ASIA INTERNATIONAL - versus -

G.R. No. 163445 PUNO, C.J., Chairperson,

HON. GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue (BIR), THE REGIONAL DIRECTOR, BIR, Region III, THE REVENUE DISTRICT OFFICER, BIR, Special Promulgated: Economic Zone, and OFFICE OF THE SOLICITOR GENERAL, Respondents. December 18, 2007 x---------------------------------x DECISION PUNO, C.J.: At bar is a petition for review on certiorari seeking the reversal of the decision[1] of the Court of Appeals (CA) in CA-G.R. SP No. 79329 declaring the Regional Trial Court (RTC) of Olongapo City, Branch 74, without jurisdiction over Civil Case No. 275-0-2003. The facts are undisputed. Congress enacted Republic Act (R.A.) No. 7227 creating the Subic Special Economic Zone (SSEZ) and extending a number of economic or tax incentives therein. Section 12 of the law provides: (a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government Code, the [SSEZ] shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments; (b) The [SSEZ] shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the [SSEZ], as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the [SSEZ]. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprise within the [SSEZ] shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all business and enterprise within the [SSEZ] to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the [SSEZ], the same shall be resolved in favor of the latter; (d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and future shall be allowed and maintained in the [SSEZ]; (emphasis supplied) On January 24, 1995, then Secretary of Finance Roberto F. De Ocampo, through the recommendation of then Commissioner of Internal Revenue (CIR) Liwayway Vinzons-Chato, issued Revenue Regulations [Rev. Reg.] No. 1-95,[2] providing the Rules and Regulations to Implement the Tax Incentives Provisions Under Paragraphs (b) and (c) of Section 12, [R.A.] No. 7227, [o]therwise known as the Bases Conversion and Development Act of 1992. Subsequently, Rev. Reg. No. 12-97[3] was issued providing for the Regulations Implementing Sections 12(c) and 15 of [R.A.] No. 7227 and Sections 24(b) and (c) of [R.A.] No. 7916 Allocating Two Percent (2%) of the Gross Income Earned by All Businesses and Enterprises Within the Subic, Clark, John Hay, Poro Point Special Economic Zones and other Special Economic Zones under PEZA. On September 27, 1999, Rev. Reg. No. 16-99[4] was issued Amending [RR] No. 1-95, as amended, and other related Rules and Regulations to Implement the Provisions of paragraphs (b) and (c) of Section 12 of [R.A.] No. 7227, otherwise known as the Bases Conversion and Development Act of 1992 Relative to the Tax Incentives Granted to Enterprises Registered in the Subic Special Economic and Freeport Zone. On June 3, 2003, then CIR Guillermo L. Parayno, Jr. issued Revenue Memorandum Circular (RMC) No. 312003 setting the Uniform Guidelines on the Taxation of Imported Motor Vehicles through the Subic Free

Port Zone and Other Freeport Zones that are Sold at Public Auction. The assailed portions of the RMC read: II. Tax treatments on the transactions involved in the importation of motor vehicles through the SSEFZ and other legislated Freeport zones and subsequent sale thereof through public auction.Pursuant to existing revenue issuances, the following are the uniform tax treatments that are to be adopted on the different transactions involved in the importation of motor vehicles through the SSEFZ and other legislated Freeport zones that are subsequently sold through public auction: A. Importation of motor vehicles into the freeport zones

1. Motor vehicles that are imported into the Freeport zones for exclusive use within the zones are, as a general rule, exempt from customs duties, taxes and other charges, provided that the importer-consignee is a registered enterprise within such freeport zone. However, should these motor vehicles be brought out into the customs territory without returning to the freeport zones, the customs duties, taxes and other charges shall be paid to the BOC before release thereof from its custody. xxx 3. For imported motor vehicles that are imported by persons that are not duly registered enterprises of the freeport zones, or that the same are intended for public auction within the freeport zones, the importer-consignee/auctioneer shall pay the value-added tax (VAT) and excise tax to the BOC before the registration thereof under its name with the LTO and/or the conduct of the public auction. xxx B. Subsequent sale/public auction of the motor vehicles

1. Scenario One The public auction is conducted by the consignee of the imported motor vehicles within the freeport zone xxx 1.2. In case the consignee-auctioneer is a registered enterprise and/or locator not entitled to the preferential tax treatment or if the same is entitled from such incentive but its total income from the customs territory exceeds 30% of its entire income derived from the customs territory and the freeport zone, the income derived from the public auction shall be subjected to the regular internal revenue taxes imposed by the Tax Code. xxx 1.4. In the event that the winning bidder shall bring the motor vehicles into the customs territory, the winning bidder shall be deemed the importer thereof and shall be liable to pay the VAT and excise tax, if applicable, based on the winning bid price. However, in cases where the consignee-auctioneer has already paid the VAT and excise tax on the motor vehicles before the registration thereof with LTO and the conduct of public auction, the additional VAT and excise tax shall be paid by winning bidder resulting from the difference between the winning bid price and the value used by the consignee-auctioneer in payment of such taxes. For excise tax purposes, in case the winning bid price is lower than the total costs to import, reconditioning/rehabilitation of the motor vehicles, and other administrative and selling expenses, the basis for the computation of the excise tax shall be the total costs plus ten percent (10%) thereof. The additional VAT and excise taxes shall be paid to the BIR before the auctioned motor vehicles are registered with the LTO. 1.5 In case the services of a professional auctioneer is employed for the public auction, the final withholding tax of 25%, in case he/she is a non-resident citizen or alien, or the expanded withholding tax of 20%, in case he/she is a resident citizen or alien, shall be withheld by the consignee-auctioneer from the amount of consideration to be paid to the professional auctioneer and shall be remitted accordingly to the BIR. This was later amended by RMC No. 32-2003,[5] to wit: II. The imported motor vehicles after its release from Customs custody are sold through public auction/negotiated sale by the consignee within or outside of the Freeport Zone: A. The gross income earned by the consignee-seller from the public auction/negotiated sale of the imported vehicles shall be subject to the preferential tax rate of five percent (5%) in lieu of the internal revenue taxes imposed by the National Internal Revenue Code of 1997, provided that the following conditions are present: 1.That the consignee-seller is a duly registered enterprise entitled to such preferential tax rate as well as a registered taxpayer with the Bureau of Internal Revenue (BIR). 2.That the total income generated by the consignee-seller from sources within the customs territory does not exceed thirty percent (30%) of the total income derived from all sources. B. In case the consignee-seller is a registered enterprise and/or locator not entitled to the preferential tax treatment or if the same is entitled from such incentive but its total income from the customs territory exceeds thirty percent (30%) of its entire income derived from the customs territory and the freeport zone, the sales or income derived from the public auction/negotiated sale shall be subjected to the regular internal revenue taxes imposed by the Tax Code. The consignee-seller shall also observe the compliance requirements prescribed by the Tax Code. When public auction or negotiated sale is conducted within or outside of the freeport zone, the following tax treatment shall be observed:

1. Value Added Tax (VAT)/ Percentage Tax (PT) VAT or PT shall be imposed on every public auction or negotiated sale. 2. Excise Tax The imposition of excise tax on public auction or negotiated sale shall be held in abeyance pending verification that the importers selling price used as a basis by the Bureau of Customs in computing the excise tax is correctly determined. Petitioners Asia International Auctioneers, Inc. (AIAI) and Subic Bay Motors Corporation are corporations organized under Philippine laws with principal place of business within the SSEZ. They are engaged in the importation of mainly secondhand or used motor vehicles and heavy transportation or construction equipment which they sell to the public through auction. Petitioners filed a complaint before the RTC of Olongapo City, praying for the nullification of RMC No. 312003 for being unconstitutional and an ultra vires act. The complaint was docketed as Civil Case No. 2750-2003 and raffled to Branch 74. Subsequently, petitioners filed their First Amended Complaint to Declare Void, Ultra Vires, and Unconstitutional [RMC] No. 31-2003 dated June 3, 2003 and [RMC] No. 322003 dated June 5, 2003, with Application for a Writ of Temporary Restraining Order and Preliminary Injunction[6] to enjoin respondents from implementing the questioned RMCs while the case is pending. Particularly, they question paragraphs II(A)(1) and (3), II(B)(1.2), (1.4) and (1.5) of RMC No. 31-2003 and paragraphs II(A)(2) and (B) of RMC No. 32-2003. Before a responsive pleading was filed, petitioners filed their Second Amended Complaint[7] to include Rev. Reg. Nos. 1-95, 12-97 and 16-99 dated January 24, 1995, August 7, 1997 and September 27, 1999, respectively, which allegedly contain some identical provisions as the questioned RMCs, but without changing the cause of action in their First Amended Complaint. The Office of the Solicitor General (OSG) submitted its Comment (In Opposition to the Application for Issuance of a Writ of Preliminary Injunction).[8] Respondents CIR, Regional Director and Revenue District Officer submitted their joint Opposition (To The Prayer for Preliminary Injunction and/or Temporary Restraining Order by Petitioners).[9] Then Secretary of Finance Jose Isidro N. Camacho filed a Motion to Dismiss the case against him, alleging that he is not a party to the suit and petitioners have no cause of action against him.[10] Respondents CIR, BIR Regional Director and BIR Revenue District Officer also filed their joint Motion to Dismiss on the grounds that [t]he trial court has no jurisdiction over the subject matter of the complaint and [a] condition precedent, that is, exhaustion of administrative remedies, has not been complied with.[11][12] for allegedly failing to comply with Section 4, Rule 15 of the Rules of Court. To this, the respondents filed their Opposition.[13] Petitioners filed their Motion to Expunge from the Records the Respondents[] Motion to Dismiss Meantime, BIR Revenue District Officer Rey Asterio L. Tambis sent a 10-Day Preliminary Notice[14] to the president of petitioner AIAI for unpaid VAT on auction sales conducted on June 6-8, 2003, as per RMC No. 32-2003. On August 1, 2003, the trial court issued its order[15] granting the application for a writ of preliminary injunction. The dispositive portion of the order states: WHEREFORE, premises considered, petitioners application for the issuance of a writ of preliminary injunction is hereby GRANTED. Let the writ issue upon the filing and approval by the court of an injunction bond in the amount of Php 1 Million. SO ORDERED.[16] Consequently, respondents CIR, the BIR Regional Director of Region III, the BIR Revenue District Officer of the SSEZ, and the OSG filed with the CA a petition for certiorari under Rule 65 of the Rules of Court with prayer for the issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin the trial court from exercising jurisdiction over the case.[17] Meantime, BIR Regional Director Danilo A. Duncano sent a Preliminary Assessment Notice[18] to the President of AIAI, informing him of the VAT due from the company for the auction sales conducted on June 6-8, 2003 as per RMC No. 32-2003, plus surcharge, interest and compromise penalty. Thereafter, a Formal Letter of Demand[19] was sent to the President of petitioner AIAI by the Officer-in-Charge of the BIR Office of the Regional Director. On March 31, 2004, the CA issued its assailed decision, the dispositive portion of which states: WHEREFORE, the petition is GRANTED. Public respondent Regional Trial Court, Branch 74, of Olongapo City is hereby declared bereft of jurisdiction to take cognizance of Civil Case No. 275-0-2003. Accordingly, said Civil Case No. 275-0-2003 is hereby DISMISSED and the assailed Order dated August 1, 2003, ANNULLED and SET ASIDE. SO ORDERED.[20] Hence, this Petition for Review on Certiorari[21] with an application for a temporary restraining order and a writ of preliminary injunction to enjoin respondents from pursuing sending letters of assessments to petitioners. Petitioners raise the following issues: [a] [W]hether a petition for certiorari under Rule 65 of the New Rules is proper where the issue raised therein has not yet been resolved at the first instance by the Court where the original action was filed, and, necessarily, without first filing a motion for reconsideration; [b] [W]hich Court- the regular courts of justice established under Batas Pambansa Blg. 129 or the Court of Tax Appeals is the proper court of jurisdiction to hear a case to declare Revenue Memorandum Circulars unconstitutional and against an existing law where the challenge does not involve the rate and figures of the imposed taxes;

[c] [D]ependent on an affirmative resolution of the second issue in favor of the regular courts of justice, whether the writ of preliminary injunction granted by the Court at Olongapo City was properly and legally issued.[22] Petitioners contend that there were fatal procedural defects in respondents petition for certiorari with the CA. They point out that the CA resolved the issue of jurisdiction without waiting for the lower court to first rule on the issue. Also, respondents did not file a motion for reconsideration of the trial courts order granting the writ of preliminary injunction before filing the petition with the CA. The arguments are unmeritorious. Jurisdiction is defined as the power and authority of a court to hear, try and decide a case.[23] The issue is so basic that it may be raised at any stage of the proceedings, even on appeal.[24] In fact, courts may take cognizance of the issue even if not raised by the parties themselves.[25] There is thus no reason to preclude the CA from ruling on this issue even if allegedly, the same has not yet been resolved by the trial court. As to respondents failure to file a motion for reconsideration, we agree with the ruling of the CA, which states: It is now settled that the filing of a motion for reconsideration is not always sine qua non before availing of the remedy of certiorari.[26] Hence, the general rule of requiring a motion for reconsideration finds no application in a case where what is precisely being assailed is lack of jurisdiction of the respondent court. [27] And considering also the urgent necessity for resolving the issues raised herein, where further delay could prejudice the interests of the government,[28] the haste with which the Solicitor General raised these issues before this Court becomes understandable.[29] Now, to the main issue: does the trial court have jurisdiction over the subject matter of this case? Petitioners contend that jurisdiction over the case at bar properly pertains to the regular courts as this is an action to declare as unconstitutional, void and against the provisions of [R.A. No.] 7227 the RMCs issued by the CIR. They explain that they do not challenge the rate, structure or figures of the imposed taxes, rather they challenge the authority of the respondent Commissioner to impose and collect the said taxes. They claim that the challenge on the authority of the CIR to issue the RMCs does not fall within the jurisdiction of the Court of Tax Appeals (CTA). Petitioners arguments do not sway. R.A. No. 1125, as amended, states: Sec. 7. Jurisdiction.The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other laws or part of law administered by the Bureau of Internal Revenue; x x x (emphases supplied) We have held that RMCs are considered administrative rulings which are issued from time to time by the CIR.[30] Rodriguez v. Blaquera[31] is in point. This case involves Commonwealth Act No. 466, as amended by R.A. No. 84, which imposed upon firearm holders the duty to pay an initial license fee of P15 and an annual fee of P10 for each firearm, with the exception that in case of bona fide and active members of duly organized gun clubs and accredited by the Provost Marshal General, the annual fee is reduced to P5 for each firearm. Pursuant to this, the CIR issued General Circular No. V-148 which stated that bona fide and active members of duly organized gun clubs and accredited by the Provost Marshal General shall pay an initial fee of fifteen pesos and an annual fee of five pesos for each firearm held on license except caliber . 22 revolver or rifle. The General Circular further provided that [m]ere membership in the gun club does not, as a matter of right, entitle the member to the reduced rates prescribed by law. The licensee must be accredited by the Chief of Constabulary [and] the firearm covered by the license of the member must be of the target model in order that he may be entitled to the reduced rates. Rodriguez, as manager of the Philippine Rifle and Pistol Association, Inc., a duly accredited gun club, in behalf of the members who have paid under protest the regular annual fee of P10, filed an action in the Court of First Instance (now RTC) of Manila for the nullification of the circular and the refund of P5. On the issue of jurisdiction, plaintiff similarly contended that the action was not an appeal from a ruling of the CIR but merely an attempt to nullify General Circular No. V-148, hence, not within the jurisdiction of the CTA. The Court, in finding this argument unmeritorious, explained: 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 to the statutory provision above mentioned, 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 said statute, the administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of [R.A.] No. 1125, section 7 of which provides that the [CTA] 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 law administered by the Bureau of Internal Revenue. Besides, it is plain from plaintiffs original complaint that one of its main purposes was to secure an order for the refund of the sums collected in excess of the amount he claims to be due by way of annual fee from the gun club members, regardless of the class of firearms they have. Although the prayer for reimbursement has been eliminated from his amended complaint, it is only too obvious that the nullification of General Circular No. V-148 is merely a step preparatory to a claim for refund.

Similarly, in CIR v. Leal,[32] pursuant to Section 116 of Presidential Decree No. 1158 (The National Internal Revenue Code, as amended) which states that [d]ealers in securities shall pay a tax equivalent to six (6%) per centum of their gross income. Lending investors shall pay a tax equivalent to five (5%) per cent, of their gross income, the CIR issued Revenue Memorandum Order (RMO) No. 15-91 imposing 5% lending investors tax on pawnshops based on their gross income and requiring all investigating units of the BIR to investigate and assess the lending investors tax due from them. The issuance of RMO No. 1591 was an offshoot of the CIRs finding that the pawnshop business is akin to that of lending investors as defined in Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91 subjecting pawn tickets to documentary stamp tax. Respondent therein, Josefina Leal, owner and operator of Josefinas Pawnshop, asked for a reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the same was denied by petitioner CIR. Leal then filed a petition for prohibition with the RTC of San Mateo, Rizal, seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR, through the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The RTC denied the motion. Petitioner filed a petition for certiorari and prohibition with the CA which dismissed the petition for lack of basis. In reversing the CA, dissolving the Writ of Preliminary Injunction issued by the trial court and ordering the dismissal of the case before the trial court, the Supreme Court held that [t]he questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of pawnshops. They were issued pursuant to the CIRs power under Section 245[33] of the Tax Code to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes. The Court held that under R.A. No. 1125 (An Act Creating the Court of Tax Appeals), as amended, such rulings of the CIR are appealable to the CTA. In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that exportation or removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. They were issued pursuant to the power of the CIR under Section 4 of the National Internal Revenue Code,[34] viz: Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.-- The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code 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 supplied) Petitioners point out that the CA based its decision on Section 7 of R.A. No. 1125 that the CTA shall exercise exclusive appellate jurisdiction to review by appeal decisions of the CIR. They argue that in the instant case, there is no decision of the respondent CIR on any disputed assessment to speak of as what is being questioned is purely the authority of the CIR to impose and collect value-added and excise taxes. Petitioners failure to ask the CIR for a reconsideration of the assailed revenue regulations and RMCs is another reason why the instant case should be dismissed. 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 courts power of judicial review can be sought.[35] 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. [36] Petitioners insistence for this Court to rule on the merits of the case would only prove futile. Having declared the court a quo without jurisdiction over the subject matter of the instant case, any further disquisition would be obiter dictum. IN VIEW WHEREOF, the petition is DENIED. SO ORDERED. REYNATO S. PUNO Chief Justice WE CONCUR: ANGELINA SANDOVAL-GUTIERREZ Associate Justice

THIRD DIVISION [G.R. No. 155491, September 16, 2008] SMART COMMUNICATIONS, INC., PETITIONER, VS. THE CITY OF DAVAO, REPRESENTED HEREIN BY ITS MAYOR HON. RODRIGO R. DUTERTE, AND THE SANGGUNIANG PANLUNGSOD OF DAVAO CITY, RESPONDENTS. DECISION NACHURA, J.:

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, represented by its Mayor, Hon. Rodrigo R. Duterte, and the Sangguniang Panlungsod of Davao City, to annul the Decision[1] dated July 19, 2002 of the Regional Trial Court (RTC) and its Order[2] dated September 26, 2002 in Sp. Civil Case No. 28,976-2002. The Facts On February 18, 2002, Smart filed a special civil action for declaratory 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 1, Article 10 thereof, the pertinent portion of which reads: Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City. Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 7294[5] subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160;[6] (b) Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions; (c) the 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. 7294; and (d) the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts.[7] On March 2, 2002, respondents filed their Answer[8] in which they contested the tax exemption claimed by Smart. They invoked the power granted by the Constitution to local government units to create their own sources of revenue.[9] On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues were involved in the case, the RTC issued an order requiring the parties to submit their respective memoranda and, thereafter, the case would be deemed submitted for resolution.[10] 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 city's 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. Thus, the instant case. Smart assigns the following errors: [a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S FRANCHISE (REPUBLIC ACT NO. 7294), WHICH CONTAINS THE "IN LIEU OF ALL TAXES" CLAUSE, AND WHICH IS A SPECIAL LAW ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY. [b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONER'S FRANCHISE IS A GENERAL LAW AND DID NOT REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX OF THE LOCAL GOVERNMENT CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW. [c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, AND SECTION 193 OF THE CODE, WHICH PROVIDES FOR WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE. [d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137 AND 193 OF THE LOCAL GOVERNMENT CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE TIME OF ITS ENACTMENT BUT NOT TO FUTURE EXEMPTIONS. [e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY CONSTRUCTION THAT TAX EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER. [f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONER'S FRANCHISE (REPUBLIC ACT NO. 7294) HAS BEEN AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925, "THE PUBLIC TELECOMMUNICATIONS POLICY ACT," TAKING INTO ACCOUNT THE FRANCHISE OF GLOBE TELECOM, INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY. [g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE DEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT CODE. [h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION OF THE LOCAL FRANCHISE TAX ON PETITIONER WOULD VIOLATE THE CONSTITUTIONAL PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS. [i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.[17] The Issue In sum, the pivotal issue in this case is whether Smart is liable to pay the franchise tax imposed by the City of Davao.

The Ruling of the Court We rule in the affirmative. I. Prospective Effect of R.A. No. 7160 On March 27, 1992, Smart's 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 Smart's 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 Smart's 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 Smart's 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, omunicipal, 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, nonbank 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 Globe's 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 Company, Inc. v. City of Davao,[40] and recently in Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan ,[41] Congress, in approving Section 23 of R.A. No. 7925, did not intend it to operate as a blanket tax 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 telecommunications entities, including those whose exemptions had been 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 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, Smart's 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. In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. x x x. WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-50449 January 30, 1982 FILINVEST CREDIT CORPORATION, plaintiff-appellee, vs. PHILIPPINE ACETYLENE, CO., INC., defendant-appellant.

DE CASTRO, J.: This case is certified to Us by the Court of Appeals in its Resolution 1 dated March 22, 1979 on the ground that it involves purely questions of law, as raised in the appeal of the decision of the Court of First Instance of Manila, Branch XII in Civil Case No. 91932, the dispositive portion of which reads as follows: In view of the foregoing consideration, the court hereby renders judgment l) directing defendant to pay plaintiff: a) the sum of P22,227.81 which is the outstanding unpaid obligation of the defendant under the assigned credit, with 12 %interest from the date of the firing of the complaint in this suit until the same is fully paid; b) the sum equivalent to l5% of P22,227.81 as and for attorney's fees; and 2) directing plaintiff to deliver to, and defendant to accept, the motor vehicle, subject of the chattel may have been changed by the result of ordinary wear and tear of the vehicle. Defendant to pay the cost of suit. SO ORDERED. The facts, as found in the decision
2

subject of the instant appeal, are undisputed.

On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-appellant herein, purchased from one Alexander Lim, as evidenced by a Deed of Sale marked as Exhibit G, a motor vehicle described as Chevorlet, 1969 model with Serial No. 136699Z303652 for P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80 payable, under the terms and conditions of the promissory note (Exh. B), at a monthly installment of P1,036.70 for thirty-four (34) months, due and payable on the first day of each month starting December 1971 through and inclusive September 1, 1974 with 12 % interest per annum on each unpaid installment, and attorney's fees in the amount equivalent to 25% of the total of the outstanding unpaid amount. As security for the payment of said promissory note, the appellant executed a chattel mortgage (Exh. C) over the same motor vehicle in favor of said Alexander Lim. Subsequently, on November 2, 1971. Alexander Lim assigned to the Filinvest Finance Corporation all his rights, title, and interests in the promissory note and chattel mortgage by virtue of a Deed of Assignment (Exh. D). Thereafter, the Filinvest Finance Corporation, as a consequence of its merger with the Credit and Development Corporation assigned to the new corporation, the herein plaintiff-appellee Filinvest Credit Corporation, all its rights, title, and interests on the aforesaid promissory note and chattel mortgage (Exh. A) which, in effect, the payment of the unpaid balance owed by defendant-appellant to Alexander Lim was financed by plaintiff-appellee such that Lim became fully paid. Appellant failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage since it had defaulted in the payment of nine successive installments. Appellee then sent a demand letter (Exh. 1) whereby its counsel demanded "that you (appellant) remit the aforesaid amount in full in addition to stipulated interest and charges or return the mortgaged property to my client at its office at 2133 Taft Avenue, Malate, Manila within five (5) days from date of this letter during office hours. " Replying thereto, appellant, thru its assistant general- manager, wrote back (Exh. 2) advising appellee of

its decision to "return the mortgaged property, which return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly, the mortgaged vehicle was returned to the appellee together with the document "Voluntary Surrender with Special Power of Attorney To Sell" 3 executed by appellant on March 12, 1973 and confirmed to by appellee's vice-president. On April 4, 1973, appellee wrote a letter (Exh. H) to appellant informing the latter that appellee cannot sell the motor vehicle as there were unpaid taxes on the said vehicle in the sum of P70,122.00. On the last portion of the said letter, appellee requested the appellant to update its account by paying the installments in arrears and accruing interest in the amount of P4,232.21 on or before April 9, 1973. On May 8, 1973, appellee, in a letter (Exh. 1), offered to deliver back the motor vehicle to the appellant but the latter refused to accept it, so appellee instituted an action for collection of a sum of money with damages in the Court of First Instance of Manila on September 14, 1973. In its answer, appellant, while admitting the material allegations of the appellee's complaint, avers that appellee has no cause of action against it since its obligation towards the appellee was extinguished when in compliance with the appellee's demand letter, it returned the mortgaged property to the appellee, and that assuming arguendo that the return of the property did not extinguish its obligation, it was nonetheless justified in refusing payment since the appellee is not entitled to recover the same due to the breach of warranty committed by the original vendor-assignor Alexander Lim. After the case was submitted for decision, the Court of First Instance of Manila, Branch XII rendered its decision dated February 25, 1974 which is the subject of the instant appeal in this Court. Appellant's five assignment of errors may be reduced to, or said to revolve around two issues: first, whether or not the return of the mortgaged motor vehicle to the appellee by virtue of its voluntary surrender by the appellant totally extinguished and/or cancelled its obligation to the appellee; second, whether or not the warranty for the unpaid taxes on the mortgaged motor vehicle may be properly raised and imputed to or passed over to the appellee. Consistent with its stand in the court a quo, appellant now reiterates its main contention that appellee, after giving appellant an option either to remit payment in full plus stipulated interests and charges or return the mortgaged motor vehicle, had elected the alternative remedy of exacting fulfillment of the obligation, thus, precluding the exercise of any other remedy provided for under Article 1484 of the Civil Code of the Philippines which reads: Article 1484. Civil Code. - In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: 1) Exact fulfillment of the obligation, should the vendee fail to pay; 2) Cancel the sale, should the vendee's failure to pay cover two or more installments; 3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. In support of the above contention, appellant maintains that when it opted to return, as in fact it did return, the mortgaged motor vehicle to the appellee, said return necessarily had the effect of extinguishing appellant's obligation for the unpaid price to the appellee, construing the return to and acceptance by the appellee of the mortgaged motor vehicle as a mode of payment, specifically, dation in payment or dacion en pago which according to appellant, virtually made appellee the owner of the mortgaged motor vehicle by the mere delivery thereof, citing Articles 1232, 1245, and 1497 of the Civil Code, to wit: Article 1232. Payment means not only the delivery of money but also the performance, in any manner, of an obligation. xxx xxx xxx Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. xxx xxx xxx Article 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee. Passing at once on the relevant issue raised in this appeal, We find appellant's contention devoid of persuasive force. The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant, to the mortgagee, the herein appellee, does not constitute dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of obligation. 4 In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. 5 In any case, common consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation.

The evidence on the record fails to show that the mortgagee, the herein appellee, consented, or at least intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the hands of the appellant. A more solid basis of the true intention of the parties is furnished by the document executed by appellant captioned "Voluntary Surrender with Special Power of Attorney To Sell" dated March 12, 1973, attached as Annex "C" of the appellant's answer to the complaint. An examination of the language of the document reveals that the possession of the mortgaged motor vehicle was voluntarily surrendered by the appellant to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of the appellant who retains ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the undertaking of the appellant to pay the difference, if any, between the selling price and the mortgage obligation. With the stipulated conditions as stated, the appellee, in essence was constituted as a mere agent to sell the motor vehicle which was delivered to the appellee, not as its property, for if it were, he would have full power of disposition of the property, not only to sell it as is the limited authority given him in the special power of attorney. Had appellee intended to completely release appellant of its mortgage obligation, there would be no necessity of executing the document captioned "Voluntary Surrender with Special Power of Attorney To Sell." Nowhere in the said document can We find that the mere surrender of the mortgaged motor vehicle to the appellee extinguished appellant's obligation for the unpaid price. Appellant would also argue that by accepting the delivery of the mortgaged motor vehicle, appellee is estopped from demanding payment of the unpaid obligation. Estoppel would not he since, as clearly set forth above, appellee never accepted the mortgaged motor vehicle in full satisfaction of the mortgaged debt. Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguish appellant's liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it recovered possession thereof. 6 It is worth noting that it is the fact of foreclosure and actual sale of the mortgaged chattel that bar the recovery by the vendor of any balance of the purchaser's outstanding obligation not satisfied by the sale. 7 As held by this Court, if the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific performance. 8 This is exactly what happened in the instant case. On the second issue, there is no dispute that there is an unpaid taxes of P70,122.00 due on the mortgaged motor vehicle which, according to appellant, liability for the breach of warranty under the Deed of Sale is shifted to the appellee who merely stepped into the shoes of the assignor Alexander Lim by virtue of the Deed of Assignment in favor of appellee. The Deed of Sale between Alexander Lim and appellant and the Deed of Assignment between Alexander Lim and appellee are very clear on this point. There is a specific provision in the Deed of Sale that the seller Alexander Lim warrants the sale of the motor vehicle to the buyer, the herein appellant, to be free from liens and encumbrances. When appellee accepted the assignment of credit from the seller Alexander Lim, there is a specific agreement that Lim continued to be bound by the warranties he had given to the buyer, the herein appellant, and that if it appears subsequently that "there are such counterclaims, offsets or defenses that may be interposed by the debtor at the time of the assignment, such counterclaims, offsets or defenses shall not prejudice the FILINVEST FINANCE CORPORATION and I (Alexander Lim) further warrant and hold the said corporation free and harmless from any such claims, offsets, or defenses that may be availed of." 9 It must be noted that the unpaid taxes on the motor vehicle is a burden on the property. Since as earlier shown, the ownership of the mortgaged property never left the mortgagor, the herein appellant, the burden of the unpaid taxes should be home by him, who, in any case, may not be said to be without remedy under the law, but definitely not against appellee to whom were transferred only rights, title and interest, as such is the essence of assignment of credit. 10 WHEREFORE, the judgment appealed from is hereby affirmed in toto with costs against defendantappellant. SO ORDERED. Barredo (Chairman), Aquino, Concepcion, Jr., Ericta and Escolin, JJ., concur