through
the instant petition, alleging that the CTA committed grave abuse of
discretion when it assumed authority to take cognizance of the case
despite its lack of jurisdiction to do so.19
The Issue Before the Court
The core issue to be resolved is whether or not the CTA properly
assumed jurisdiction over the petition assailing the imposition of
excise tax on Petron's importation of alkylate based on Section 148
(e) of the NIRC.
The Court's Ruling
The petition is meritorious.
The CIR asserts that the interpretation of the subject tax provision,
i.e., Section 148 (e) of the NIRC, embodied in CMC No. 164-2012, is an
exercise of her quasi-legislative function which is reviewable by the
Secretary of Finance, whose decision, in turn, is appealable to the
Office of
the President and, ultimately, to the regular courts, and that only her
quasi-judicial functions or the authority to decide disputed
assessments, refunds, penalties and the like are subject to the
exclusive appellate jurisdiction of the CTA.20 She likewise contends
that the petition suffers from prematurity due to Petron 's failure to
exhaust all available remedies within the administrative level in
accordance with the Tariff and Customs Code (TCC).21
The CIR's position is well-grounded.
Section 4 of the NIRC confers upon the CIR both: (a) the power to
interpret tax laws in the exercise of her quasi-legislative function; and
(b) the power to decide tax cases in the exercise of her quasi-judicial
function. It also delineates the jurisdictional authority to review the
validity of the CIR's exercise of the said powers, thus:
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.
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 or other 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. (Emphases and underscoring
supplied)
The CTA is a court of special jurisdiction, with power to review by
appeal decisions involving tax disputes rendered by either the CIR or
the COC.1âwphi1 Conversely, it has no jurisdiction to determine the
validity of a ruling issued by the CIR or the COC in the exercise of their
quasi-legislative powers to interpret tax laws. These observations
may be deduced from a reading of Section 7 of RA 1125,22 as
amended by RA 9282,23 entitled "An Act Creating the Court of Tax
Appeals," enumerating the cases over which the CT A may exercise its
jurisdiction:
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;
3. Decisions, orders or resolutions of the Regional Trial Comis in local
tax cases originally decided or resolved by them in the exercise of
their original or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges, seizure,
detention or release of property affected, fines, forfeitures or other
penalties in relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau of Customs;
5. Decisions of the Central Board of Assessment Appeals in the
exercise of its appellate jurisdiction over cases involving the
assessment and taxation of real property originally decided by the
provincial or city board of assessment appeals;
6. Decisions of the Secretary of Finance on customs cases elevated to
him automatically for review from decisions of the Commissioner of
Customs which are adverse to the Government under Section 2315 of
the Tariff and Customs Code;
7. Decisions of the Secretary of Trade and Industry, in the case of
nonagricultural product, commodity or article, and the Secretary of
Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and
302, respectively, of the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800, where either party may
appeal the decision to impose or not to impose said duties.
b. Jurisdiction over cases involving criminal offenses as herein
provided:
1. Exclusive original jurisdiction over all criminal offenses arising from
violations of the National Internal Revenue Code or Tariff and
Customs Code and other laws administered by the Bureau of Internal
Revenue or the Bureau of Customs: Provided, however, That offenses
or felonies mentioned in this paragraph where the principal amount
of taxes and fees, exclusive of charges and penalties, claimed is less
than One million pesos (₱1,000,000.00) or where there is no specified
amount claimed shall be tried by the regular Courts and the
jurisdiction of the CTA shall be appellate. Any provision of law or the
Rules of Court to the contrary notwithstanding, the criminal action
and the corresponding civil action for the recovery of civil liability for
taxes and penalties shall at all times be simultaneously instituted
with, and jointly determined in the same proceeding by the CT A, the
filing of the criminal action being deemed to necessarily carry with it
the filing of the civil action, and no right to reserve the filling of such
civil action separately from the criminal action will be recognized.
2. Exclusive appellate jurisdiction in criminal offenses:
a. Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax cases originally decided by them, in their
respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or orders of
the Regional Trial Courts in the exercise of their appellate jurisdiction
over tax cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts in their
respective jurisdiction.
c. Jurisdiction over tax collection cases as herein provided:
1. Exclusive original jurisdiction in tax collection cases involving final
and executory assessments for taxes, fees, charges and penalties:
Provided, however, That collection cases where the principal amount
of taxes and fees, exclusive of charges and penalties, claimed is less
than One million pesos (₱1,000,000.00) shall be tried by the proper
Municipal Trial Court, Metropolitan Trial Court and Regional Trial
Court.
2. Exclusive appellate jurisdiction in tax collection cases:
a. Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax collection cases originally decided by
them, in their respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or orders of
the Regional Trial Courts in the exercise of their appellate jurisdiction
over tax collection cases originally decided by the Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in
their respective jurisdiction. (Emphasis supplied)
In this case, Petron's tax liability was premised on the COC's issuance
of CMC No. 164-2012, which gave effect to the CIR's June 29, 2012
Letter interpreting Section 148 (e) of the NIRC as to include alkyl ate
among the articles subject to customs duties, hence, Petron's petition
before the CTA ultimately challenging the legality and
constitutionality of the CIR's aforesaid interpretation of a tax
provision. In line with the foregoing discussion, however, the CIR
correctly argues that the CT A had no jurisdiction to take cognizance
of the petition as its resolution would necessarily involve a
declaration of the validity or constitutionality of the CIR's
interpretation of Section 148 (e) of the NIRC, which is subject to the
exclusive review by the Secretary of Finance and ultimately by the
regular courts. In British American Tobacco v. Camacho,24 the Court
ruled that the CTA's jurisdiction to resolve tax disputes excludes the
power to rule on the constitutionality or validity of a law, rule or
regulation, to wit:
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. x x x.25
In asserting its jurisdiction over the present case, the CTA explained
that Petron's petition filed before it "simply puts in question" the
propriety or soundness of the CIR's interpretation and application of
Section 148 (e) of the NIRC (as embodied in CMC No. 164-2012) "in
relation to" the imposition of excise tax on Petron's importation of
alkylate; thus, the CTA posits that the case should be regarded as
"other matters arising under [the NIRC]" under the second paragraph
of Section 4 of the NIRC, therefore falling within the CTA's
jurisdiction:26
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.
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 or other 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. (Emphases and underscoring
supplied)
The Court disagrees.
As the CIR aptly pointed out, the phrase "other matters arising under
this Code," as stated in the second paragraph of Section 4 of the NIRC,
should be understood as pertaining to those matters directly related
to the preceding phrase "disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation
thereto" and must therefore not be taken in isolation to invoke the
jurisdiction of the CTA.27 In other words, the subject phrase should be
used only in reference to cases that are, to begin with, subject to the
exclusive appellate jurisdiction of the CTA, i.e., those controversies
over which the CIR had exercised her quasi-judicial functions or her
power to decide disputed assessments, refunds or internal revenue
taxes, fees or other charges, penalties imposed in relation thereto,
not to those that involved the CIR's exercise of quasi-legislative
powers.
In Enrile v. Court of Appeals,28 the Court, applying the statutory
construction principle of ejusdem generis,29explained the import of
using the general clause "other matters arising under the Customs
Law or other law or part of law administered by the Bureau of
Customs" in the enumeration of cases subject to the exclusive
appellate jurisdiction of the CTA, saying that: [T]he 'other matters'
that may come under the general clause should be of the same nature
as those that have preceded them applying the rule of construction
known as ejusdem generis.30(Emphasis and underscoring supplied)
Hence, as the CIR's interpretation of a tax provision involves an
exercise of her quasi-legislative functions, the proper recourse against
the subject tax ruling expressed in CMC No. 164-2012 is a review by
the Secretary of Finance and ultimately the regular courts. In
Commissioner of Customs v. Hypermix Feeds Corporation,31 the Court
has held 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. 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. x x x.32
Besides, Petron prematurely invoked the jurisdiction of the CT A.
Under Section 7 of RA 1125, as amended by RA 9282, what is
appealable to the CT A is the decision of the COC over a customs
collector's adverse ruling on a taxpayer's protest:
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;
xxxx
4. Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges, seizure,
detention or release of property affected, fines, forfeitures or other
penalties in relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau of Customs;
xxxx
Section 11 of the same law is no less categorical in stating that what
may be the subject of an appeal to the CT A is a decision, ruling or
inaction of the CIR or the COC, among others:
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 ruling or after the
expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.
xxxx
In this case, there was even no tax assessment to speak of. While
customs collector Federico Bulanhagui himself admitted during the
CTA's November 8, 2012 hearing that the computation he had written
at the back page of the IEIRD served as the final assessment imposing
excise tax on Petron's importation of alkylate,33 the Court concurs
with the CIR's stance that the subject IEIRD was not yet the customs
collector's final assessment that could be the proper subject of
review. And even if it were, the same should have been brought first
for review before the COC and not directly to the CTA. It should be
stressed that the CTA has no jurisdiction to review by appeal,
decisions of the customs collector.34 The TCC prescribes that a party
adversely affected by a ruling or decision of the customs collector
may protest such ruling or decision upon payment of the amount
due35 and, if aggrieved by the action of the customs collector on the
matter under protest, may have the same reviewed by the COC.36 It is
only after the COC shall have made an adverse ruling on the matter
may the aggrieved party file an
appeal to the CT A.37
Notably, Petron admitted to not having filed a protest of the
assessment before the customs collector and elevating a possible
adverse ruling therein to the COC, reasoning that such a procedure
would be costly and impractical, and would unjustly delay the
resolution of the issues which, being purely legal in nature anyway,
were also beyond the authority of the customs collector to resolve
with finality.38 This admission is at once decisive of the issue of the
CTA's jurisdiction over the petition. There being no protest ruling by
the customs collector that was appealed to the COC, the filing of the
petition before the CTA was premature as there was nothing yet to
review.39
Verily, the fact that there is no decision by the COC to appeal from
highlights Petron's failure to exhaust administrative remedies
prescribed by law. Before a party is allowed to seek the intervention
of the courts, it is a pre-condition that he avail of all administrative
processes afforded him, such that if a remedy within the
administrative machinery can be resorted to by giving the
administrative officer every opportunity to decide on a matter that
comes within his jurisdiction, then such remedy must be exhausted
first before the court's power of judicial review can be sought,
otherwise, the premature resort to the court is fatal to one's cause of
action.40 While there are exceptions to the principle of exhaustion of
administrative remedies, it has not been sufficiently shown that the
present case falls under any of the exceptions.
WHEREFORE, the petition is GRANTED. The Resolutions dated
February 13, 2013 and May 8, 2013 of the Court of Tax Appeals (CTA),
Second Division in CTA Case No. 8544 are hereby REVERSED and SET
ASIDE. The petition for review filed by private respondent Petron
Corporation before the CTA is DISMISSED for lack of jurisdiction and
prematurity.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice