[G.R. No. 151135.

July 2, 2004]
CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
QUISUMBING, J.:
For review is the Decision[1] dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which
reversed and set aside the decision [2] dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered
the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input
value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also assails the
appellate courts Resolution,[3] dated December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and
other hospital supplies for export. Petitioners place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly
registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the
provisions of Republic Act No. 7227. [4] As an SBMA-registered firm, petitioner is exempt from all local and national
internal revenue taxes except for the preferential tax provided for in Section 12 (c) [5] of Rep. Act No. 7227. Petitioner
also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of
Registration RDO Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in
the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the
purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997
and 1998, respectively.[6]
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No.
7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue
district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly
with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or
issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the
period January 1, 1997 toNovember 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the
Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A)
[7]
if read in relation to Section 106(A)(2)(a) [8] of the National Internal Revenue Code, as amended and Section 12(b)
[9]
and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for
refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or
tax credit and its compliance with the rules on tax refund as provided for in Sections 204 [10] and 229[11] of the Tax
Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby
ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.
SO ORDERED.[12]

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax
Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose
sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the
Certificate of RegistrationRDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the
Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of
supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and
Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a SBFZregistered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by
the two-year prescriptive period under Section 229 of the Tax Code.The tax court also limited the refund only to the
input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the manufacture of its
goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials
and supplies shipped or delivered to the petitioners Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the
Court of Appeals. Respondent maintained that the exemption of ContexCorp. under Rep. Act No. 7227 was limited
only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out
that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users;
hence, the direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contexs claim for
refund of erroneously paid taxes is DENIED accordingly.
SO ORDERED.[13]
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of
raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing
rules covers only the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer,
and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer
as an additional costs of the goods.[14] This was because the exemption granted by Rep. Act No. 7227 relates to the
act of importation and Section 107 [15] of the Tax Code specifically imposes the VAT on importations. The appellate
court applied the principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises
from internal revenue taxes is qualified as pertaining only to those for which they may be directly liable. It then stated
that apparently, the legislative intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes,
which SBFZ-registered enterprise may be liable for and only in connection with their importation of raw materials,
capital, and equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER,
A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS
FOR THE YEARS 1997 AND 1998.[16]

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of
Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2)
the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It
contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national
taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our
attention to regulations issued by both the SBMA and BIR clearly and categorically providing that the tax exemption
provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of supplies and
materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions,
such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be
directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VATregistered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to
the buyer, transferee or lessee. [17] Unlike a direct tax, such as the income tax, which primarily taxes an individuals
ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods,
services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer
expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the
tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is
transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to
the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. [18]Stated
differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or
services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
consumer of such goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.[19]
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the
transaction can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid.[20] This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or
exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt
goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the
issuance of a VAT invoice or receipt.[21]
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax
burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction
for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.
[22]

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only
removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the

exempt firms business or non-retail customers. It is for this reason that a sharp distinction must be made between
zero-rating and exemption in designating a value-added tax.[23]
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw
materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all
national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95. [24]
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration[25] issued by the
BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous
with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously
passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such
VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated Value-Added Tax
Regulations provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
Export Sales shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as
the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise
known as the Bases Conversion and Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and
accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority
(CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a
signatory effectively subject such sales to zero-rate.
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer
and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax)
previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioners purchases did

exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an
exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and
hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and
supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of
Appeals in CA-G.R. SP No. 62823, as well as its Resolution ofDecember 19, 2001 are AFFIRMED. No pronouncement
as to costs.
G.R. No. 183553

November 12, 2012

DIAGEO
PHILIPPINES,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

INC., Petitioner,

DECISION
PERLAS-BERNABE, J.:
Before the Court is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision 1 of the Court of Tax
Appeals (CTA) En Banc dated July 2, 2008 in CTA EB No. 260.
The petition seeks the proper interpretation of Section 130(D) 2 of the National Internal Revenue Code of 1997 (Tax
Code), particularly, on the question of who may claim the refund or tax credit of excise taxes paid on goods actually
exported.
The Factual Antecedents
Petitioner Diageo Philippines, Inc. (Diageo) is a domestic corporation organized and existing under the laws of the
Republic of Philippines and is primarily engaged in the business of importing, exporting, manufacturing, marketing,
distributing, buying and selling, by wholesale, all kinds of beverages and liquors and in dealing in any material, article,
or thing required in connection with or incidental to its principal business. 3 It is registered with the Bureau of Internal
Revenue (BIR) as an excise tax taxpayer, with Tax Identification No. 000-161-879-000. 4
For the periodNovember 1, 2003 to December 31, 2004, Diageo purchased raw alcohol from its supplier for use in the
manufacture of its beverage and liquor products. The supplier imported the raw alcohol and paid the related excise
taxes thereon before the same were sold to the petitioner.5 The purchase price for the raw alcohol included, among
others, the excise taxes paid by the supplierin the total amount of P12,007,528.83. 6
Subsequently, Diageo exported its locally manufactured liquor products to Japan, Taiwan, Turkey and Thailand and
received the corresponding foreign currency proceeds of such export sales. 7
Within two (2) years from the time the supplier paid the subject excise taxes, Diageo filed with the BIR Large
Taxpayers Audit and Investigation Division II applications for tax refund/issuance of tax credit certificates
corresponding to the excise taxes which its supplier paid but passed on to it as part of the purchase price of the
subject raw alcohol invoking Section 130(D) of the Tax Code.
However, due to the failure of the respondent Commissioner of Internal Revenue (CIR) to act upon Diageos claims,
the latter was constrained to timely file a petition for review before the CTA. 8

On December 27, 2005, the CIR filed its Answer assailing Diageos lack of legal personality to institute the claim for
refund because it was not the one that paid the alleged excise taxes but its supplier. 9 Subsequently, the CIR filed a
motion to dismiss reiterating the same issue.10
The Ruling of the Court of Tax Appeals
On July 20, 2006, the CTA Second Division issued a Resolution 11dismissing the petition on the ground that Diageo is
not the real party in interest to file the claim for refund. Citing Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue,12 the CTA Second Division ruled that although an excise tax is an indirect tax which can be passed
on to the purchaser of goods, the liability therefor still remains with the manufacturer or seller, hence, the right to
claim refund is only available to it. 13 Diageo filed a motion for reconsideration which was subsequently denied in the
Resolution dated January 8, 2007.14
On February 13, 2007, Diageo filed a petition for review 15 which the CTAEn Bancin its Decision dated July 2,
2008dismissed,thereby affirming the ruling of the CTA Second Division. 16
Citing Rule 3, Section 2,17 of the Rules of Court, the CTA En Banc held that the right to a refund or tax credit of the
excise taxes under Section 130(D) of the Tax Code is available only to persons enumerated in Sections 130(A)
(1)18 and (2)19 of the same Code because they are the ones primarily and legally liable to pay such taxes. As Diageo
failed to prove that it had actually paid the claimed excise taxes as manufacturer-exporter, the CTA En Banc likewise
did not find it as the proper party to claim a refund.Hence, the instant petition.
Diageo claims to be a real party in interest entitled to recover the subject refund or tax credit because it stands to be
benefited or injured by the judgment in this suit. 20 It contends that the tax privilege under Section 130(D) applies to
every exporter provided the conditions therein set forth are complied with, namely, (1) the goods are exported either
in their original state or as ingredients or part of any manufactured goods or products; (2) the exporter submits proof
of exportation; and (3) the exporter likewise submits proof of receipt of the corresponding foreign exchange
payment.21It argues that Section 130(D) does not limit the grant of the tax privilege to manufacturers/producersexporters only but to every exporter of locally manufactured/produced goods subject only to the conditions
aforementioned.22
The Issue
The sole issue to be resolved is whether Diageo has the legal personality to file aclaim for refund or tax credit for the
excise taxes paid by its supplier on the raw alcohol it purchased and used in the manufacture of its exported goods.
Ruling of the Court
The petition is without merit.
Excise
indirect taxes.

taxes

partake

of

the

nature

of

Diageo bases its claim for refund on Section 130 of the Tax Code which reads:
Section 130.Filing of Return and Payment of Excise Tax on Domestic Products. xxx
(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax.(1) Persons Liable to File a Return. Every person liable to pay excise tax imposed under this Title shall file a separate
return for each place of production setting forth, among others, the description and quantity or volume of products to
be removed, the applicable tax base and the amount of tax due thereon; Provided however, That in the case of
indigenous petroleum, natural gas or liquefied natural gas, the excise tax shall be paid by the first buyer, purchaser or
transferee for local sale, barter or transfer, while the excise tax on exported products shall be paid by the owner,
lessee, concessionaire or operator of the mining claim.Should domestic products be removed from the place of

production without the payment of the tax, the owner or person having possession thereof shall be liable for the tax
due thereon.
xxxx
(D) Credit for Excise tax on Goods Actually Exported.- When goods locally produced or manufactured are removed and
actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or
parts of any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon
submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment:
Provided, That the excise tax on mineral products, except coal and coke, imposed under Section 151 shall not be
creditable or refundable even if the mineral products are actually exported.
A reading of the foregoing provision, however, reveals that contrary to the position of Diageo, the right to claim a
refund or be credited with the excise taxes belongs to its supplier. The phrase "any excise tax paid thereon shall be
credited or refunded" requires that the claimant be the same person who paid the excise tax. In Silkair (Singapore)
Pte, Ltd. v. Commissioner of Internal Revenue, the Court has categorically declared that "[t]he proper party to
question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law
and who paid the same even if he shifts the burden thereof to another." 23
Excise taxes imposed under Title VI of the Tax Code are taxes on property 24 which are imposed on "goods
manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to
things imported."25 Though excise taxes are paid by the manufacturer or producer before removal of domestic
products from the place of production 26 or by the owner or importer before the release of imported articles from the
customshouse,27 the same partake of the nature of indirect taxes when it is passed on to the subsequent purchaser.
Indirect taxesare defined asthose wherein the liability for the payment of the tax falls on one person but the burden
thereof can be shifted to another person. When the seller passes on the tax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered. 28
Accordingly, when the excise taxes paid by the supplier were passed on to Diageo, what was shifted is not the tax per
se but anadditional cost of the goods sold. Thus, the supplier remains the statutory taxpayer even if Diageo, the
purchaser, actually shoulders the burden of tax.
The
party
taxes.

statutory
to

taxpayer
claim

is
refund

the
of

proper
indirect

As defined in Section 22(N) of the Tax Code, a taxpayer means any person subject to tax. 1wphi1 He is, therefore,
the person legally liable to file a return and pay the tax as provided for in Section 130(A). As such, he is the person
entitled to claim a refund.
Relevant isSection 204(C) of the Tax Code which provides:
Section 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 refined 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. (Emphasis supplied)

Pursuant to the foregoing, the person entitled to claim a tax refund is the statutory taxpayer or the person liable for or
subject to tax.29 In the present case, it is not disputed that the supplier of Diageo imported the subject raw alcohol,
hence, it was the one directly liable and obligated to file a return and pay the excise taxes under the Tax Code before
the goods or products are removed from the customs house. It is, therefore, the statutory taxpayer as contemplated
by law and remains to be so, even if it shifts the burden of tax to Diageo. Consequently, the right to claim a refund, if
legally allowed, belongs to it and cannot be transferred to another, in this case Diageo, without any clear provision of
law allowing the same.
Unlike the law on Value Added Tax which allows the subsequent purchaser under the tax credit method to refund or
credit input taxes passed on to it by a supplier,30 no provision for excise taxes exists granting non-statutory taxpayer
like Diageo to claim a refund or credit. It should also be stressed that when the excise taxes were included in the
purchase price of the goods sold to Diageo, the same was no longer in the nature of a tax but already formed part of
the cost of the goods.
Finally, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of
the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be
mistaken.31 Unfortunately, Diageo failed to meet the burden of proof that it is covered by the exemption granted under
Section 130(D) of the Tax Code.
In sum, Diageo, not being the party statutorily liable to pay excise taxes and having failed to prove that it is covered
by the exemption granted under Section 130(D) of the Tax Code, is not the proper party to claim a refund or credit of
the excise taxes paid on the ingredients of its exported locally produced liquor.
WHIEREFORE, the petition is DENIED and the assailed CTA En Banc Decision in CTA EB No. 260 dated July 2, 2008 is
AFFIRMED.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR.,
Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision [1] of the Court of Appeals of 31 January 2001 in CA-G.R. SP No.
57799 affirming the 3 January 2000 Decision [2] of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, [3] which
held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance
Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside
of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an
amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were
evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. [5]

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return [7] for the year 1989, declaring, among other
things, its gain from the sale of real property in the amount ofP75,728.021. After crediting withholding taxes
of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by
a Deed of Sale of Shares of Stocks.[9] Three and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice [10] and demand letter to the
CIC for deficiency income tax for the year 1989 in the amount ofP79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC,
and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 19871989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan
and Mario Luza Bautista, received a Notice of Assessment [12] dated 9 January 1995 from the Commissioner of Internal
Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return P75,987,725.00
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75

Add: 50% Surcharge 12,499,999.88

25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995, [14] the Commissioner dismissed the protest, stating that a fraudulent scheme
was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain
of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of
land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of
35%.
On 15 February 1996, the Estate filed a petition for review [15] with the CTA alleging that the Commissioner erred
in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions actually constituted
a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the
seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated
sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income
tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such
falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well
within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which
provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being
tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner
of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the
name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the
gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is
already dead, his estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud
to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted
by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction,
the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three
years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also
ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency
income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner
on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property owned by CIC was
the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative,
dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived
his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The

CTA denied[20] the motion for reconsideration, prompting the Commissioner to file a petition for review [21] with the
Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning
that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is better
situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda
Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT
TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF
CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the
Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it.
She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book
I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not
from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles
Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all
its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga
to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. [23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an

accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and
(3) a course of action or failure of action which is unlawful. [24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,
[25]
and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance [26] as other inv.
Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as other inv.
Cibeles Bldg. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the
many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant
of CIC and an old timer in the company. [27] But Mr. Prieto did not testify on this matter, hence, that information
remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for
investigation of Altonaga was unserved,[28] Altonaga having left for the United States of America in January 1990.
Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to
him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum,
respondent Estate declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one hundred percent.
But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely,
Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the
property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a
lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [ sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from
CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is
tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions,
and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially
that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the
35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the
same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits
and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view
of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation
of tax liabilities than for legitimate business purposes constitutes one of tax evasion. [31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. [32] The
incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the
transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation
of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by
mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the
tax policies of Congress.[33]

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale
to Altonaga should be disregarded for income tax purposes. [34] The two sale transactions should be treated as a single
direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A)
of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, and partnerships, no matter how created or organized but not including general
professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos;
and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 1986 [35] (now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file
a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as
the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on
the tax consequence of the two sale transactions. [36] Thus, the BIR was amply informed of the transactions even prior
to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made
with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not
negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was
false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.[37] The assessment for the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.
Is respondent Estate liable

for the 1989 deficiency

income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the
owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and
vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of
cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation
may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. [38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily
held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989.
Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations,
contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as Annex B and made a part hereof. The business of
Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of
Cibeles for the fiscal years 1987, 1988 and 1989. [39][Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals
of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered
ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance
Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER
TRADES
CORPORATION,
and
DELPHIN
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of
first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of
real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of
the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same
property and providing that during the existence or after the term of this lease the lessor should he
decide to sell the property leased shall first offer the same to the lessee and the letter has the priority
to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per
stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco
and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate,
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a
total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in
its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision
reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to
acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is
27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec.,
pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition
and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a
parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the
Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer
of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent
will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher
Trades Corporation, as provided in the same contractual provision invoked by private respondent. (pp.
251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which,
in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of
exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the
parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties,
Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that
the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there
was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in
exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of
interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even
spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art.
1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art.
1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and
distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's
same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a
separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the
same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from
the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton
[1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and
pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot
sharer in the assets of the corporation. But this character of proportionate interest is not hidden
beneath a false appearance of a given sum in money, as in the case of par value shares. The capital
stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money,
but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no
matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par
value of shares, the attention of persons interested in the financial condition of a corporation is
focused upon the value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of exchange on
the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the spouses of
this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation in
entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free exchange
of property, they were able to execute the deed of exchange free from income tax and
acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as a
result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value
share in the defendant corporation was for the purpose of flexibility. Can you explain
flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the
board of directors in increasing capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is held
by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular person
of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence,
the private respondent has no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate
Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court
of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
G.R. No. 171266

April 4, 2007

INTERNATIONAL
EXCHANGE
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

BANK, Petitioner,

DECISION
CARPIO MORALES, J.:
Is a Savings Account-Fixed Savings Deposit (FSD) evidenced by a passbook issued by International Exchange Bank
(petitioner) subject to documentary stamp tax (DST) for the years 1996 and 1997?
Petitioner, a banking institution duly organized and existing under the laws of the Philippines, was on April 13, 1999
served Letter of Authority No. 000020535 1 by the Commissioner of Internal Revenue (respondent) directing the
examination by a "Special Team created pursuant to RSO 797-98" (Special Team) of petitioners books of accounts
and other accounting records for the year 1997 and "unverified prior years." An examination of said documents was in
fact conducted.
Petitioner subsequently received on November 16, 1999 a "Notice to Taxpayer" 2 from the Assistant Commissioner,
Enforcement Service of the Bureau of Internal Revenue, notifying it of the results of the examination conducted by the
Special Team regarding its tax liabilities, which amounted to P465,158,118.31 for 1996 and P17,033,311,974.23 for
1997, and requesting it to appear for an informal conference to present its side.
Between November3 and December4 1999, petitioners representatives met with the Special Team to discuss and/or
dispute portions of the Special Teams audit findings. Eventually, the parties resolved issues relating to transactions
involving payment of final withholding and gross receipts taxes. 5
On January 6, 2000, petitioner was personally served with an undated Pre-Assessment Notice 6 (PAN) assessing it of
deficiency on its purchases of securities from the Bangko Sentral ng Pilipinas or Government Securities PurchasedReverse Repurchase Agreement (RRPA) and its FSD for the taxable years 1996 and 1997, viz:
Details
(Taxable Year 1996)

of

Discrepancies

INDUSTRY ISSUES
1. DOCUMENTARY STAMP TAX (DST) On Government Securities Purchased-RRPA and Savings Deposits - SD
totaling P25,180,492.15.
Government Securities Purchased-RRP amounting to P3,584,098,013.35 is subject to DST under Section 180 of the
NIRC, as amended, since this falls under the classification of Deposits Substitutes as defined by RR 3-97.

Savings Deposit-FSD amounting to P9,845,497,800.27 should be treated as time deposits considering that its features
are very much the same as time deposits (interest rates; terms). In substance, these are certificate[s] of deposits
subject to Documentary Stamp Tax under Section 180 of the NIRC which provides among others that certificate[s] of
deposits bearing interest and others not payable on sight or demand are subject to DST.7
Details
(Taxable Year 1997)

of

Discrepancies

INDUSTRY ISSUES
1. DOCUMENTARY STAMP TAX (DST) On Government Securities Purchased-RRPA and Savings Deposits-FSD
totaling P75,383,751.55.
Government Securities Purchased-RRP amounting to P12,180.427,820.44 is subject to DST under Sec. 180 of the
NIRC, as amended, since this falls under the classification of Deposit Substitutes as defined by RR 3-97.
Savings Deposits-FSD amounting to P28,024,239,673.35 should be treated as time deposits considering that its
features are very much the same as time deposits (interest rates; terms). In substance, these are certificates of
deposit subject to Documentary Stamp Tax under Section 180 of the NIRC which provides among others that
certificate[s] of deposit bearing interest and others not payable on sight or demand are subject to DST. 8 (Underscoring
in the original)
The PAN advised petitioner that in case it was not agreeable to the above-quoted findings, it may "see the Assistant
Commissioner-Enforcement Service to clarify issues arising from the investigation and/or review," and its failure to do
so within 15 days from receipt of the PAN would mean that it was agreeable. 9
On January 12, 2000, petitioner received a Formal Assessment Notice 10 (FAN) for deficiency DST on its RRPA and FSD,
including surcharges, in the amounts of P25,180,492.15 for 1996 and P75,383,751.55 for 1997, and an accompanying
demand letter11 requesting payment thereof within 30 days.
Acting on the FAN, petitioner filed on February 11, 2000 a protest letter 12 alleging that the assessments should be
reconsidered on the grounds that: (1) the assessments are null and void for having been issued without any authority
and due process, and were made beyond the prescribed period for making assessments; (2) there is no law imposing
DST on RRPA, and assuming that DST was payable, it is the Bangko Sentral ng Pilipinas which is liable therefor; (3)
there is no law imposing DST on its FSD; and (4) assuming the deficiency assessments for DST were proper, the
imposition of surcharges was patently without legal authority.
Respondent failed to act on the protest, prompting petitioner to file a petition for review before the Court of Tax
Appeals (CTA).
By Decision13 of October 26, 2004, the First Division of the CTA (CTA Division) disposed as follows:
WHEREFORE, petitioners deficiency assessments pertaining to the reverse purchase agreements in the amounts
of P6,720,183.77 and P22,838,302.16 inclusive of surcharges, for the years 1996 and 1997, respectively, are hereby
CANCELLED and WITHDRAWN. However, the deficiency assessments pertaining to savings deposits-FSD are hereby
UPHELD and petitioner is ORDERED to PAY the respondent the amount ofP71,005,757.77 representing deficiency
documentary stamp tax for the years 1996 and 1997. In addition thereto, petitioner is ORDERED to PAY respondent
20% delinquency interest from February 12, 2000 until fully paid pursuant to Section 249 of the 1997
NIRC.14 (Emphasis and underscoring supplied)
Petitioner moved for reconsideration of the CTA Division decision. Respondent moved too for a partial review of the
decision.

Petitioner argued that its FSD is not subject to DST since it was not one of the documents enumerated either under
the 1977 Tax Code (Tax Code) or the 1997 National Internal Revenue Code (NIRC). Respondent on the other hand
argued that petitioner should be liable not only for DST on its FSD but also on its RRPA.
For lack of merit, the CTA Division, by Resolution 15 of April 20, 2005, denied petitioners motion for reconsideration
and respondents motion for partial reconsideration.
Only petitioner appealed to the CTA En Banc before which it proffered that its FSD cannot be considered a certificate
of deposit subject to DST under Section 180 of the Tax Code for, unlike a certificate of deposit which is a negotiable
instrument, the passbook it issued for its FSD was not payable to the order of the depositor or to some other person
as the deposit could only be withdrawn by the depositor or by a duly authorized representative. 16
Petitioner likewise proffered that the legislative deliberations on the bill that was to become Republic Act No. (R.A.)
924317 showed that the definition of certificates of deposit was amended to include "other evidences of deposits that
are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of
the deposit and the risks involved or drawing interest and having a specific maturity date" in order to plug a revenue
loophole caused by the term "certificates of deposit" provided under the Tax Code and the NIRC. 18
Furthermore, petitioner argued that a "deposits [sic] evidenced by a passbook [which] have features akin to a time
deposit," such as petitioners FSD, is not subject to DST under the Tax Code and the NIRC. 19
Finally, petitioner argued that the FAN for 1996 and 1997 were issued in violation of its right to due process, they
having been issued even before it could respond to the PAN; and that the 1996 assessment is null and void for having
been issued beyond the 3-year prescriptive period.
By Decision20 of January 30, 2006, the CTA En Banc affirmed the decision of the CTA Division finding petitioner liable
for payment of deficiency DST for its FSD.
In affirming the CTA Division Decision, the CTA En Banc held that a time deposit is a type of a certificate of deposit
drawing interest, and petitioners FSD has the same nature and characteristics as those of a time deposit; that the
requirement of due process had been substantially complied with; and the 1996 assessment was not barred by
prescription because there was no requirement for the filing of a DST return under the Tax Code.
Hence, the present petition for review on certiorari, petitioner reiterating the same grounds advanced before the CTA
En Banc.
The issue, in the main, is whether petitioners FSD is subject to DST for the years assessed.
The applicable provision is Section 180 of the Tax Code, as amended by R.A. 7660, 21 which reads:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities
issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not
payable on sight or demand. - On all loan agreements signed abroad wherein the object of the contract is located or
used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and securities
issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for
the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there
shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided, That
only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure
such loan, whichever will yield a higher tax: Provided, however, That loan agreements or promissory notes the
aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his
purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a
house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax
provided under this section. (Emphasis and underscoring supplied)

Petitioner posits that based on this Courts definition of a certificate of deposit in Far East Bank and Trust Company v.
Querimit, 22 viz:
A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money
on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other
person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. . . . 23
its FSD is not a certificate of deposit since there is nothing in the terms and conditions printed on the passbook
evidencing it that can be construed to mean that the bank or banker acknowledges the receipt of a sum of money on
deposit.24
Petitioner moreover posits that the FSD, unlike a certificate of deposit, is not negotiable or payable to the order of
some other person or his order but is "only withdrawable by the depositor or his authorized representative." 25
Petitioners position does not lie.
As correctly found by the CTA En Banc, a passbook representing an interest earning deposit account issued by a bank
qualifies as a certificate of deposit drawing interest. 26
A document to be deemed a certificate of deposit requires no specific form as long as there is some written
memorandum that the bank accepted a deposit of a sum of money from a depositor.27 What is important and
controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature attached
to it, inasmuch as substance, not form, is paramount. 28
Contrary to petitioners claim, not all certificates of deposit are negotiable. A certificate of deposit may or may not be
negotiable as gathered from the use of the conjunction or, instead of and, in its definition. A certificate of deposit
may be payable to the depositor, to the order of the depositor, or to some other person or his order.
In any event, the negotiable character of any and all documents under Section 180 is immaterial for purposes of
imposing DST.
Orders for the payment of sum of money payable at sight or on demand are of course explicitly exempted from the
payment of DST. Thus, a regular savings account with a passbook which is withdrawable at any time is not subject to
DST, unlike a time deposit which is payable on a fixed maturity date.
As for petitioners argument that its FSD is similar to a regular savings deposit because it is evidenced by a
passbook,29 and that based on the legislative deliberations on the bill which was to become R.A. 9243 which amended
Section 180 of the NIRC (which is to a large extent the same as Section 180 of the Tax Code, as amended by R.A.
7660), Congress admitted that deposits evidenced by passbooks which have features akin to time deposits are not
subject to DST,30 the same does not lie.
The FSD, like a time deposit, provides for a higher interest rate when the deposit is not withdrawn within the required
fixed period; otherwise, it earns interest pertaining to a regular savings deposit. Having a fixed term and the reduction
of interest rates in case of pre-termination are essential features of a time deposit. Thus explains the CTA En Banc:
It is well-settled that certificates of time deposit are subject to the DST and that a certificate of time deposit is but a
type of a certificate of deposit drawing interest. Thus, in resolving the issue before Us, it is necessary to determine
whether petitioners Savings Account-Fixed Savings Deposit (SA-FSD) has the same nature and characteristics as a
time deposit. In this regard, the findings of fact stated in the assailed Decision [of the CTA Division] are as follows:
"In this case, a depositor of a savings deposit-FSD is required to keep the money with the bank for at least thirty (30)
days in order to yield a higher interest rate. Otherwise, the deposit earns interest pertaining only to a regular savings
deposit.

The same feature is present in a time deposit. A depositor is allowed to withdraw his time deposit even before its
maturity subject to bank charges on its pre[-]termination and the depositor loses his entitlement to earn the interest
rate corresponding to the time deposit. Instead, he earns interest pertaining only to a regular savings deposit. Thus,
petitioners argument that the savings deposit-FSD is withdrawable anytime as opposed to a time deposit which has a
maturity date, is not tenable. In both cases, the deposit may be withdrawn anytime but the depositor gets to earn a
lower rate of interest. The only difference lies on the evidence of deposit, a savings deposit-FSD is evidenced by a
passbook, while a time deposit is evidenced by a certificate of time deposit."
In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount of deposit must be
maintained for a fixed period. Such being the case, We agree with the finding that the SA-FSD is a deposit account
with a fixed term. Withdrawal before the expiration of said fixed term results in the reduction of the interest rate.
Having a fixed term and reduction of interest rate in case of pre-termination are essentially the features of a time
deposit. Hence, this Court concurs with the conclusion reached in the assailed Decision that petitioners SA-FSD and
time deposit are substantially the same. . . .31 (Italics in the original; underscoring supplied)
The findings and conclusions reached by the CTA which, by the very nature of its function, is dedicated exclusively to
the consideration of tax problems and has necessarily developed an expertise on the subject, and unless there has
been an abuse or improvident exercise of authority,32 and none has been shown in the present case, deserves respect.
It bears emphasis that DST is levied on the exercise by persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the execution of specific instruments. 33 It is an excise
upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. 34
While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to
evade payment of just taxes. 35 To claim that time deposits evidenced by passbooks should not be subject to DST is a
clear evasion of the rule on equality and uniformity in taxation that requires the imposition of DST on documents
evidencing transactions of the same kind, in this particular case, on all certificates of deposits drawing interest. 36
The further amendment of Section 180 of the NIRC and its renumbering as Section 179 by R.A. 9243, which was
approved on February 17, 2004, viz:
SEC. 5. Section 180 of the National Internal Revenue Code of 1997, as amended, is hereby renumbered as Section
179 and further amended to read as follows:
SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a
documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the
issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1)
year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its
term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp
tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan.
For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending
transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements,
including those signed abroad wherein the object of contract is located or used in the Philippines, instruments and
securities issued by the government of any of its instrumentalities, deposit substitute debt instruments, certificates or
other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking
into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity
date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation." (Underscoring supplied),
does not mean that as proffered, prior to its further amendment on said date, Section 180 of the Tax Code and the
NIRC time deposits for which passbooks were issued were exempted from payment of DST.
If at all, the further amendment was intended to eliminate precisely the scheme used by banks of issuing passbooks
to "cloak" its time deposits as regular savings deposits. This is reflected from the following exchanges between Mr.

Miguel Andaya of the Bankers Association of the Philippines and Senator Ralph Recto, Senate Chairman of the
Committee on Ways and Means, during the deliberations on Senate Bill No. 2518 which eventually became R.A. 9243:
MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to clarify. Savings deposit at the present
time is not subject to DST.
THE CHAIRMAN. Thats right.
MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going to encourage deposits,
whether savings or time
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . .its questionable whether we should tax it with DST at all, even the question of imposing final
withholding tax has been raised as an issue.
THE CHAIRMAN. If I had it my way, Ill cut it by half.
MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue, even the industry itself
right now is not pushing in that direction, but in the long term, when most of us in this room are gone, we
hope that DST will disappear from the face of this earth, no.
Now, I think the move of the DOF to expand the coverage of or to add that phrase, "Other evidence of
indebtedness," it just removed ambiguity. When we testified earlier in the House on this very same bull, we
did not interpose any objections if only for the sake of avoiding further ambiguity in the implementation of
DST on deposits. Because of what has happened so far is, we dont know whether the examiner is gonna
come in and say, "This savings deposit is not savings but its time deposit." So, I think what DOF has done is
to eliminate any confusion. They said that a deposit that has a maturity. . .
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . . . which is time, in effect, regardless of what form it takes should be subject to DST.
THE CHAIRMAN. Would that include savings deposit now?
MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed maturity . . .
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . . that would fall under the purview.37 (Underscoring supplied)
Finally, as the records show, contrary to petitioners claim, it had been afforded the opportunity to protest the
assessment notices as in fact it even requested for a re-investigation which is, given the nature of the present case,
the essence of due process.38
WHEREFORE, the petition is DENIED.
SO ORDERED.

THIRD DIVISION
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,

G.R. No. 177279

Present:

CARPIO MORALES, J.,

Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

- versus -

HON. RAUL M. GONZALEZ, Secretary of

Justice, L. M. CAMUS ENGINEERING Promulgated:
CORPORATION (represented by LUIS M.
CAMUS and LINO D. MENDOZA),
October 13, 2010
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing
the Decision[1] dated October 31, 2006 and Resolution[2]dated March 6, 2007 of the Court of Appeals (CA) in CA-G.R. SP
No. 93387 which affirmed the Resolution[3] dated December 13, 2005 of respondent Secretary of Justice in I.S. No. 2003774 for violation of Sections 254 and 255 of the National Internal Revenue Code of 1997 (NIRC).
The facts as culled from the records:
Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then Commissioner of
Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C. Advincula, Jr., Simplicio V. Cabantac,
Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora supervised by Section Chief Sixto C. Dy, Jr. of the Tax Fraud
Division (TFD), National Office, conducted a fraud investigation for all internal revenue taxes to ascertain/determine
the tax liabilities of respondent L. M. Camus Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and
1999.[4] The audit and investigation against LMCEC was precipitated by the information provided by an informer that
LMCEC had substantial underdeclared income for the said period. For failure to comply with the subpoena duces
tecum issued in connection with the tax fraud investigation, a criminal complaint was instituted by the Bureau of Internal
Revenue (BIR) against LMCEC on January 19, 2001 for violation of Section 266 of the NIRC (I.S. No. 00-956 of the
Office of the City Prosecutor of Quezon City).[5]
Based on data obtained from an informer and various clients of LMCEC, [6] it was discovered that LMCEC filed
fraudulent tax returns with substantial underdeclarations of taxable income for the years 1997, 1998 and
1999. Petitioner thus assessed the company of total deficiency taxes amounting to P430,958,005.90 (income tax
-P318,606,380.19 and value-added tax [VAT] - P112,351,625.71) covering the said period. The Preliminary
Assessment Notice (PAN) was received by LMCEC on February 22, 2001.[7]
LMCECs alleged underdeclared income was summarized by petitioner as follows:
Year

Income
Per ITR

Income
Per Investigation ndeclared

1997
1998

96,638,540.00
86,793,913.00

283,412,140.84
236,863,236.81

1999

88,287,792.00

251,507,903.13

I
ncome
186,733,600.84
150,069,323.8
1
163,220,111.13

Percentage of
Underdeclaration

193.30%
172.90%
184.90%[8]

In view of the above findings, assessment notices together with a formal letter of demand dated August 7,
2002 were sent to LMCEC through personal service on October 1, 2002.[9] Since the company and its representatives
refused to receive the said notices and demand letter, the revenue officers resorted to constructive service [10] in
accordance with Section 3, Revenue Regulations (RR) No. 12-99 [11].
On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to the Secretary of
Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus and Lino D. Mendoza, the latter two
were sued in their capacities as President and Comptroller, respectively. The case was docketed as I.S. No. 2003774. In the Joint Affidavit executed by the revenue officers who conducted the tax fraud investigation , it was alleged
that despite the receipt of the final assessment notice and formal demand letter on October 1, 2002, LMCEC failed and
refused to pay the deficiency tax assessment in the total amount of P630,164,631.61, inclusive of increments, which
had become final and executory as a result of the said taxpayers failure to file a protest thereon within the thirty (30)day reglementary period.[12]
Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable whatsoever
for the alleged tax deficiency which had become due and demandable. Considering that the complaint and its annexes
all showed that the suit is a simple civil action for collection and not a tax evasion case, the Department of Justice
(DOJ) is not the proper forum for BIRs complaint. They also assail as invalid the assessment notices which bear no
serial numbers and should be shown to have been validly served by an Affidavit of Constructive Service executed and
sworn to by the revenue officers who served the same. As stated in LMCECs letter-protest dated December 12,
2002addressed to Revenue District Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the company
had already undergone a series of routine examinations for the years 1997, 1998 and 1999; under the NIRC, only one
examination of the books of accounts is allowed per taxable year.[13]
LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic Recovery
Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998 and 1999; for 1997, its
tax liability was terminated and closed under Letter of Termination [14] dated June 1, 1999 issued by petitioner and
signed by the Chief of the Assessment Division. [15] LMCEC claimed it made payments of income tax, VAT and
expanded withholding tax (EWT), as follows:
TAXABLE
YEAR
1997

1998
1999

AMOUNT OF TAXES
PAID
Termination Letter Under Letter
of
Authority
No.
174600
DatedNovember 4, 1998
ERAP Program pursuant
to RR #2-99

EWT - P 6,000.00
VAT - 540,605.02
IT - 3,000.00
WC - 38,404.55
VAT - 61,635.40

VAP Program pursuant

to RR #8-2001

IT - 878,495.28
VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped from further taking any action against it and its corporate
officers concerning the taxable years 1997 to 1999. With the grant of immunity from audit from the companys
availment of ERAP and VAP, which have a feature of a tax amnesty, the element of fraud is negated the moment the
Bureau accepts the offer of compromise or payment of taxes by the taxpayer. The act of the revenue officers in finding
justification under Section 6(B) of the NIRC (Best Evidence Obtainable) is misplaced and unavailing because they were
not able to open the books of the company for the second time, after the routine examination, issuance of termination
letter and the availment of ERAP and VAP. LMCEC thus maintained that unless there is a prior determination of fraud

supported by documents not yet incorporated in the docket of the case, petitioner cannot just issue LAs without first
terminating those previously issued. It emphasized the fact that the BIR officers who filed and signed the AffidavitComplaint in this case were the same ones who appeared as complainants in an earlier case filed against Camus for
his alleged failure to obey summons in violation of Section 5 punishable under Section 266 of the NIRC of 1997 (I.S.
No. 00-956 of the Office of the City Prosecutor of Quezon City). After preliminary investigation, said case was
dismissed for lack of probable cause in a Resolution issued by the Investigating Prosecutor on May 2, 2001.[17]
LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner for having no
basis in fact and law. However, until now the said protest remains unresolved. As to the alleged informant who
purportedly supplied the confidential information, LMCEC believes that such person is fictitious and his true identity
and personality could not be produced. Hence, this case is another form of harassment against the company as what
had been found by the Office of the City Prosecutor of Quezon City in I.S. No. 00-956. Said case and the present case
both have something to do with the audit/examination of LMCEC for taxable years 1997, 1998 and 1999 pursuant to
LA No. 00009361.[18]
In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed with the contention
of LMCEC that the complaint filed is not criminal in nature, pointing out that LMCEC and its officers Camus and
Mendoza were being charged for the criminal offenses defined and penalized under Sections 254 (Attempt to Evade or
Defeat Tax) and 255 (Willful Failure to Pay Tax) of the NIRC. This finds support in Section 205 of the same Code which
provides for administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action) remedies in
order to enforce collection of taxes. Both remedies may be pursued either independently or simultaneously.In this
case, the BIR decided to simultaneously pursue both remedies and thus aside from this criminal action, the Bureau
also initiated administrative proceedings against LMCEC.[19]
On the lack of control number in the assessment notice, petitioner explained that such is a mere office
requirement in the Assessment Service for the purpose of internal control and monitoring; hence, the unnumbered
assessment notices should not be interpreted as irregular or anomalous. Petitioner stressed that LMCEC already lost
its right to file a protest letter after the lapse of the thirty (30)-day reglementary period. LMCECs protest-letter
dated December 12, 2002 to RDO Clavelina S. Nacar, RD No. 40, Cubao,Quezon City was actually filed only
on December 16, 2002, which was disregarded by the petitioner for being filed out of time. Even assuming for the
sake of argument that the assessment notices were invalid, petitioner contended that such could not affect the
present criminal action,[20] citing the ruling in the landmark case of Ungab v. Cusi, Jr.[21]
As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division, Revenue Region
No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that the undated Certification issued by RDO
Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City stated that the report of the 1997 Internal Revenue taxes of
LMCEC had already been submitted for review and approval of higher authorities. LMCEC also cannot claim as excuse
from the reopening of its books of accounts the previous investigations and examinations. Under Section 235 (a), an
exception was provided in the rule on once a year audit examination in case of fraud, irregularity or mistakes, as
determined by the Commissioner. Petitioner explained that the distinction between a Regular Audit Examination and
Tax Fraud Audit Examination lies in the fact that the former is conducted by the district offices of the Bureaus Regional
Offices, the authority emanating from the Regional Director, while the latter is conducted by the TFD of the National
Office only when instances of fraud had been determined by the petitioner.[22]
Petitioner further asserted that LMCECs claim that it was granted immunity from audit when it availed of the
VAP and ERAP programs is misleading. LMCEC failed to state that its availment of ERAP under RR No. 2-99 is not a
grant of absolute immunity from audit and investigation, aside from the fact that said program was only for income

tax and did not cover VAT and withholding tax for the taxable year 1998. As for LMCECS availment of VAP in 1999
under RR No. 8-2001 dated August 1, 2001 as amended by RR No. 10-2001 dated September 3, 2001, the company
failed to state that it covers only income tax and VAT, and did not include withholding tax. However, LMCEC is not
actually entitled to the benefits of VAP under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle of
estoppel invoked by LMCEC, estoppel clearly does not lie against the BIR as this involved the exercise of an inherent
power by the government to collect taxes.[23]
Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956 is misleading
because said case involves another violation and offense (Sections 5 and 266 of the NIRC). Said case was filed by
petitioner due to the failure of LMCEC to submit or present its books of accounts and other accounting records for
examination despite the issuance of subpoena duces tecum against Camus in his capacity as President of
LMCEC. While indeed a Resolution was issued by Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing the
complaint, the same is still on appeal and pending resolution by the DOJ. The determination of probable cause in said
case is confined to the issue of whether there was already a violation of the NIRC by Camus in not complying with the
subpoena duces tecum issued by the BIR.[24]
Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by the
Commissioner is because the latter agreed with the findings of the investigating revenue officers that fraud exists in this
case. In the conduct of their investigation, the revenue officers observed the proper procedure under Revenue
Memorandum Order (RMO) No. 49-2000 wherein it is required that before the issuance of a Letter of Authority against a
particular taxpayer, a preliminary investigation should first be conducted to determine if a prima facie case for tax fraud
exists. As to the allegedly unresolved protest filed on April 20, 2001 by LMCEC over the PAN, this has been disregarded
by the Bureau for being pro forma and having been filed beyond the 15-day reglementary period. A subsequent letter
dated April 20, 2001 was filed with the TFD and signed by a certain Juan Ventigan. However, this was disregarded and
considered a mere scrap of paper since the said signatory had not shown any prior authorization to represent
LMCEC. Even assuming said protest letter was validly filed on behalf of the company, the issuance of a Formal Demand
Letter and Assessment Notice through constructive service on October 1, 2002 is deemed an implied denial of the said
protest. Lastly, the details regarding the informer being confidential, such information is entitled to some degree of
protection, including the identity of the informant against LMCEC.[25]
In their Joint Rejoinder-Affidavit, [26] Camus and Mendoza reiterated their argument that the identity of the
alleged informant is crucial to determine if he/she is qualified under Section 282 of the NIRC. Moreover, there was no
assessment that has already become final, the validity of its issuance and service has been put in issue being
anomalous, irregular and oppressive. It is contended that for criminal prosecution to proceed before assessment,
there must be a prima facie showing of a willful attempt to evade taxes. As to LMCECs availment of the VAP and ERAP
programs, the certificate of immunity from audit issued to it by the BIR is plain and simple, but petitioner is now
saying it has the right to renege with impunity from its undertaking. Though petitioner deems LMCEC not qualified to
avail of the benefits of VAP, it must be noted that if it is true that at the time the petitioner filed I.S. No. 00-956
sometime in January 2001 it had already in its custody that Confidential Information No. 29-2000 dated July 7, 2000,
these revenue officers could have rightly filed the instant case and would not resort to filing said criminal complaint for
refusal to comply with a subpoena duces tecum.
On September 22, 2003, the Chief State Prosecutor issued a Resolution [27] finding no sufficient evidence to
establish probable cause against respondents LMCEC, Camus and Mendoza. It was held that since the payments were
made by LMCEC under ERAP and VAP pursuant to the provisions of RR Nos. 2-99 and 8-2001 which were offered to
taxpayers by the BIR itself, the latter is now in estoppel to insist on the criminal prosecution of the respondent
taxpayer. The voluntary payments made thereunder are in the nature of a tax amnesty. The unnumbered assessment

notices were found highly irregular and thus their validity is suspect; if the amounts indicated therein were collected,
it is uncertain how these will be accounted for and if it would go to the coffers of the government or elsewhere. On the
required prior determination of fraud, the Chief State Prosecutor declared that the Office of the City Prosecutor in I.S.
No. 00-956 has already squarely ruled that (1) there was no prior determination of fraud, (2) there was indiscriminate
issuance of LAs, and (3) the complaint was more of harassment. In view of such findings, any ensuing LA is thus
defective and allowing the collection on the assailed assessment notices would already be in the context of a fishing
expedition or witch-hunting. Consequently, there is nothing to speak of regarding the finality of assessment notices in
the aggregate amount of P630,164,631.61.
Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor.[28]
Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review under
Resolution dated December 13, 2005.[29]
The Secretary of Justice found that petitioners claim that there is yet no finality as to LMCECs payment of its
1997 taxes since the audit report was still pending review by higher authorities, is unsubstantiated and misplaced. It
was noted that the Termination Letter issued by the Commissioner on June 1, 1999 is explicit that the matter is
considered closed. As for taxable year 1998, respondent Secretary stated that the record shows that LMCEC paid VAT
and withholding tax in the amount of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the
issuance of a certificate of immunity from audit for 1998 by the Office of the Commissioner of Internal Revenue. For
taxable year 1999, respondent Secretary found that pursuant to earlier LA No. 38633 dated July 4, 2000, LMCECs
1999 tax liabilities were still pending investigation for which reason LMCEC assailed the subsequent issuance of LA No.
00009361 dated August 25, 2000 calling for a similar investigation of its alleged 1999 tax deficiencies when no final
determination has yet been arrived on the earlier LA No. 38633. [30]
On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the existence of the
following circumstances indicating fraud in the settlement of LMCECs tax liabilities: (1) there must be intentional and
substantial understatement of tax liability by the taxpayer; (2) there must be intentional and substantial
overstatement of deductions or exemptions; and (3) recurrence of the foregoing circumstances. First, petitioner
miserably failed to explain why the assessment notices were unnumbered; second,the claim that the tax fraud
investigation was precipitated by an alleged informant has not been corroborated nor was it clearly established, hence
there is no other conclusion but that the Bureau engaged in a fishing expedition; and furthermore, petitioners course
of action is contrary to Section 235 of the NIRC allowing only once in a given taxable year such examination and
inspection of the taxpayers books of accounts and other accounting records. There was no convincing proof presented
by petitioner to show that the case of LMCEC falls under the exceptions provided in Section 235. Respondent
Secretary duly considered the issuance of Certificate of Immunity from Audit and Letter of Termination dated June 1,
1999 issued to LMCEC.[31]
Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice found
petitioner to have engaged in forum shopping in view of the fact that while there is still pending an appeal from the
Resolution of the City Prosecutor of Quezon City in said case, petitioner hurriedly filed the instant case, which not only
involved the same parties but also similar substantial issues (the joint complaint-affidavit also alleged the issuance of
LA No. 00009361 dated August 25, 2000). Clearly, the evidence oflitis pendentia is present. Finally, respondent
Secretary noted that if indeed LMCEC committed fraud in the settlement of its tax liabilities, then at the outset, it
should have been discovered by the agents of petitioner, and consequently petitioner should not have issued the
Letter of Termination and the Certificate of Immunity From Audit. Petitioner thus should have been more circumspect
in the issuance of said documents. [32]

Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent
Secretary via a certiorari petition in the CA.
On October 31, 2006, the CA rendered the assailed decision [33] denying the petition and concurred with the
findings and conclusions of respondent Secretary. Petitioners motion for reconsideration was likewise denied by the
appellate court.[34] It appears that entry of judgment was issued by the CA stating that its October 31, 2006 Decision
attained finality on March 25, 2007.[35] However, the said entry of judgment was set aside upon manifestation by the
petitioner that it has filed a petition for review before this Court subsequent to its receipt of the Resolution
dated March 6, 2007 denying petitioners motion for reconsideration on March 20, 2007.[36]
The petition is anchored on the following grounds:
I.
The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by dismissing the complaint based on grounds which are not even
elements of the offenses charged.
II.
The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by dismissing petitioners evidence, contrary to law.
III.
The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by inquiring into the validity of a Final Assessment Notice which has
become final, executory and demandable pursuant to Section 228 of the Tax Code of 1997 for failure
of private respondent to file a protest against the same. [37]

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for violation of
Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information
and Pay Tax).
Petitioner filed the criminal complaint against the private respondents for violation of the following provisions
of the NIRC, as amended:
SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in any
manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in
addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Thirty thousand pesos (P30,000) but not more than One hundred thousand pesos (P100,000)
and suffer imprisonment of not less than two (2) years but not more than four (4)
years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the
filing of a civil suit for the collection of taxes.
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 any 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 compensations 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.
x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is insufficient evidence
to establish probable cause to charge private respondents under the above provisions, based on the following
findings: (1) the tax deficiencies of LMCEC for taxable years 1997, 1998 and 1999 have all been settled or terminated,
as in fact LMCEC was issued a Certificate of Immunity and Letter of Termination, and availed of the ERAP and VAP
programs; (2) there was no prior determination of the existence of fraud; (3) the assessment notices are
unnumbered, hence irregular and suspect; (4) the books of accounts and other accounting records may be subject to
audit examination only once in a given taxable year and there is no proof that the case falls under the exceptions
provided in Section 235 of the NIRC; and (5) petitioner committed forum shopping when it filed the instant case even
as the earlier criminal complaint (I.S. No. 00-956) dismissed by the City Prosecutor of Quezon City was still pending
appeal.
Petitioner argues that with the finality of the assessment due to failure of the private respondents to challenge
the same in accordance with Section 228 of the NIRC, respondent Secretary has no jurisdiction and authority to
inquire into its validity. Respondent taxpayer is thereby allowed to do indirectly what it cannot do directly to raise a
collateral attack on the assessment when even a direct challenge of the same is legally barred. The rationale for
dismissing the complaint on the ground of lack of control number in the assessment notice likewise betrays a lack of
awareness of tax laws and jurisprudence, such circumstance not being an element of the offense. Worse, the final,
conclusive and undisputable evidence detailing a crime under our taxation laws is swept under the rug so easily on
mere conspiracy theories imputed on persons who are not even the subject of the complaint.
We grant the petition.
There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax fraud
investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax returns for
1997, 1998 and 1999. Pursuant to RR No. 12-99,[38] a PAN was sent to and received by LMCEC on February 22, 2001
wherein it was notified of the proposed assessment of deficiency taxes amounting to P430,958,005.90 (income tax
- P318,606,380.19 and VAT - P112,351,625.71) covering taxable years 1997, 1998 and 1999. [39] In response to said
PAN, LMCEC sent a letter-protest to the TFD, which denied the same on April 12, 2001 for lack of legal and factual
basis and also for having been filed beyond the 15-day reglementary period. [40]
As mentioned in the PAN, the revenue officers were not given the opportunity to examine LMCECs books of
accounts and other accounting records because its officers failed to comply with the subpoena duces tecum earlier
issued, to verify its alleged underdeclarations of income reported by the Bureaus informant under Section 282 of the
NIRC. Hence, a criminal complaint was filed by the Bureau against private respondents for violation of Section 266
which provides:
SEC. 266. Failure to Obey Summons. Any person who, being duly summoned to appear to
testify, or to appear and produce books of accounts, records, memoranda, or other papers, or to
furnish information as required under the pertinent provisions of this Code, neglects to appear or to
produce such books of accounts, records, memoranda, or other papers, or to furnish such information,
shall, upon conviction, be punished by a fine of not less than Five thousand pesos (P5,000) but not
more than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but
not more than two (2) years.
It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present considering that
the outcome of I.S. No. 00-956 is not determinative of the issue as to whether probable cause exists to charge the
private respondents with the crimes of attempt to evade or defeat tax and willful failure to supply correct and accurate
information and pay tax defined and penalized under Sections 254 and 255, respectively. For the crime of tax evasion
in particular, compliance by the taxpayer with such subpoena, if any had been issued, is irrelevant. As we held

in Ungab v. Cusi, Jr.,[41] [t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a]
fraudulent [return] with intent to evade and defeat x x x the tax. Thus, respondent Secretary erred in holding that
petitioner committed forum shopping when it filed the present criminal complaint during the pendency of its appeal
from the City Prosecutors dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in the course
of the preliminary investigation on LMCECs correct tax liabilities for taxable years 1997, 1998 and 1999.
In the Details of Discrepancies attached as Annex B of the PAN, [42] private respondents were already notified that
inasmuch as the revenue officers were not given the opportunity to examine LMCECs books of accounts, accounting
records and other documents, said revenue officers gathered information from third parties. Such procedure is
authorized under Section 5 of the NIRC, which provides:
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take
Testimony of Persons. In ascertaining the correctness of any return, or in making a return when none
has been made, or in determining the liability of any person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or other data which may be relevant or material to such
inquiry;
(B) To obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities, including the Bangko
Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as, but
not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and
the names, addresses, and financial statements of corporations, mutual fund companies, insurance
companies, regional operating headquarters of multinational companies, joint accounts, associations,
joint ventures or consortia and registered partnerships, and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or employee
of such person, or any person having possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the person liable for tax, or any other
person, to appear before the Commissioner or his duly authorized representative at a time and place
specified in the summons and to produce such books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or material
to such inquiry; x x x
x x x x (Emphasis supplied.)
Private respondents assertions regarding the qualifications of the informer of the Bureau deserve scant
consideration. We have held that the lack of consent of the taxpayer under investigation does not imply that the BIR
obtained the information from third parties illegally or that the information received is false or malicious. Nor does the
lack of consent preclude the BIR from assessing deficiency taxes on the taxpayer based on the documents .[43] In the
same vein, herein private respondents cannot be allowed to escape criminal prosecution under Sections 254 and 255
of the NIRC by mere imputation of a fictitious or disqualified informant under Section 282 simply because other than
disclosure of the official registry number of the third party informer, the Bureau insisted on maintaining the
confidentiality of the identity and personal circumstances of said informer.
Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No. 12-99, assessment
notice and formal demand informing the said taxpayer of the law and the facts on which the assessment is made, as
required by Section 228 of the NIRC. Respondent Secretary, however, fully concurred with private respondents
contention that the assessment notices were invalid for being unnumbered and the tax liabilities therein stated have
already been settled and/or terminated.

We do not agree.
A notice of assessment is:
[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be without
merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of
investigation submitted by the Revenue Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state
the fact, the law, rules and regulations or jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the notice of assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a requirement for its validity but rather the
contents thereof which should inform the taxpayer of the declaration of deficiency tax against said taxpayer. Both the
formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules
and regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under Section
228 of the NIRC.
Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on
which the assessment is made. Otherwise, the assessment is void. To implement the provisions of Section 228 of the
NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative.The
letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the
facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall be void. The same shall
be sent to the taxpayer only by registered mail or by personal delivery. x x x. [45](Emphasis supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCECs tax
deficiencies but also details of the specified discrepancies, explaining the legal and factual bases of the assessment. It
also reiterated that in the absence of accounting records and other documents necessary for the proper determination
of the companys internal revenue tax liabilities, the investigating revenue officers resorted to the Best Evidence
Obtainable as provided in Section 6(B) of the NIRC (third party information) and in accordance with the procedure laid
down in RMC No. 23-2000 dated November 27, 2000. Annex A of the Formal Letter of Demand thus stated:
Thus, to verify the validity of the information previously provided by the informant, the assigned
revenue officers resorted to third party information. Pursuant to Section 5(B) of the NIRC of 1997,
access letters requesting for information and the submission of certain documents (i.e., Certificate of
Income Tax Withheld at Source and/or Alphabetical List showing the income payments made to L.M.
Camus Engineering Corporation for the taxable years 1997 to 1999) were sent to the various clients of
the subject corporation, including but not limited to the following:
1. Ayala Land Inc.
2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation

From the documents gathered and the data obtained therein, the substantial
underdeclaration as defined under Section 248(B) of the NIRC of 1997 by your corporation
of its income had been confirmed. x x x x[46] (Emphasis supplied.)

In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that the estimated
tax liabilities arising from LMCECs underdeclaration amounted to P186,773,600.84 in 1997, P150,069,323.81 in 1998
and P163,220,111.13 in 1999. These figures confirmed that the non-declaration by LMCEC for the taxable years 1997,
1998 and 1999 of an amount exceeding 30% income [47] declared in its return is considered a substantial
underdeclaration of income, which constituted prima facieevidence of false or fraudulent return under Section 248(B)
[48]

of the NIRC, as amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent Secretary found the
latters claim as meritorious on the basis of the Certificate of Immunity From Audit issued on December 6, 1999
pursuant to RR No. 2-99 and Letter of Termination dated June 1, 1999 issued by Revenue Region No. 7 Chief of
Assessment Division Ruth Vivian G. Gandia. Petitioner, however, clarified that the certificate of immunity from audit
covered only income tax for the year 1997 and does not include VAT and withholding taxes, while the Letter of
Termination involved tax liabilities for taxable year 1997 (EWT, VAT and income taxes) but which was submitted for
review of higher authorities as per the Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr. [50] For 1999,
private respondents supposedly availed of the VAP pursuant to RR No. 8-2001.
RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering the scarcity of financial and
human resources as well as the time constraints within which the Bureau has to clean the Bureaus backlog of
unaudited tax returns in order to keep updated and be focused with the most current accounts in preparation for the
full implementation of a computerized tax administration, the said revenue regulation was issued providing for last
priority in audit and investigation of tax returns to accomplish the said objective without, however, compromising the
revenue collection that would have been generated from audit and enforcement activities. The program named as
Economic Recovery Assistance Payment (ERAP) Program granted immunity from audit and investigation of income tax,
VAT and percentage tax returns for 1998. It expressly excluded withholding tax returns (whether for income, VAT, or
percentage tax purposes). Since such immunity from audit and investigation does not preclude the collection of
revenues generated from audit and enforcement activities, it follows that the Bureau is likewise not barred from
collecting any tax deficiency discovered as a result of tax fraud investigations. Respondent Secretarys opinion that RR
No. 2-99 contains the feature of a tax amnesty is thus misplaced.
Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a
chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case.
[51]

Even assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax amnesty, it bears noting that a

tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of
the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the
taxing authority.[52]
For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-2001, through
payment supposedly made in October 29, 2001 before the said program ended on October 31, 2001, did not amount
to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from prosecution for filing
fraudulent return and attempt to evade or defeat tax. As correctly asserted by petitioner, from the express terms of
the aforesaid revenue regulations, LMCEC is not qualified to avail of the VAP granting taxpayers the privilege of last
priority in the audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under
certain conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was the subject of

investigation as a result of verified information filed by a Tax Informer under Section 282 of the NIRC duly recorded in
the BIR Official Registry as Confidential Information (CI) No. 29-2000 [53] even prior to the issuance of the PAN.
Section 1 of RR No. 8-2001 provides:
SECTION 1. COVERAGE. x x x
Any person, natural or juridical, including estates and trusts, liable to pay any of the abovecited internal revenue taxes for the above specified period/s who, due to inadvertence or otherwise,
erroneously paid his internal revenue tax liabilities or failed to file tax return/pay taxes may avail of
the Voluntary Assessment Program (VAP), except those falling under any of the following
instances:
1.1 Those covered by a Preliminary Assessment Notice (PAN), Final Assessment Notice
(FAN), or Collection Letter issued on or before July 31, 2001; or
1.2 Persons under investigation as a result of verified information filed by a Tax
Informer under Section 282 of the Tax Code of 1997, duly processed and recorded in the
BIR Official Registry Book on or before July 31, 2001;
1.3 Tax fraud cases already filed and pending in courts for adjudication; and
x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any subsequent audit of its
account books and other accounting records in view of the strong finding of underdeclaration in LMCECs payment of
correct income tax liability by more than 30% as supported by the written report of the TFD detailing the facts and the
law on which such finding is based, pursuant to the tax fraud investigation authorized by petitioner under LA No.
00009361. This conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001 provides:
SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A taxpayer who has availed
of the VAP shall not be audited except upon authorization and approval of the Commissioner of
Internal Revenue when there is strong evidence or finding of understatement in the payment of
taxpayers correct tax liability by more than thirty percent (30%) as supported by a written report of
the appropriate office detailing the facts and the law on which such finding is based: Provided,
however, that any VAP payment should be allowed as tax credit against the deficiency tax due, if any,
in case the concerned taxpayer has been subjected to tax audit.
xxxx

Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-2001 and RR
No. 10-2001, we hold that respondent Secretary gravely erred in declaring that petitioner is now estopped from
assessing any tax deficiency against LMCEC after issuance of the aforementioned documents of immunity from
audit/investigation and settlement of tax liabilities. It is axiomatic that the State can never be in estoppel, and this is
particularly true in matters involving taxation. The errors of certain administrative officers should never be allowed to
jeopardize the governments financial position.[54]
Respondent Secretarys other ground for assailing the course of action taken by petitioner in proceeding with
the audit and investigation of LMCEC -- the alleged violation of the general rule in Section 235 of the NIRC allowing
the examination and inspection of taxpayers books of accounts and other accounting records only once in a taxable
year -- is likewise untenable. As correctly pointed out by petitioner, the discovery of substantial underdeclarations of
income by LMCEC for taxable years 1997, 1998 and 1999 upon verified information provided by an informer under
Section 282 of the NIRC, as well as the necessity of obtaining information from third parties to ascertain the

correctness of the return filed or evaluation of tax compliance in collecting taxes (as a result of the disobedience to
the summons issued by the Bureau against the private respondents), are circumstances warranting exception from
the general rule in Section 235.[55]
As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997, 1998 and
1999 in amounts equivalent to more than 30% (the computation in the final assessment notice showed
underdeclarations of almost 200%) constitutes prima facie evidence of fraudulent return under Section 248(B) of the
NIRC. Prior to the issuance of the preliminary and final notices of assessment, the revenue officers conducted a
preliminary investigation on the information and documents showing substantial understatement of LMCECs tax
liabilities which were provided by the Informer, following the procedure under RMO No. 15-95. [56] Based on the prima
facie finding of the existence of fraud, petitioner issued LA No. 00009361 for the TFD to conduct a formal fraud
investigation of LMCEC.[57] Consequently, respondent Secretarys ruling that the filing of criminal complaint for violation
of Sections 254 and 255 of the NIRC cannot prosper because of lack of prior determination of the existence of fraud,
is bereft of factual basis and contradicted by the evidence on record.
Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in
favor of the correctness of a tax assessment unless proven otherwise. [58] We have held that a taxpayers failure to file
a petition for review with the Court of Tax Appeals within the statutory period rendered the disputed assessment final,
executory and demandable, thereby precluding it from interposing the defenses of legality or validity of the
assessment and prescription of the Governments right to assess. [59]Indeed, any objection against the assessment
should have been pursued following the avenue paved in Section 229 (now Section 228) of the NIRC on protests on
assessments of internal revenue taxes.[60]
Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002 were duly
served on LMCEC on October 1, 2002. Private respondents did not file a motion for reconsideration of the said
assessment notice and formal demand; neither did they appeal to the Court of Tax Appeals. Section 228 of the
NIRC[61] provides the remedy to dispute a tax assessment within a certain period of time. It states that an assessment
may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment
by the taxpayer. No such administrative protest was filed by private respondents seeking reconsideration of the August
7, 2002 assessment notice and formal letter of demand. Private respondents cannot belatedly assail the said
assessment, which they allowed to lapse into finality, by raising issues as to its validity and correctness during the
preliminary investigation after the BIR has referred the matter for prosecution under Sections 254 and 255 of the NIRC.
As we held in Marcos II v. Court of Appeals[62]:
It is not the Department of Justice which is the government agency tasked to determine the
amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, whose
determinations and assessments are presumed correct and made in good faith. The taxpayer has the
duty of proving otherwise. In the absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. Even an assessment based on estimates
is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily
or capriciously. The burden of proof is upon the complaining party to show clearly that the
assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial
affirmance of said assessment. x x x.
Moreover, these objections to the assessments should have been raised, considering
the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal
Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition
for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the
petitioner reflects his disregard or even repugnance of the established institutions for governance in
the scheme of a well-ordered society. The subject tax assessments having become final,
executory and enforceable, the same can no longer be contested by means of a disguised

protest. In the main, Certiorari may not be used as a substitute for a lost appeal or remedy. This
judicial policy becomes more pronounced in view of the absence of sufficient attack against the
actuations of government. (Emphasis supplied.)

The determination of probable cause is part of the discretion granted to the investigating prosecutor and ultimately,
the Secretary of Justice. However, this Court and the CA possess the power to review findings of prosecutors in
preliminary investigations. Although policy considerations call for the widest latitude of deference to the prosecutors
findings, courts should never shirk from exercising their power, when the circumstances warrant, to determine
whether the prosecutors findings are supported by the facts, or by the law. In so doing, courts do not act as
prosecutors but as organs of the judiciary, exercising their mandate under the Constitution, relevant statutes, and
remedial rules to settle cases and controversies. [63] Clearly, the power of the Secretary of Justice to review does not
preclude this Court and the CA from intervening and exercising our own powers of review with respect to the DOJs
findings, such as in the exceptional case in which grave abuse of discretion is committed, as when a clear sufficiency
or insufficiency of evidence to support a finding of probable cause is ignored. [64]
WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution dated March 6, 2007 of
the Court of Appeals in CA-G.R. SP No. 93387 are hereby REVERSED and SET ASIDE. The Secretary of Justice is
hereby DIRECTED to order the Chief State Prosecutor to file before the Regional Trial Court of Quezon City, National
Capital Judicial Region, the corresponding Information against L. M. Camus Engineering Corporation, represented by
its President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of Sections 254 and 255 of the National
Internal Revenue Code of 1997.
No costs.
SO ORDERED.
G.R. No. 168557

February 16, 2007

FELS
vs.
THE PROVINCE OF BATANGAS and

ENERGY,

INC., Petitioner,

THE OFFICE OF THE PROVINCIAL ASSESSOR OF BATANGAS, Respondents.

x----------------------------------------------------x
G.R. No. 170628

February 16, 2007

NATIONAL
POWER
CORPORATION, Petitioner,
vs.
LOCAL BOARD OF ASSESSMENT APPEALS OF BATANGAS, LAURO C. ANDAYA, in his capacity as the
Assessor of the Province of Batangas, and the PROVINCE OF BATANGAS represented by its Provincial
Assessor, Respondents.
DECISION
CALLEJO, SR., J.:
Before us are two consolidated cases docketed as G.R. No. 168557 and G.R. No. 170628, which were filed by
petitioners FELS Energy, Inc. (FELS) and National Power Corporation (NPC), respectively. The first is a petition for
review on certiorari assailing the August 25, 2004 Decision 1 of the Court of Appeals (CA) in CA-G.R. SP No. 67490 and
its Resolution2 dated June 20, 2005; the second, also a petition for review on certiorari, challenges the February 9,

2005 Decision3 and November 23, 2005 Resolution4 of the CA in CA-G.R. SP No. 67491. Both petitions were dismissed
on the ground of prescription.
The pertinent facts are as follows:
On January 18, 1993, NPC entered into a lease contract with Polar Energy, Inc. over 3x30 MW diesel engine power
barges moored at Balayan Bay in Calaca, Batangas. The contract, denominated as an Energy Conversion
Agreement5 (Agreement), was for a period of five years. Article 10 reads:
10.1 RESPONSIBILITY. NAPOCOR shall be responsible for the payment of (a) all taxes, import duties, fees, charges
and other levies imposed by the National Government of the Republic of the Philippines or any agency or
instrumentality thereof to which POLAR may be or become subject to or in relation to the performance of their
obligations under this agreement (other than (i) taxes imposed or calculated on the basis of the net income of POLAR
and Personal Income Taxes of its employees and (ii) construction permit fees, environmental permit fees and other
similar fees and charges) and (b) all real estate taxes and assessments, rates and other charges in respect of the
Power Barges.6
Subsequently, Polar Energy, Inc. assigned its rights under the Agreement to FELS. The NPC initially opposed the
assignment of rights, citing paragraph 17.2 of Article 17 of the Agreement.
On August 7, 1995, FELS received an assessment of real property taxes on the power barges from Provincial Assessor
Lauro C. Andaya of Batangas City. The assessed tax, which likewise covered those due for 1994, amounted
to P56,184,088.40 per annum. FELS referred the matter to NPC, reminding it of its obligation under the Agreement to
pay all real estate taxes. It then gave NPC the full power and authority to represent it in any conference regarding the
real property assessment of the Provincial Assessor.
In a letter7 dated September 7, 1995, NPC sought reconsideration of the Provincial Assessors decision to assess real
property taxes on the power barges. However, the motion was denied on September 22, 1995, and the Provincial
Assessor advised NPC to pay the assessment.8 This prompted NPC to file a petition with the Local Board of Assessment
Appeals (LBAA) for the setting aside of the assessment and the declaration of the barges as non-taxable items; it also
prayed that should LBAA find the barges to be taxable, the Provincial Assessor be directed to make the necessary
corrections.9
In its Answer to the petition, the Provincial Assessor averred that the barges were real property for purposes of
taxation under Section 199(c) of Republic Act (R.A.) No. 7160.
Before the case was decided by the LBAA, NPC filed a Manifestation, informing the LBAA that the Department of
Finance (DOF) had rendered an opinion10 dated May 20, 1996, where it is clearly stated that power barges are not real
property subject to real property assessment.
On August 26, 1996, the LBAA rendered a Resolution11 denying the petition. The fallo reads:
WHEREFORE, the Petition is DENIED. FELS is hereby ordered to pay the real estate tax in the amount
ofP56,184,088.40, for the year 1994.
SO ORDERED.12
The LBAA ruled that the power plant facilities, while they may be classified as movable or personal property, are
nevertheless considered real property for taxation purposes because they are installed at a specific location with a
character of permanency. The LBAA also pointed out that the owner of the bargesFELS, a private corporationis the
one being taxed, not NPC. A mere agreement making NPC responsible for the payment of all real estate taxes and
assessments will not justify the exemption of FELS; such a privilege can only be granted to NPC and cannot be
extended to FELS. Finally, the LBAA also ruled that the petition was filed out of time.
Aggrieved, FELS appealed the LBAAs ruling to the Central Board of Assessment Appeals (CBAA).

On August 28, 1996, the Provincial Treasurer of Batangas City issued a Notice of Levy and Warrant by Distraint 13over
the power barges, seeking to collect real property taxes amounting to P232,602,125.91 as of July 31, 1996. The
notice and warrant was officially served to FELS on November 8, 1996. It then filed a Motion to Lift Levy dated
November 14, 1996, praying that the Provincial Assessor be further restrained by the CBAA from enforcing the
disputed assessment during the pendency of the appeal.
On November 15, 1996, the CBAA issued an Order 14 lifting the levy and distraint on the properties of FELS in order not
to preempt and render ineffectual, nugatory and illusory any resolution or judgment which the Board would issue.
Meantime, the NPC filed a Motion for Intervention 15 dated August 7, 1998 in the proceedings before the CBAA. This
was approved by the CBAA in an Order16 dated September 22, 1998.
During the pendency of the case, both FELS and NPC filed several motions to admit bond to guarantee the payment of
real property taxes assessed by the Provincial Assessor (in the event that the judgment be unfavorable to them). The
bonds were duly approved by the CBAA.
On April 6, 2000, the CBAA rendered a Decision17 finding the power barges exempt from real property tax. The
dispositive portion reads:
WHEREFORE, the Resolution of the Local Board of Assessment Appeals of the Province of Batangas is hereby reversed.
Respondent-appellee Provincial Assessor of the Province of Batangas is hereby ordered to drop subject property under
ARP/Tax Declaration No. 018-00958 from the List of Taxable Properties in the Assessment Roll. The Provincial
Treasurer of Batangas is hereby directed to act accordingly.
SO ORDERED.18
Ruling in favor of FELS and NPC, the CBAA reasoned that the power barges belong to NPC; since they are actually,
directly and exclusively used by it, the power barges are covered by the exemptions under Section 234(c) of R.A. No.
7160.19 As to the other jurisdictional issue, the CBAA ruled that prescription did not preclude the NPC from pursuing
its claim for tax exemption in accordance with Section 206 of R.A. No. 7160. The Provincial Assessor filed a motion for
reconsideration, which was opposed by FELS and NPC.
In a complete volte face, the CBAA issued a Resolution 20 on July 31, 2001 reversing its earlier decision. The fallo of the
resolution reads:
WHEREFORE, premises considered, it is the resolution of this Board that:
(a) The decision of the Board dated 6 April 2000 is hereby reversed.
(b) The petition of FELS, as well as the intervention of NPC, is dismissed.
(c) The resolution of the Local Board of Assessment Appeals of Batangas is hereby affirmed,
(d) The real property tax assessment on FELS by the Provincial Assessor of Batangas is likewise hereby
affirmed.
SO ORDERED.21
FELS and NPC filed separate motions for reconsideration, which were timely opposed by the Provincial Assessor. The
CBAA denied the said motions in a Resolution22 dated October 19, 2001.
Dissatisfied, FELS filed a petition for review before the CA docketed as CA-G.R. SP No. 67490. Meanwhile, NPC filed a
separate petition, docketed as CA-G.R. SP No. 67491.

On January 17, 2002, NPC filed a Manifestation/Motion for Consolidation in CA-G.R. SP No. 67490 praying for the
consolidation of its petition with CA-G.R. SP No. 67491. In a Resolution 23 dated February 12, 2002, the appellate court
directed NPC to re-file its motion for consolidation with CA-G.R. SP No. 67491, since it is the ponente of the latter
petition who should resolve the request for reconsideration.
NPC failed to comply with the aforesaid resolution. On August 25, 2004, the Twelfth Division of the appellate court
rendered judgment in CA-G.R. SP No. 67490 denying the petition on the ground of prescription. The decretal portion
of the decision reads:
WHEREFORE, the petition for review is DENIED for lack of merit and the assailed Resolutions dated July 31, 2001 and
October 19, 2001 of the Central Board of Assessment Appeals are AFFIRMED.
SO ORDERED.24
On September 20, 2004, FELS timely filed a motion for reconsideration seeking the reversal of the appellate courts
decision in CA-G.R. SP No. 67490.
Thereafter, NPC filed a petition for review dated October 19, 2004 before this Court, docketed as G.R. No. 165113,
assailing the appellate courts decision in CA-G.R. SP No. 67490. The petition was, however, denied in this Courts
Resolution25 of November 8, 2004, for NPCs failure to sufficiently show that the CA committed any reversible error in
the challenged decision. NPC filed a motion for reconsideration, which the Court denied with finality in a
Resolution26 dated January 19, 2005.
Meantime, the appellate court dismissed the petition in CA-G.R. SP No. 67491. It held that the right to question the
assessment of the Provincial Assessor had already prescribed upon the failure of FELS to appeal the disputed
assessment to the LBAA within the period prescribed by law. Since FELS had lost the right to question the assessment,
the right of the Provincial Government to collect the tax was already absolute.
NPC filed a motion for reconsideration dated March 8, 2005, seeking reconsideration of the February 5, 2005 ruling of
the CA in CA-G.R. SP No. 67491. The motion was denied in a Resolution 27 dated November 23, 2005.
The motion for reconsideration filed by FELS in CA-G.R. SP No. 67490 had been earlier denied for lack of merit in a
Resolution28 dated June 20, 2005.
On August 3, 2005, FELS filed the petition docketed as G.R. No. 168557 before this Court, raising the following issues:
A.
Whether power barges, which are floating and movable, are personal properties and therefore, not subject to real
property tax.
B.
Assuming that the subject power barges are real properties, whether they are exempt from real estate tax under
Section 234 of the Local Government Code ("LGC").
C.
Assuming arguendo that the subject power barges are subject to real estate tax, whether or not it should be NPC
which should be made to pay the same under the law.
D.
Assuming arguendo that the subject power barges are real properties, whether or not the same is subject to
depreciation just like any other personal properties.

E.
Whether the right of the petitioner to question the patently null and void real property tax assessment on the
petitioners personal properties is imprescriptible. 29
On January 13, 2006, NPC filed its own petition for review before this Court (G.R. No. 170628), indicating the
following errors committed by the CA:
I
THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE APPEAL TO THE LBAA WAS FILED OUT OF TIME.
II
THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE POWER BARGES ARE NOT SUBJECT TO REAL
PROPERTY TAXES.
III
THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE ASSESSMENT ON THE POWER BARGES WAS
NOT MADE IN ACCORDANCE WITH LAW.30
Considering that the factual antecedents of both cases are similar, the Court ordered the consolidation of the two
cases in a Resolution31 dated March 8, 2006.1awphi1.net
In an earlier Resolution dated February 1, 2006, the Court had required the parties to submit their respective
Memoranda within 30 days from notice. Almost a year passed but the parties had not submitted their respective
memoranda. Considering that taxesthe lifeblood of our economyare involved in the present controversy, the Court
was prompted to dispense with the said pleadings, with the end view of advancing the interests of justice and avoiding
further delay.
In both petitions, FELS and NPC maintain that the appeal before the LBAA was not time-barred. FELS argues that
when NPC moved to have the assessment reconsidered on September 7, 1995, the running of the period to file an
appeal with the LBAA was tolled. For its part, NPC posits that the 60-day period for appealing to the LBAA should be
reckoned from its receipt of the denial of its motion for reconsideration.
Petitioners contentions are bereft of merit.
Section 226 of R.A. No. 7160, otherwise known as the Local Government Code of 1991, provides:
SECTION 226. Local Board of Assessment Appeals. Any owner or person having legal interest in the property who is
not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within
sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment
Appeals of the province or city by filing a petition under oath in the form prescribed for the purpose, together with
copies of the tax declarations and such affidavits or documents submitted in support of the appeal.
We note that the notice of assessment which the Provincial Assessor sent to FELS on August 7, 1995, contained the
following statement:
If you are not satisfied with this assessment, you may, within sixty (60) days from the date of receipt hereof, appeal
to the Board of Assessment Appeals of the province by filing a petition under oath on the form prescribed for the
purpose, together with copies of ARP/Tax Declaration and such affidavits or documents submitted in support of the
appeal.32

Instead of appealing to the Board of Assessment Appeals (as stated in the notice), NPC opted to file a motion for
reconsideration of the Provincial Assessors decision, a remedy not sanctioned by law.
The remedy of appeal to the LBAA is available from an adverse ruling or action of the provincial, city or municipal
assessor in the assessment of the property. It follows then that the determination made by the respondent Provincial
Assessor with regard to the taxability of the subject real properties falls within its power to assess properties for
taxation purposes subject to appeal before the LBAA. 33
We fully agree with the rationalization of the CA in both CA-G.R. SP No. 67490 and CA-G.R. SP No. 67491. The two
divisions of the appellate court cited the case of Callanta v. Office of the Ombudsman, 34 where we ruled that under
Section 226 of R.A. No 7160, 35 the last action of the local assessor on a particular assessment shall be the notice of
assessment; it is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure
likewise does not permit the property owner the remedy of filing a motion for reconsideration before the local
assessor. The pertinent holding of the Court in Callanta is as follows:
x x x [T]he same Code is equally clear that the aggrieved owners should have brought their appeals before the LBAA.
Unfortunately, despite the advice to this effect contained in their respective notices of assessment, the owners chose
to bring their requests for a review/readjustment before the city assessor, a remedy not sanctioned by the law. To
allow this procedure would indeed invite corruption in the system of appraisal and assessment. It conveniently courts
a graft-prone situation where values of real property may be initially set unreasonably high, and then subsequently
reduced upon the request of a property owner. In the latter instance, allusions of a possible covert, illicit trade-off
cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be prevented and excised
from our system.36
For its part, the appellate court declared in CA-G.R. SP No. 67491:
x x x. The Court announces: Henceforth, whenever the local assessor sends a notice to the owner or lawful possessor
of real property of its revised assessed value, the former shall no longer have any jurisdiction to entertain any request
for a review or readjustment. The appropriate forum where the aggrieved party may bring his appeal is the LBAA as
provided by law. It follows ineluctably that the 60-day period for making the appeal to the LBAA runs without
interruption. This is what We held in SP 67490 and reaffirm today in SP 67491. 37
To reiterate, if the taxpayer fails to appeal in due course, the right of the local government to collect the taxes due
with respect to the taxpayers property becomes absolute upon the expiration of the period to appeal. 38 It also bears
stressing that the taxpayers failure to question the assessment in the LBAA renders the assessment of the local
assessor final, executory and demandable, thus, precluding the taxpayer from questioning the correctness of the
assessment, or from invoking any defense that would reopen the question of its liability on the merits. 39
In fine, the LBAA acted correctly when it dismissed the petitioners appeal for having been filed out of time; the CBAA
and the appellate court were likewise correct in affirming the dismissal. Elementary is the rule that the perfection of
an appeal within the period therefor is both mandatory and jurisdictional, and failure in this regard renders the
decision final and executory.40
In the Comment filed by the Provincial Assessor, it is asserted that the instant petition is barred by res judicata; that
the final and executory judgment in G.R. No. 165113 (where there was a final determination on the issue of
prescription), effectively precludes the claims herein; and that the filing of the instant petition after an adverse
judgment in G.R. No. 165113 constitutes forum shopping.
FELS maintains that the argument of the Provincial Assessor is completely misplaced since it was not a party to the
erroneous petition which the NPC filed in G.R. No. 165113. It avers that it did not participate in the aforesaid
proceeding, and the Supreme Court never acquired jurisdiction over it. As to the issue of forum shopping, petitioner
claims that no forum shopping could have been committed since the elements of litis pendentia or res judicata are not
present.
We do not agree.

Res judicata pervades every organized system of jurisprudence and is founded upon two grounds embodied in various
maxims of common law, namely: (1) public policy and necessity, which makes it to the interest of the
State that there should be an end to litigation republicae ut sit litium; and (2) the hardship on the individual of
being vexed twice for the same cause nemo debet bis vexari et eadem causa. A conflicting doctrine would subject
the public peace and quiet to the will and dereliction of individuals and prefer the regalement of the litigious
disposition on the part of suitors to the preservation of the public tranquility and happiness. 41 As we ruled in Heirs of
Trinidad De Leon Vda. de Roxas v. Court of Appeals:42
x x x An existing final judgment or decree rendered upon the merits, without fraud or collusion, by a court of
competent jurisdiction acting upon a matter within its authority is conclusive on the rights of the parties and their
privies. This ruling holds in all other actions or suits, in the same or any other judicial tribunal of concurrent
jurisdiction, touching on the points or matters in issue in the first suit.
xxx
Courts will simply refuse to reopen what has been decided. They will not allow the same parties or their privies to
litigate anew a question once it has been considered and decided with finality. Litigations must end and terminate
sometime and somewhere. The effective and efficient administration of justice requires that once a judgment has
become final, the prevailing party should not be deprived of the fruits of the verdict by subsequent suits on the same
issues filed by the same parties.
This is in accordance with the doctrine of res judicata which has the following elements: (1) the former judgment
must be final; (2) the court which rendered it had jurisdiction over the subject matter and the parties; (3) the
judgment must be on the merits; and (4) there must be between the first and the second actions, identity of parties,
subject matter and causes of action. The application of the doctrine of res judicata does not require absolute identity
of parties but merely substantial identity of parties. There is substantial identity of parties when there is community of
interest or privity of interest between a party in the first and a party in the second case even if the first case did not
implead the latter.43
To recall, FELS gave NPC the full power and authority to represent it in any proceeding regarding real property
assessment. Therefore, when petitioner NPC filed its petition for review docketed as G.R. No. 165113, it did so not
only on its behalf but also on behalf of FELS. Moreover, the assailed decision in the earlier petition for review filed in
this Court was the decision of the appellate court in CA-G.R. SP No. 67490, in which FELS was the petitioner. Thus, the
decision in G.R. No. 165116 is binding on petitioner FELS under the principle of privity of interest. In fine, FELS and
NPC are substantially "identical parties" as to warrant the application of res judicata. FELSs argument that it is not
bound by the erroneous petition filed by NPC is thus unavailing.
On the issue of forum shopping, we rule for the Provincial Assessor. Forum shopping exists when, as a result of an
adverse judgment in one forum, a party seeks another and possibly favorable judgment in another forum other than
by appeal or special civil action or certiorari. There is also forum shopping when a party institutes two or more actions
or proceedings grounded on the same cause, on the gamble that one or the other court would make a favorable
disposition.44
Petitioner FELS alleges that there is no forum shopping since the elements of res judicata are not present in the cases
at bar; however, as already discussed, res judicata may be properly applied herein. Petitioners engaged in forum
shopping when they filed G.R. Nos. 168557 and 170628 after the petition for review in G.R. No. 165116. Indeed,
petitioners went from one court to another trying to get a favorable decision from one of the tribunals which allowed
them to pursue their cases.
It must be stressed that an important factor in determining the existence of forum shopping is the vexation caused to
the courts and the parties-litigants by the filing of similar cases to claim substantially the same reliefs. 45 The rationale
against forum shopping is that a party should not be allowed to pursue simultaneous remedies in two different fora.
Filing multiple petitions or complaints constitutes abuse of court processes, which tends to degrade the administration
of justice, wreaks havoc upon orderly judicial procedure, and adds to the congestion of the heavily burdened dockets
of the courts.46

Thus, there is forum shopping when there exist: (a) identity of parties, or at least such parties as represent the same
interests in both actions, (b) identity of rights asserted and relief prayed for, the relief being founded on the same
facts, and (c) the identity of the two preceding particulars is such that any judgment rendered in the pending case,
regardless of which party is successful, would amount to res judicata in the other.47
Having found that the elements of res judicata and forum shopping are present in the consolidated cases, a discussion
of the other issues is no longer necessary. Nevertheless, for the peace and contentment of petitioners, we shall shed
light on the merits of the case.
As found by the appellate court, the CBAA and LBAA power barges are real property and are thus subject to real
property tax. This is also the inevitable conclusion, considering that G.R. No. 165113 was dismissed for failure to
sufficiently show any reversible error. Tax assessments by tax examiners are presumed correct and made in good
faith, with the taxpayer having the burden of proving otherwise. 48 Besides, factual findings of administrative bodies,
which have acquired expertise in their field, are generally binding and conclusive upon the Court; we will not assume
to interfere with the sensible exercise of the judgment of men especially trained in appraising property. Where the
judicial mind is left in doubt, it is a sound policy to leave the assessment undisturbed. 49 We find no reason to depart
from this rule in this case.
In Consolidated Edison Company of New York, Inc., et al. v. The City of New York, et al., 50 a power company brought
an action to review property tax assessment. On the citys motion to dismiss, the Supreme Court of New York held
that the barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil
barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were
subject to real property taxation.
Moreover, Article 415 (9) of the New Civil Code provides that "[d]ocks and structures which, though floating, are
intended by their nature and object to remain at a fixed place on a river, lake, or coast" are considered immovable
property. Thus, power barges are categorized as immovable property by destination, being in the nature of machinery
and other implements intended by the owner for an industry or work which may be carried on in a building or on a
piece of land and which tend directly to meet the needs of said industry or work.51
Petitioners maintain nevertheless that the power barges are exempt from real estate tax under Section 234 (c) of R.A.
No. 7160 because they are actually, directly and exclusively used by petitioner NPC, a government- owned and
controlled corporation engaged in the supply, generation, and transmission of electric power.
We affirm the findings of the LBAA and CBAA that the owner of the taxable properties is petitioner FELS, which in fine,
is the entity being taxed by the local government. As stipulated under Section 2.11, Article 2 of the Agreement:
OWNERSHIP OF POWER BARGES. POLAR shall own the Power Barges and all the fixtures, fittings, machinery and
equipment on the Site used in connection with the Power Barges which have been supplied by it at its own cost.
POLAR shall operate, manage and maintain the Power Barges for the purpose of converting Fuel of NAPOCOR into
electricity.52
It follows then that FELS cannot escape liability from the payment of realty taxes by invoking its exemption in Section
234 (c) of R.A. No. 7160, which reads:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property
tax:
xxx
(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and
government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and
transmission of electric power; x x x

Indeed, the law states that the machinery must be actually, directly and exclusively used by the government owned or
controlled corporation; nevertheless, petitioner FELS still cannot find solace in this provision because Section 5.5,
Article 5 of the Agreement provides:
OPERATION. POLAR undertakes that until the end of the Lease Period, subject to the supply of the necessary Fuel
pursuant to Article 6 and to the other provisions hereof, it will operate the Power Barges to convert such Fuel into
electricity in accordance with Part A of Article 7. 53
It is a basic rule that obligations arising from a contract have the force of law between the parties. Not being contrary
to law, morals, good customs, public order or public policy, the parties to the contract are bound by its terms and
conditions.54
Time and again, the Supreme Court has stated that taxation is the rule and exemption is the exception. 55 The law
does not look with favor on tax exemptions and the entity that would seek to be thus privileged must justify it by
words too plain to be mistaken and too categorical to be misinterpreted. 56 Thus, applying the rule of strict construction
of laws granting tax exemptions, and the rule that doubts should be resolved in favor of provincial corporations, we
hold that FELS is considered a taxable entity.
The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be responsible for the
payment of all real estate taxes and assessments, does not justify the exemption. The privilege granted to petitioner
NPC cannot be extended to FELS. The covenant is between FELS and NPC and does not bind a third person not privy
thereto, in this case, the Province of Batangas.
It must be pointed out that the protracted and circuitous litigation has seriously resulted in the local governments
deprivation of revenues. The power to tax is an incident of sovereignty and is unlimited in its magnitude,
acknowledging in its very nature no perimeter so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who are to pay for it. 57 The right of local
government units to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is
consistent with the State policy to guarantee the autonomy of local governments 58 and the objective of the Local
Government Code that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest
development as self-reliant communities and make them effective partners in the attainment of national goals. 59
In conclusion, we reiterate that the power to tax is the most potent instrument to raise the needed revenues to
finance and support myriad activities of the local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. 60
WHEREFORE, the Petitions are DENIED and the assailed Decisions and Resolutions AFFIRMED.
SO ORDERED.

THIRD DIVISION
SAN ROQUE POWER CORPORATION,
Petitioner,

G.R. No. 180345

Present:
CORONA, J.,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.

- versus -

COMMISSIONER
OF
REVENUE,
Respondent.

INTERNAL

Promulgated:

November 25, 2009

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner San Roque
Power Corporation assails the Decision [1] of the Court of Tax Appeals (CTA) En Banc dated 20 September 2007 in CTA
EB No. 248, affirming the Decision[2] dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, which
dismissed the claim of petitioner for the refund and/or issuance of a tax credit certificate in the amount of Two
Hundred Forty-Nine Million Three Hundred Ninety-Seven Thousand Six Hundred Twenty Pesos and 18/100
(P249,397,620.18) allegedly representing unutilized input Value Added Tax (VAT) for the period covering January to
December 2002.

Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the assessment
and collection of all national internal revenue taxes, fees, and charges, including the Value Added Tax (VAT), imposed
by Section 108[3] of the National Internal Revenue Code (NIRC) of 1997. Moreover, it is empowered to grant refunds
or issue tax credit certificates in accordance with Section 112 of the NIRC of 1997 for unutilized input VAT paid on
zero-rated or effectively zero-rated sales and purchases of capital goods, to wit:
SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-rated or Effectively Zero-rated SalesAny 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 GoodsA 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
the 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.

On the other hand, petitioner is a domestic corporation organized under the corporate laws of the Republic of
the Philippines. On 14 October 1997, it was incorporated for the sole purpose of building and operating the San
Roque Multipurpose Project in San Manuel, Pangasinan, which is an indivisible project consisting of the power station,
the dam, spillway, and other related facilities. [4] It is registered with the Board of Investments (BOI) on a preferred
pioneer status to engage in the design, construction, erection, assembly, as well as own, commission, and operate
electric power-generating plants and related activities, for which it was issued the Certificate of Registration No. 97356 dated11 February 1998.[5] As a seller of services, petitioner is registered with the BIR as a VAT taxpayer under
Certificate of Registration No. OCN-98-006-007394. [6]

On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National Power
Corporation (NPC) to develop the hydro potential of the LowerAgno River, and to be able to generate additional power
and energy for the Luzon Power Grid, by developing and operating the San Roque Multipurpose Project. The PPA
provides that petitioner shall be responsible for the design, construction, installation, completion and testing and
commissioning of the Power Station and it shall operate and maintain the same, subject to the instructions of the
NPC. During the cooperation period of 25 years commencing from the completion date of the Power Station, the NPC
shall purchase all the electricity generated by the Power Plant. [7]

Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for and was
granted five Certificates of Zero Rate by the BIR, through the Chief Regulatory Operations Monitoring Division, now
the Audit Information, Tax Exemption & Incentive Division. Based on these certificates, the zero-rated status of
petitioner commenced on 27 September 1998 and continued throughout the year 2002.[8]

For the period January to December 2002, petitioner filed with the respondent its Monthly VAT Declarations
and Quarterly VAT Returns. Its Quarterly VAT Returns showed excess input VAT payments on account of its
importation and domestic purchases of goods and services, as follows [9]:
Period Covered
1st Quarter
(January
2002to
March
2002)

1,
31,

2nd Quarter
(April
2002 to

1,

Date Filed
Particulars
April
20, Tax Due for the Quarter (Box 13C)
2002
Input Tax carried over from previous
qtr (22B)
Input VAT on Domestic Purchases for the
Qtr
(22D)
Input VAT on Importation of Goods for
the Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)
July 24, 2002 Tax
Due
for
the
Quarter
(Box 13C)
Input Tax carried over from previous qtr
(22B)

Amount
P
26,247.27
296,124,429.21

95,003,348.91

20,758,668.00
411,886,446.12
173,909,435.66
237,977,010.46
(237,950,763.19)
(237,950,763.19)
P

blank

237,950,763.19

Input VAT on Domestic Purchases for the

Qtr
(22D)
65,206,499.83
Input VAT on Importation of Goods for the
Qtr
(22F)
18,485,758.00
Total Available Input tax (23)
321,643,021.02
VAT Refund/TCC Claimed (24A)
237,950,763.19
Net Creditable Input Tax (25)
83,692,257.83
VAT payable (Excess Input Tax) (26)
(83,692,257.83)
Tax Payable (overpayment) (28)
(83,692,257.83)

June 30, 2002)

3rd Quarter

October 25, Tax

Due
for
the
Quarter
2002
(Box 13C)
(July 1, 2002 to
Input Tax carried over from previous qtr
(22B)
September
30,
Input VAT on Domestic Purchases for the
2002)
Qtr
(22D)
Input VAT on Importation of Goods for the
Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)
4th Quarter
(October
2002to
December
2002)

1,
31,

blank

199,428,027.47

28,924,020.79

1,465,875.00
229,817,923.26
Blank
229,817,923.26
(229,817,923.26)
(229,817,923.26)

January 23, Tax Due for the Quarter (Box 13C)

2003
Input Tax carried over from previous qtr
(22B)
Input VAT on Domestic Purchases for the
Qtr
(22D)
Input VAT on Importation of Goods for the
Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)

P 34,996.36
114,082,153.62

18,166,330.54

2,308,837.00
134,557,321.16
83,692,257.83
50,865,063.33
(50,830,066.97)
(50,830,066.97)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the BIR four
separate administrative claims for refund of Unutilized Input VAT paid for the period January to March 2002, April to
June 2002, July to September 2002, and October to December 2002, respectively. In these letters addressed to the
BIR, Carlos Echevarria (Echevarria), the Vice President and Director of Finance of petitioner, explained that petitioners
sale of power to NPC are subject to VAT at zero percent rate, in accordance with Section 108(B)(3) of the NIRC.
[10]

Petitioner sought to recover the total amount of P250,258,094.25, representing its unutilized excess VAT on its

importation of capital and other taxable goods and services for the year 2002, broken down as follows [11]:
Qtr
Involved

Output Tax
(A)

Input Tax
Domestic Purchases
(B)

Importations
(C)

Excess Input Tax

(D) = (B) + (C)

(A)
1st
2nd
3rd
4th

P 26,247.27
34,996.36
P61,243.63

P95,003,348.91
65,206,499.83
28,924,020.79
18,166,330.54
P207,300,200.07

P20,758,668.00
18,485,758.00
1,465,875.00
2,308,837.00
P43,019,138.00

P115,735,769.84
83,692,257.83
30,389,895.79
20,440,171.18
P250,258,094.44

Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on Domestic Purchases
during the first quarter of 2002; (2) Input VAT on Domestic Purchases for the fourth quarter of 2002; and (3) Input
VAT on Importation of Goods for the fourth quarter of 2002. The amendments read as follows[12]:
Period Covered
1st Quarter
(January
2002 to

1,

March 31, 2002)

Date Filed
Particulars
April
24, Tax Due for the Quarter (Box 13C)
2003
Input Tax carried over from previous qtr
(22B)
Input VAT on Domestic Purchases for the
Qtr
(22D)
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)

2nd Quarter

April
2003

(April 1, 2002 to
June 30, 2002)

3rd Quarter

October
2002

(July 1, 2002 to
September
2002)

30,

24, Tax
Due
for
the
Quarter
(Box 13C)
Input Tax carried over from previous qtr
(22B)
Input VAT on Domestic Purchases for the
Qtr
(22D)
Input VAT on Importation of Goods for the
Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)

Amount
P
26,247.27
297,719,296.25

95,126,981.69
20,758,668.00
413,604,945.94
175,544,002.27
175,544,002.27
(238,060,943.67)
(238,034,696.40)
P

blank

238,034,696.40

65,206,499.83

18,485,758.00
321,643,021.02
237,950,763.19
83,692,257.83
(83,692,257.83)
(83,692,257.83)

25, Tax
Due
for
the
Quarter
(Box13C)
Input Tax carried over from previous qtr
(22B)
Input VAT on Domestic Purchases for the
Qtr
(22D)
Input VAT on Importation of Goods for the
Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)

blank

83,692,257.83

28,924,020.79

1,465,875.00
114,082,153.62
Blank
114,082,153.62
(114,082,153.62)
(114,082,153.62)

4th Quarter
(October
2002to
December
2002)

1,

January
2003

31,

23, Tax Due for the Quarter (Box 13C)

Input Tax carried over from previous qtr
(22B)
Input VAT on Domestic Purchases for the
Qtr
(22D)
Input VAT on Importation of Goods for the
Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)
Net Creditable Input Tax (25)
VAT payable (Excess Input Tax) (26)
Tax Payable (overpayment) (28)

P 34,996.36
114,082,153.62

17,918,056.50

1,573,004.00
133,573,214.12
83,692,257.83
49,880,956.29
(49,845,959.93)
(49,845,959.93)

On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its claims for tax refund
or credit for the first and fourth quarter of 2002, respectively. Petitioner sought to recover a total amount
of P249,397,620.18 representing its unutilized excess VAT on its importation and domestic purchases of goods and
services for the year 2002, broken down as follows[13]:
Qtr
Involved

1st
2nd
3rd
4th

Date Filed

30-May-03
25-Oct-02
27-Feb-03
31-Jul-03

Output Tax

(A)

Input Tax
Domestic
Purchases
(B)

P 26,247.27
34,996.36
P61,243.63

P95,126,981.69
65,206,499.83
28,924,920.79
17,918,056.50
P207,175,558.81

Importations

Excess Input Tax

(C)

(D) = (B) + (C)

(A)
P20,758,668.00 P115,859,402.42
18,185,758.00 83,692,257.83
1,465,875,00
30,389,895.79
1,573,004.00
19,456,064.14
P42,283,305.00 P249,397,620.18

Respondent failed to act on the request for tax refund or credit of petitioner, which prompted the latter to file
on 5 April 2004, with the CTA in Division, a Petition for Review, docketed as CTA Case No. 6916 before it could be
barred by the two-year prescriptive period within which to file its claim. Petitioner sought the refund of the amount
of P249,397,620.18 representing its unutilized excess VAT on its importation and local purchases of various goods and
services for the year 2002.[14]

During the proceedings before the CTA Second Division, petitioner presented the following documents, among
other pieces of evidence: (1) Petitioners Amended Quarterly VAT return for the 4 th Quarter of 2002 marked as Exhibit
A, showing the amount of P42,500,000.00 paid by NTC to petitioner for all the electricity produced during test runs;
(2) the special audit report, prepared by the CPA firm of Punongbayan and Araullo through a partner, Angel A. Aguilar
(Aguilar), and the attached schedules, marked as Exhibits J-2 to J-21; (3) Sales Invoices and Official Receipts and
related documents issued to petitioner for the year 2002, marked as Exhibits J-4-A1 to J-4-L265; (4) Audited
Financial Statements of Petitioner for the year 2002, with comparative figures for 2001, marked as Exhibit K; and
(5) the Affidavit of Echevarria dated 9 February 2005, marked as Exhibit L.[15]

During the hearings, the parties jointly stipulated on the issues involved:
1.

Whether or not petitioners sales are subject to value-added taxes at effectively zero percent
(0%) rate;

2.

Whether or not petitioner incurred input taxes which are attributable to its effectively zerorated transactions;

3.

Whether or not petitioners importation and purchases of capital goods and related services
are within the scope and meaning of capital goods under Revenue Regulations No. 7-95;

4.

Whether or not petitioners input taxes are sufficiently substantiated with VAT invoices or
official receipts;

5.

Whether or not the VAT input taxes being claimed for refund/tax credit by petitioner (had)
been credited or utilized against any output taxes or (had) been carried forward to the
succeeding quarter or quarters; and

6.

Whether or not petitioner is entitled to a refund of VAT input taxes it paid from January 1,
2002 to December 31, 2002 in the total amount of Two Hundred Forty Nine Million Three
Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100 Pesos (P249,397,620.18).

Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the amount
of P249,397,620.18 representing its unutilized input VAT paid on importation and purchases of capital and other
taxable goods and services from January 1 to December 31, 2002.

After a hearing on the merits, the CTA Second Division rendered a Decision [16] dated 23 March 2006 denying
petitioners claim for tax refund or credit. The CTA noted that petitioner based its claim on creditable input VAT paid,
which is attributable to (1) zero-rated or effectively zero-rated sale, as provided under Section 112(A) of the NIRC,
and (2) purchases of capital goods, in accordance with Section 112(B) of the NIRC.

The court ruled that in order for

petitioner to be entitled to the refund or issuance of a tax credit certificate on the basis of Section 112(A) of the NIRC,
it must establish that it had incurred zero-rated sales or effectively zero-rated sales for the taxable year 2002.

Since

records show that petitioner did not make any zero-rated or effectively-zero rated sales for the taxable year 2002, the
CTA reasoned that petitioners claim must be denied. Parenthetically, the court declared that the claim for tax refund
or credit based on Section 112(B) of the NIRC requires petitioner to prove that it paid input VAT on capital goods
purchased, based on the definition of capital goods provided under Section 4.112-1(b) of Revenue Regulations No. 795i.e., goods or properties which have an estimated useful life of greater than one year, are treated as depreciable
assets under Section 34(F) of the NIRC, and are used directly or indirectly in the production or sale of taxable goods
and services. The CTA found that the evidence offered by petitionerthe suppliers invoices and official receipts and
Import Entries and Internal Revenue Declarations and the audit report of the Court-commissioned Independent
Certified Public Accountant (CPA) are insufficient to prove that the importations and domestic purchases were
classified as capital goods and properties entered as part of the Property, Plant and Equipment account of the
petitioner. The dispositive part of the said Decision reads:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.[17]

Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion for Reconsideration
which was denied by the CTA Second Division in a Resolution dated 4 January 2007.[18]

Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En Banc promulgated
its Decision[19] on 20 September 2007 denying petitioners appeal. The CTA En Banc reiterated the ruling of the
Division that petitioners claim based on Section 112(A) of the NIRC should be denied since it did not present any
records of any zero-rated or effectively zero-rated transactions. It clarified that since petitioner failed to prove that
any sale of its electricity had transpired, petitioner may base its claim only on Section 112(B) of the NIRC, the
provision governing the purchase of capital goods. The court noted that the report of the Court-commissioned
auditing firm, Punongbayan & Araullo, dealt specifically with the unutilized input taxes paid or incurred by petitioner
on its local and foreign purchases of goods and services attributable to its zero-rated sales, and not to purchases of
capital goods. It decided that petitioner failed to prove that the purchases evidenced by the invoices and receipts,
which petitioner presented, were classified as capital goods which formed part of its Property, Plant and Equipment,
especially since petitioner failed to present its books of account. The dispositive part of the said Decision reads:
WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly,
the assailed Decision and Resolution are hereby AFFIRMED.[20]

The CTA En Banc denied petitioners Motion for Reconsideration in a Resolution dated 22 October 2007.[21]

Hence, the present Petition for Review where the petitioner raises the following errors allegedly committed by
the CTA En banc:
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 FAILING OR REFUSING TO
APPRECIATE THE OVERWHELMING AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE
PETITIONER, THUS DEPRIVING PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND
II
THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE ABSENCE OF
ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES
NOT ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERORATED SALES, CONTRARY TO PROVISIONS OF LAW.[22]

The present Petition is meritorious.

The main issue in this case is whether or not petitioner may claim a tax refund or credit in the amount
of P249,397,620.18 for creditable input tax attributable to zero-rated or effectively zero-rated sales pursuant to
Section 112(A) of the NIRC or for input taxes paid on capital goods as provided under Section 112(B) of the NIRC.

To resolve the issue, this Court must re-examine the facts and the evidence offered by the parties. It is an
accepted doctrine that this Court is not a trier of facts. It is not its function to review, examine and evaluate or weigh
the probative value of the evidence presented. However, this rule does not apply where the judgment is premised on
a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which if considered
would justify a different conclusion.[23]

After reviewing the records, this Court finds that petitioners claim for refund or credit is justified under
Section 112(A) of the NIRC which states that:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated SalesAny 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.

To claim refund or tax credit under Section 112(A), petitioner must comply with the following criteria: (1) the
taxpayer is VAT registered; (2) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (3) the input
taxes are due or paid; (4) the input taxes are not transitional input taxes; (5) the input taxes have not been applied
against output taxes during and in the succeeding quarters; (6) the input taxes claimed are attributable to zero-rated
or effectively zero-rated sales; (7) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1)
and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with BSP
rules and regulations; (8) where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales,
and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be
proportionately allocated on the basis of sales volume; and (9) the claim is filed within two years after the close of the
taxable quarter when such sales were made.[24]

Based on the evidence presented, petitioner complied with the abovementioned requirements. Firstly,
petitioner had adequately proved that it is a VAT registered taxpayer when it presented Certificate of Registration No.
OCN-98-006-007394, which it attached to its Petition for Review dated 29 March 2004 filed before the CTA in
Division. Secondly, it is unquestioned that petitioner is engaged in providing electricity for NPC, an activity which is
subject to zero rate, under Section 108(B)(3) of the NIRC. Thirdly, petitioner offered as evidence suppliers VAT
invoices or official receipts, as well as Import Entries and Internal Revenue Declarations (Exhibits J-4-A1 to J-4L265),

which

were

examined

in

the

audit

conducted

by

Aguilar, the

Court-commissioned

Independent

CPA. Significantly, Aguilar noted in his audit report (Exhibit J-2) that of theP249,397,620.18 claimed by petitioner,
he

identified

items

with

incomplete

documentation

and

errors

in

computation

with

total

amount

of P3,266,009.78. Based on these findings, the remaining input VAT of P246,131,610.40 was properly documented
and recorded in the books. The said report reads:
In performing the procedures referred under the Procedures Performed section of this report, no
matters came to our attention that cause us to believe that the amount of input VAT applied for as tax
credit certificate/refund of P249,397,620.18 for the period January 1, 2002 to December 31, 2002
should be adjusted except for input VAT claimed with incomplete documentation, those with various
and other exceptions on the supporting documents and those with errors in computation totaling
P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit Procedures
Performed sections of this report. We have also ascertained that the input VAT claimed are properly
recorded in the books and, except as specifically identified in the Findings and Results of the AgreedUpon Audit Procedures Performed sections of this report, are properly supported by original and
appropriate suppliers VAT invoices and/or official receipts. [25]

Fourthly, the input taxes claimed, which consisted of local purchases and importations made in 2002, are not
transitional input taxes, which Section 111 of the NIRC defines as input taxes allowed on the beginning inventory of
goods, materials and supplies. [26] Fifthly, the audit report of Aguilar affirms that the input VAT being claimed for tax
refund or credit is net of the input VAT that was already offset against output VAT amounting to P26,247.27 for the
first quarter of 2002 and P34,996.36 for the fourth quarter of 2002,[27] as reflected in the Quarterly VAT Returns.[28]

The main dispute in this case is whether or not petitioners claim complied with the sixth requirementthe
existence of zero-rated or effectively zero-rated sales, to which creditable input taxes may be attributed. The CTA in
Division and en banc denied petitioners claim solely on this ground. The tax courts based this conclusion on the
audited report, marked as Exhibit J-2, stating that petitioner made no sale of electricity to NPC in 2002.
[29]

Moreover, the affidavit of Echevarria (Exhibit L), petitioners Vice President and Director for Finance, contained

an admission that no commercial sale of electricity had been made in favor of NPC in 2002 since the project was still
under construction at that time.[30]

However, upon closer examination of the records, it appears that on 2002, petitioner carried out a sale of
electricity to NPC. The fourth quarter return for the year 2002, which petitioner filed, reported a zero-rated sale in the
amount of P42,500,000.00.[31] In the Affidavit of Echevarria dated 9 February 2005 (Exhibit L), which was
uncontroverted by respondent, the affiant stated that although no commercial sale was made in 2002, petitioner
produced and transferred electricity to NPC during the testing period in exchange for the amount of P42,500,000.00,
to wit:[32]
A: San Roque Power Corporation has had no sale yet during 2002. The P42,500,000.00 which was
paid to us by Napocor was something similar to a more cost recovery scheme. The pre-agreed
amount would be about equal to our costs for producing the electricity during the testing period and
we just reflected this in our 4th quarter return as a zero-rated sale. x x x.

The Court is not unmindful of the fact that the transaction described hereinabove was not a commercial
sale. In granting the tax benefit to VAT-registered zero-rated or effectively zero-rated taxpayers, Section 112(A) of
the

NIRC

does

not

limit

the

definition

of

sale

to

commercial

transactions

in

the

normal

course

of

business. Conspicuously, Section 106(B) of the NIRC, which deals with the imposition of the VAT, does not limit the

term sale to commercial sales, rather it extends the term to transactions that are deemed sale, which are thus
enumerated:
SEC 106. Value-Added Tax on Sale of Goods or Properties.
xxxx
(B)

Transactions Deemed Sale.The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VATregistered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60) days following
the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable
goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable construction of the law that when the term
sale is made to include certain transactions for the purpose of imposing a tax, these same transactions should be
included in the term sale when considering the availability of an exemption or tax benefit from the same revenue
measures. It is undisputed that during the fourth quarter of 2002, petitioner transferred to NPC all the electricity that
was produced during the trial period. The fact that it was not transferred through a commercial sale or in the normal
course of business does not deflect from the fact that such transaction is deemed as a sale under the law.

The seventh requirement regarding foreign currency exchange proceeds is inapplicable where petitioners
zero-rated sale of electricity to NPC did not involve foreign exchange and consisted only of a single transaction
wherein NPC paid petitioner P42,500,000.00 in exchange for the electricity transferred to it by petitioner. Similarly,
the eighth requirement is inapplicable to this case, where the only sale transaction consisted of an effectively zerorated sale and there are no exempt or taxable sales that transpired, which will require the proportionate allocation of
the creditable input tax paid.

The last requirement determines that the claim should be filed within two years after the close of the taxable
quarter when such sales were made. The sale of electricity to NPC was reported at the fourth quarter of 2002, which
closed on 31 December 2002. Petitioner had until 30 December 2004 to file its claim for refund or credit. For the
period January to March 2002, petitioner filed an amended request for refund or tax credit on 30 May 2003; for the
period July 2002 to September 2002, on 27 February 2003; and for the period October 2002 to December 2002,
on 31 July 2003.[33] In these three quarters, petitioners seasonably filed its requests for refund and tax
credit. However, for the period April 2002 to May 2002, the claim was filed prematurely on 25 October 2002, before
the last quarter had closed on 31 December 2002.[34]

Despite this lapse in procedure, this Court notes that petitioner was able to positively show that it was able to
accumulate excess input taxes on various importations and local purchases in the amount of P246,131,610.40, which
were attributable to a transfer of electricity in favor of NPC. The fact that it had filed its claim for refund or credit
during the quarter when the transfer of electricity had taken place, instead of at the close of the said quarter does not
make petitioner any less entitled to its claim. Given the special circumstances of this case, wherein petitioner was
incorporated for the sole purpose of constructing or operating a power plant that will transfer all the electricity it
generates to NPC, there is no danger that petitioner would try to fraudulently claim input tax paid on purchases that
will be attributed to sale transactions that are not zero-rated. Substantial justice, equity and fair play are on the side
of the petitioner. Technicalities and legalisms, however, exalted, should not be misused by the government to keep
money not belonging to it, thereby enriching itself at the expense of its law abiding citizens.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not belonging
to it, thereby enriching itself at the expense of its law-abiding citizens. Under the principle of solutio
indebiti provided in Art. 2154, Civil Code, the BIR received something when there [was] no right to
demand it, and thus, it has the obligation to return it. Heavily militating against respondent
Commissioner is the ancient principle that no one, not even the State, shall enrich oneself at the
expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes. [35]

It bears emphasis that effective zero-rating is not intended as a benefit to the person legally liable to pay the
tax, such as petitioner, but to relieve certain exempt entities, such as the NPC, from the burden of indirect tax so as to
encourage the development of particular industries. Before, as well as after, the adoption of the VAT, certain special
laws were enacted for the benefit of various entities and international agreements were entered into by
the Philippines with foreign governments and institutions exempting sale of goods or supply of services from indirect
taxes at the level of their suppliers. Effective zero-rating was intended to relieve the exempt entity from being
burdened with the indirect tax which is or which will be shifted to it had there been no exemption. In this case,
petitioner is being exempted from paying VAT on its purchases to relieve NPC of the burden of additional costs that
petitioner may shift to NPC by adding to the cost of the electricity sold to the latter.[36]

Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it is the
lawmakers intention that NPC be made completely exempt from all taxes, both direct and indirect:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities. - The corporation
shall be non-profit and shall devote all its returns from its capital investment, as well as excess
revenues from its operation, for expansion. To enable the corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section 1 of
this Act, the corporation is hereby declared exempt:
(a)
From the payment of all taxes, duties, fees, imposts, charges, costs and service fees
in any court or administrative proceedings in which it may be a party, restrictions and duties to the
Republic of the Philippines, its provinces, cities, municipalities, and other government agencies and
instrumentalities;
(b)
From all income taxes, franchise taxes, and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and instrumentalities;
(c)
From all import duties, compensating taxes and advanced sales tax and wharfage
fees on import of foreign goods, required for its operations and projects; and

(d)
From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the corporation in the generation, transmission,
utilization, and sale of electric power.

To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad language of
the statute will be to thwart the legislative intention in giving exemption from all forms of taxes and impositions,
without distinguishing between those that are direct and those that are not. [37]

Congress granted NPC a comprehensive tax exemption because of the significant public interest involved. This
is enunciated in Section 1 of Republic Act No. 6395:
Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive
development, utilization and conservation of Philippine water resources for all beneficial uses,
including power generation, and (2) the total electrification of the Philippines through the development
of power from all sources to meet the needs of industrial development and dispersal and the needs of
rural electrification are primary objectives of the nation which shall be pursued coordinately and
supported by all instrumentalities and agencies of government, including its financial institutions.

The ability of the NPC to provide sufficient and affordable electricity throughout the country greatly affects our
industrial and rural development. Erroneously and unjustly depriving industries that generate electrical power of tax
benefits that the law clearly grants will have an immediate effect on consumers of electricity and long term effects on
our economy.

In the same breath, we cannot lose sight of the fact that it is the declared policy of the State, expressed in
Section 2 of Republic Act No. 9136, otherwise known as the EPIRA Law, to ensure and accelerate the total
electrification of the country; to enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors; and to promote the utilization of indigenous and new and
renewable energy resources in power generation in order to reduce dependence on imported energy . Further,
Section 6 provides that pursuant to the objective of lowering electricity rates to end-users, sales of generated power
by generation companies shall be value-added tax zero-rated.

Section 75 of said law succinctly declares that this Act shall, unless the context indicates otherwise, be
construed in favor of the establishment, promotion, preservation of competition and power empowerment so that the
widest participation of the people, whether directly or indirectly is ensured.

The objectives as set forth in the EPIRA Law can only be achieved if government were to allow petitioner and
others similarly situated to obtain the input tax credits available under the law. Denying petitioner such credits would
go against the declared policies of the EPIRA Law.

The legislative grant of tax relief (whether in the EPIRA Law or the Tax Code) constitutes a sovereign
commitment of Government to taxpayers that the latter can avail themselves of certain tax reliefs and incentives in

the course of their business activities here. Such a commitment is particularly vital to foreign investors who have
been enticed to invest heavily in our countrys infrastructure, and who have done so on the firm assurance that certain
tax reliefs and incentives can be availed of in order to enable them to achieve their projected returns on these very
long-term and heavily funded investments. While the governments ability to keep its commitment is put in doubt,
credit rating turns to worse; the costs of borrowing becomes higher and the harder it will be to attract foreign
investors. The countrys earnest efforts to move forward will all be put to naught.

Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the NIRC or on
the basis of effectively zero-rated sales in the amount ofP246,131,610.40, there is no more need to establish its right
to make the same claim under Section 112(B) of the NIRC or on the basis of purchase of capital goods.

Finally, respondent contends that according to well-established doctrine, a tax refund, which is in the nature of
a tax exemption, should be construed strictissimi jurisagainst the taxpayer.[38]

However, when the claim for refund

has clear legal basis and is sufficiently supported by evidence, as in the present case, then the Court shall not hesitate
to grant the same.[39]

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax Appeals En
Banc dated 20 September 2007 in CTA EB Case No. 248, affirming the Decision dated 23 March 2006 of the CTA
Second Division in CTA Case No. 6916, is REVERSED. Respondent Commissioner of Internal Revenue is ordered to
refund, or in the alternative, to issue a tax credit certificate to petitioner San Roque Power Corporation in the amount
of Two Hundred Forty-Six Million One Hundred Thirty-One Thousand Six Hundred Ten Pesos and 40/100
(P246,131,610.40), representing unutilized input VAT for the period 1 January 2002 to 31 December 2002.

No costs.

SO ORDERED.
G.R. No. 143867

August 22, 2001

PHILIPPINE
LONG
DISTANCE
TELEPHONE
COMPANY,
INC., petitioner,
vs.
CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as the City Treasurer of Davao,respondents.
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure of the resolution, 1 dated
June 23, 2000, of the Regional Trial Court, Branch 13, Davao City, affirming the tax assessment of petitioner and the
denial of its claim for tax refund by the City Treasurer of Davao.
The facts are as follows:
On January 1999, petitioner Philippine Long Distance Telephone Co., Inc. (PLDT) applied for a Mayor's Permit to
operate its Davao Metro Exchange. Respondent City of Davao withheld action on the application pending payment by
petitioner of the local franchise tax in the amount of P3,681,985.72 for the first to the fourth quarter of 1999. 2 In a
letter dated May 31, 1999, 3 petitioner protested the assessment of the local franchise tax and requested a refund of
the franchise tax paid by it for the year 1997 and the first to the third quarters of 1998. Petitioner contended that it
was exempt from the payment of franchise tax based on an opinion of the Bureau of Local Government Finance
(BLGF), dated June 2, 1998, which reads as follows:

PLDT:
Section 12 of RA 7082 provides as follows:
"SECTION 12. 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
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
telephone or other telecommunications businesses 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 . . ."
It appears that RA 7082 further amending Act No. 3436 which granted to PLDT a franchise to install, operate
and maintain a telephone system throughout the Philippine Islands was approved on August 3, 1991. Section
12 of said franchise, likewise, contains the "in lieu of all taxes" proviso.
In this connection, Section 23 of RA 7925, quoted hereunder, which was approved on March 1, 1995, provides
for the equality of treatment in the telecommunications industry:
"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." (Italics supplied.)
On the basis of the aforequoted Section 23 of RA 7925, PLDT as a telecommunications franchise holder
becomes automatically covered by the tax exemption provisions of RA 7925, which took effect on March 16,
1995.
Accordingly, PLDT shall be exempt from the payment of franchise and business taxes imposable by LGUs
under Sections 137 and 143 (sic), respectively, of the LGC, upon the effectivity of RA 7925 on March 16,
1995. However, PLDT shall be liable to pay the franchise and business taxes on its gross receipts realized from
January 1, 1992 up to March 15, 1995, during which period PLDT was not enjoying the "most favored clause"
proviso of RA 7025 (sic).4
In a letter dated September 27, 1999, respondent Adelaida B. Barcelona, City Treasurer of Davao, denied the protest
and claim for tax refund of petitioner,5 citing the legal opinion of the City Legal Officer of Davao and Art. 10, 1 of
Ordinance No. 230, Series of 1991, as amended by Ordinance No. 519, Series of 1992, which provides:
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.6
Petitioner received respondent City Treasurer's order of denial on October 1, 1999. On November 3, 1999, it filed a
petition in the Regional Trial Court of Davao seeking a reversal of respondent City Treasurer's denial of petitioner's
protest and the refund of the franchise tax paid by it for the year 1998 in the amount of P2,580,829.23. The petition
was filed pursuant to 195 and 196 of the Local Government Code (R.A. No. 7160). No claim for refund of franchise
taxes paid in 1997 was made as the same had already prescribed under 196 of the LGC, which provides that claims
for the refund of taxes paid under it must be made within two (2) years from the date of payment of such taxes. 7
The trial court denied petitioner's appeal and affirmed the City Treasurer's decision. It ruled that the LGC withdrew all
tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on
businesses enjoying a franchise notwithstanding the grant of tax exemption to them. The trial court likewise denied

petitioner's claim for exemption under R.A. No. 7925 for the following reasons: (1) it is clear from the wording of 193
of the Local Government Code that Congress did not intend to exempt any franchise holder from the payment of local
franchise and business taxes; (2) the opinion of the Executive Director of the Bureau of Local Government Finance to
the contrary is not binding on respondents; and (3) petitioner failed to present any proof that Globe and Smart were
enjoying local franchise and business tax exemptions.
Hence, this petition for review based on the following grounds:
I. THE LOWER COURT ERRED IN APPLYING SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH
ALLOWS A CITY TO IMPOSE A FRANCHISE TAX, AND SECTION 193 THEREOF, WHICH PROVIDES FOR
WITHDRAWAL OF TAX EXEMPTION PRIVILEGES.
II. THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S FRANCHISE, AS IMPLICITLY
AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS
POLICY ACT), TAKING INTO ACCOUNT THE FRANCHISES OF GLOBE TELECOM, INC. AND SMART
COMMUNICATIONS, INC., WHICH WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
FRANCHISE AND BUSINESS TAXES MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.
III. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO THE RULING OF THE BUREAU OF LOCAL
GOVERNMENT FINANCE THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF FRANCHISE AND BUSINESS
TAXES, AMONG OTHERS, IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT
CODE.
First. The LGC, which took effect on January 1, 1992, provides:
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 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.8
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. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.
The trial court held that, under these provisions, all exemptions granted to all persons, whether natural and juridical,
including those which in the future might be granted, are withdrawn unless the law granting the exemption expressly
states that the exemption also applies to local taxes. We disagree. Sec. 137 does not state that it covers future
exemptions. In Philippine Airlines, Inc. v. Edu,9 where a provision of the Tax Code enacted on June 27, 1968 (R.A.
5431) withdrew the exemption enjoyed by PAL, it was held that a subsequent amendment of PAL's franchise,
exempting it from all other taxes except that imposed by its franchise, again entitled PAL to exemption from the date
of the enactment of such amendment. The Tax Code provision withdrawing the tax exemption was not construed as
prohibiting future grants of exemptions from all taxes.
Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the
power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of
the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal
taxing powers, doubts must be resolved in favor of municipal corporations. 10

The question, therefore, is whether, after the withdrawal of its exemption by virtue of 137 of the LGC, petitioner has
again become entitled to exemption from local franchise tax. Petitioner answers in the affirmative and points to 23 of
R.A. No. 7925, in relation to the franchises of Globe Telecom (Globe) and Smart Communications, Inc. (Smart), which
allegedly grant the latter exemption from local franchise taxes.
To begin with, tax exemptions are highly disfavored. The reason for this was explained by this Court in Asiatic
Petroleum Co. v. Llanes,11 in which it was held:
. . . Exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious to
the law. He who claims an exemption must be able to point to some positive provision of law creating the
right. . . As was said by the Supreme Court of Tennessee in Memphis vs. U. & P. Bank (91 Tenn., 546, 550),
"The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the
government; and he who claims an exemption from the common burden must justify his claim by the clearest
grant of organic or statute law." Other utterances equally or more emphatic come readily to hand from the
highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard, 416), it was said by Chief Justice
Taney, that the right of taxation will not be held to have been surrendered, "unless the intention to surrender
is manifested by words too plain to be mistaken." In the case of the Delaware Railroad Tax (18 Wallace, 206,
226), the Supreme Court of the United States said that the surrender, when claimed, must be shown by clear,
unambiguous language, which will admit of no reasonable construction consistent with the reservation of the
power. If a doubt arises as to the intent of the legislature, that doubt must be solved in favor of the State. In
Erie Railway Company vs. Commonwealth of Pennsylvania (21 Wallace, 492, 499), Mr. Justice Hunt, speaking
of exemptions, observed that a State cannot strip itself of the most essential power of taxation by doubtful
words. "It cannot, by ambiguous language, be deprived of this highest attribute of sovereignty." In Tennessee
vs. Whitworth (117 U.S., 129, 136), it was said: "In all cases of this kind the question is as to the intent of the
legislature, the presumption always being against any surrender of the taxing power." In Farrington vs.
Tennessee and County of Shelby (95 U.S., 679, 686), Mr. Justice Swayne said: ". . . When exemption is
claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded
doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any
other construction that the proposition can be supported."
The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the
legislature to grant such exemption. And, even if it is granted, the exemption must be interpreted in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority.12
In the present case, petitioner justifies its claim of tax exemption by strained inferences. First, it cites R.A. No. 7925,
otherwise known as the Public Telecommunications Policy Act of the Philippines, 23 of which reads:
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 franchises 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.
Petitioner then claims that Smart and Globe enjoy exemption from the payment of the franchise tax by virtue of their
legislative franchises per opinion of the Bureau of Local Government Finance of the Department of Finance. Finally, it
argues that because Smart and Globe are exempt from the franchise tax, it follows that it must likewise be exempt
from the tax being collected by the City of Davao because the grant of tax exemption to Smart and Globe ipso
facto extended the same exemption to it.
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.
The fact is that the term "exemption" in 23 is too general. A cardinal rule in statutory construction is that legislative
intent must be ascertained from a consideration of the statute as a whole and not merely of a particular provision. For,
taken in the abstract, a word or phrase might easily convey a meaning which is different from the one actually
intended. A general provision may actually have a limited application if read together with other provisions. 13 Hence, a
consideration of the law itself in its entirety and the proceedings of both Houses of Congress is in order.14
Art. I of Rep. Act No. 7925 contains the general provisions, stating that the Act shall be known as the Public
Telecommunications Policy Act of the Philippines, and a definition of terms. 15 Art. II provides for its policies and
objectives, which is to foster the improvement and expansion of telecommunications services in the country through:
(1) the construction of telecommunications infrastructure and interconnection facilities, having in mind the efficient
use of the radio frequency spectrum and extension of basic services to areas not yet served; (2) fair, just, and
reasonable rates and tariff charges; (3) stable, transparent, and fair administrative processes; (4) reliance on private
enterprise for direct provision of telecommunications services; (5) dispersal of ownership of telecommunications
entities in compliance with the constitutional mandate to democratize the ownership of public utilities; (6)
encouragement of the establishment of interconnection with other countries to provide access to international
communications highways and development of a competitive export-oriented domestic telecommunications
manufacturing industry; and (7) development of human resources skills and capabilities to sustain the growth and
development of telecommunications.16
Art. III provides for its administration. The operational and administrative functions are delegated to the National
Telecommunications Commission (NTC), while policy-making, research, and negotiations in international
telecommunications matters are left with the Department of Transportation and Communications. 17
Art. IV classifies the categories of telecommunications entities as: Local Exchange Operator, Inter-Exchange Carrier,
International Carrier, Value-Added Service Provider, Mobile Radio Services, and Radio Paging Services. 18 Art. V
provides for the use of other services and facilities, such as customer premises equipment, which may be used within
the premises of telecommunications subscribers subject only to the requirement that it is type-approved by the NTC,
and radio frequency spectrum, the assignment of which shall be subject to periodic review. 19
Art. VI, entitled Franchise, Rates and Revenue Determination, provides for the requirement to obtain a franchise from
Congress and a Certificate of Public Convenience and Necessity from the NTC before a telecommunications entity can
begin its operations. It also provides for the NTC's residual power to regulate the rates or tariffs when ruinous
competition results or when a monopoly or a cartel or combination in restraint of free competition exists and the rates
or tariffs are distorted or unable to function freely and the public is adversely affected. There is also a provision
relating to revenue sharing arrangements between inter-connecting carriers. 20
Art. VII provides for the rights of telecommunications users. 21
Art. VIII, entitled Telecommunications Development, where 23 is found, provides for public ownership of
telecommunications entities, privatization of existing facilities, and the equality of treatment provision. 22
Art. IX contains the Final Provisions.23
R.A. No. 7925 is thus a legislative enactment designed to set the national policy on telecommunications and provide
the structures to implement it to keep up with the technological advances in the industry and the needs of the public.
The thrust of the law is to promote gradually the deregulation of the entry, pricing, and operations of all public
telecommunications entities and thus promote a level playing field in the telecommunications industry. 24There is
nothing in the language of 23 nor in the proceedings of both the House of Representatives and the Senate in
enacting R.A. No. 7925 which shows that it contemplates the grant of tax exemptions to all telecommunications
entities, including those whose exemptions had been withdrawn by the LGC.

What this Court said in Asiatic Petroleum Co. v. Llanes25 applies mutatis mutandis to this case: "When exemption is
claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is
fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction
that the proposition can be supported." In this case, the word "exemption" in 23 of R.A. No. 7925 could contemplate
exemption from certain regulatory or reporting requirements, bearing in mind the policy of the law. It is noteworthy
that, in holding Smart and Globe exempt from local taxes, the BLGF did not base its opinion on 23 but on the fact
that the franchises granted to them after the effectivity of the LGC exempted them from the payment of local
franchise and business taxes.
Second. In the case of petitioner, the 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, 26 a highly specialized
court which performs judicial functions as it was created for the review of tax cases. 27 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. 28 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.
In sum, it does not appear that, in approving 23 of R.A. No. 7925, Congress intended it to operate as a blanket tax
exemption to all telecommunications entities. Applying the rule of strict construction of laws granting tax exemptions
and the rule that doubts should be resolved in favor of municipal corporations in interpreting statutory provisions on
municipal taxing powers, we hold that 23 of R.A. No. 7925 cannot be considered as having amended petitioner's
franchise so as to entitle it to exemption from the imposition of local franchise taxes. Consequently, we hold that
petitioner is liable to pay local franchise taxes in the amount of P3,681,985.72 for the period covering the first to the
fourth quarter of 1999 and that it is not entitled to a refund of taxes paid by it for the period covering the first to the
third quarter of 1998.
WHEREFORE, the petition for review on certiorari is DENIED and the decision of the Regional Trial Court, Branch 13,
Davao City is AFFIRMED.
SO ORDERED.

G.R. No. 192945

September 5, 2012

CITY
OF
vs.
CAMARINES SUR III ELECTRIC COOPERATIVE, INC. (CASURECO III), Respondent.

IRIGA, Petitioner,

DECISION
PERLAS-BERNABE, J.:
The Court reiterates that a franchise tax is a tax levied on the exercise by an entity of the rights or privileges granted
to it by the government.1 In the absence of a clear and subsisting legal provision granting it tax exemption, a
franchise holder, though non-profit in nature, may validly be assessed franchise tax by a local government unit.

Before the Court is a petition filed under Rule 45 of the Revised Rules of Court seeking to set aside the February 11,
2010 Decision2 and July 12, 2010 Resolution 3 of the Court of Appeals (CA), which reversed the February 7, 2005
Decision of the Regional Trial Court (RTC) of Iriga City, Branch 36 and ruled that respondent Camarines Sur III Electric
Cooperative, Inc. (CASURECO III) is exempt from payment of local franchise tax.
The Facts
CASURECO III is an electric cooperative duly organized and existing by virtue of Presidential Decree (PD) 269, 4as
amended, and registered with the National Electrification Administration (NEA). It is engaged in the business of
electric power distribution to various end-users and consumers within the City of Iriga and the municipalities of
Nabua, Bato, Baao, Buhi, Bula and Balatan of the Province of Camarines Sur, otherwise known as the "Rinconada
area."5
Sometime in 2003, petitioner City of Iriga required CASURECO III to submit a report of its gross receipts for the
period 1997-2002 to serve as the basis for the computation of franchise taxes, fees and other charges. 6 The latter
complied7 and was subsequently assessed taxes.
On January 7, 2004, petitioner made a final demand on CASURECO III to pay the franchise taxes due for the period
1998-2003 and real property taxes due for the period 1995-2003. 8 CASURECO III, however, refused to pay said taxes
on the ground that it is an electric cooperative provisionally registered with the Cooperative Development Authority
(CDA),9 and therefore exempt from the payment of local taxes. 10
On March 15, 2004, petitioner filed a complaint for collection of local taxes against CASURECO III before the RTC,
citing its power to tax under the Local Government Code (LGC) and the Revenue Code of Iriga City.11
It alleged that as of December 31, 2003, CASURECO III s franchise and real property taxes liability, inclusive of
penalties, surcharges and interest, amounted to Seventeen Million Thirty-Seven Thousand Nine Hundred Thirty-Six
Pesos and Eighty-Nine Centavos (P 17,037,936.89) and Nine Hundred Sixteen Thousand Five Hundred Thirty-Six
Pesos and Fifty Centavos (P 916,536.50), respectively.12
In its Answer, CASURECO III denied liability for the assessed taxes, asserting that the computation of the petitioner
was erroneous because it included 1) gross receipts from service areas beyond the latter s territorial jurisdiction; 2)
taxes that had already prescribed; and 3) taxes during the period when it was still exempt from local government tax
by virtue of its then subsisting registration with the CDA. 13
Ruling of the Trial Court
In its Decision dated February 7, 2005, the RTC ruled that the real property taxes due for the years 1995-1999 had
already prescribed in accordance with Section 194 14 of the LGC. However, it found CASURECO III liable for franchise
taxes for the years 2000-2003 based on its gross receipts from Iriga City and the Rinconada area on the ground that
the "situs of taxation is the place where the privilege is exercised." 15 The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing, defendant is hereby made liable to pay plaintiff real property taxes and
franchise taxes on its receipts, including those from service area covering Nabua, Bato, Baao and Buhi for the years
2000 up to the present. The realty taxes for the years 1995 and 1999 is hereby declared prescribed. The City
Assessor is hereby directed to make the proper classification of defendant s real property in accordance with
Ordinance issued by the City Council.
SO ORDERED.16
Only CASURECO III appealed from the RTC Decision, questioning its liability for franchise taxes.
Ruling of the Court of Appeals

In its assailed Decision, the CA found CASURECO III to be a non-profit entity, not falling within the purview of
"businesses enjoying a franchise" pursuant to Section 137 of the LGC. It explained that CASURECO III s non-profit
nature is diametrically opposed to the concept of a "business," which, as defined under Section 131 of the LGC, is a
"trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit." Consequently, it
relieved CASURECO III from liability to pay franchise taxes.
Petitioner moved for reconsideration, which the CA denied in its July 12, 2010 Resolution for being filed a day late,
hence, the instant petition.
Issues Before the Court
Petitioner raises two issues for resolution, which the Court restates as follows: (1) whether or not an electric
cooperative registered under PD 269 but not under RA 6938 17 is liable for the payment of local franchise taxes; and
(2) whether or not the situs of taxation is the place where the franchise holder exercises its franchise regardless of the
place where its services or products are delivered.
CASURECO III, on the other hand, raises the procedural issue that since the motion for reconsideration of the CA
Decision was filed out of time, the same had attained finality.
The Courts Ruling
The petition is meritorious.
Before delving into the substantive issues, the Court notes the procedural lapses extant in the present case.
Proper
Mode
Decision
of
Court involving local taxes

of

Appeal
the

from
Regional

the
Trial

RA 9282,18 which took effect on April 23, 2004, expanded the jurisdiction of the Court of Tax Appeals (CTA) to include,
among others, the power to review by appeal 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. 19
Considering that RA 9282 was already in effect when the RTC rendered its decision on February 7, 2005, CASURECO
III should have filed its appeal, not with the CA, but with the CTA Division in accordance with the applicable law and
the rules of the CTA. Resort to the CA was, therefore, improper, rendering its decision null and void for want of
jurisdiction over the subject matter. A void judgment has no legal or binding force or efficacy for any purpose or at
any place.20 Hence, the fact that petitioner's motion for reconsideration from the CA Decision was belatedly filed is
inconsequential, because a void and non-existent decision would never have acquired finality.21
The foregoing procedural lapses would have been sufficient to dismiss the instant petition outright and declare the
decision of the RTC final. However, the substantial merits of the case compel us to dispense with these lapses and
instead, exercise the Courts power of judicial review.
CASURECO
III
payment of franchise tax

is

not

exempt

from

PD 269, which took effect on August 6, 1973, granted electric cooperatives registered with the NEA, like CASURECO
III, several tax privileges, one of which is exemption from the payment of "all national government, local government
and municipal taxes and fees, including franchise, filing, recordation, license or permit fees or taxes." 22
On March 10, 1990, Congress enacted into law RA 6938, 23 otherwise known as the "Cooperative Code of the
Philippines," and RA 693924 creating the CDA. The latter law vested the power to register cooperatives solely on the
CDA, while the former provides that electric cooperatives registered with the NEA under PD 269 which opt not to
register with the CDA shall not be entitled to the benefits and privileges under the said law.

On January 1, 1992, the LGC took effect, and Section 193 thereof withdrew tax exemptions or incentives previously
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."25
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and
Local Government,26 the Court held that the tax privileges granted to electric cooperatives registered with NEA under
PD 269 were validly withdrawn and only those registered with the CDA under RA 6938 may continue to enjoy the tax
privileges under the Cooperative Code.
Therefore, CASURECO III can no longer invoke PD 269 to evade payment of local taxes. Moreover, its provisional
registration with the CDA which granted it exemption for the payment of local taxes was extended only until May 4,
1992. Thereafter, it can no longer claim any exemption from the payment of local taxes, including the subject
franchise tax.1wphi1
Indisputably, petitioner has the power to impose local taxes. The power of the local government units to impose and
collect taxes is derived from the Constitution itself which grants them "the power to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and limitation as the Congress may
provide."27 This explicit constitutional grant of power to tax is consistent with the basic policy of local autonomy and
decentralization of governance. With this power, local government units have the fiscal mechanisms to raise the funds
needed to deliver basic services to their constituents and break the culture of dependence on the national
government. Thus, consistent with these objectives, the LGC was enacted granting the local government units, like
petitioner, the power to impose and collect franchise tax, to wit:
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. xxx
SEC. 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city, may levy the taxes, fees, and
charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied
and collected by highly urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates
allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes.
Taking a different tack, CASURECO III maintains that it is exempt from payment of franchise tax because of its nature
as a non-profit cooperative, as contemplated in PD 269, 28 and insists that only entities engaged in business, and not
non-profit entities like itself, are subject to the said franchise tax.
The Court is not persuaded.
In National Power Corporation v. City of Cabanatuan, 29 the Court declared that "a franchise tax is a tax on the
privilege of transacting business in the state and exercising corporate franchises granted by the state." 30 It is not
levied on the corporation simply for existing as a corporation, upon its property or its income, but on its exercise of
the rights or privileges granted to it by the government. 31 "It is within this context that the phrase tax on businesses
enjoying a franchise in Section 137 of the LGC should be interpreted and understood." 32
Thus, to be liable for local franchise tax, the following requisites should concur: (1) that one has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise
within the territory of the pertinent local government unit. 33
There is a confluence of these requirements in the case at bar. By virtue of PD 269, NEA granted CASURECO III a
franchise to operate an electric light and power service for a period of fifty (50) years from June 6, 1979, 34 and it is
undisputed that CASURECO III operates within Iriga City and the Rinconada area. It is, therefore, liable to pay
franchise tax notwithstanding its non-profit nature.

CASURECO
franchise
within
Rinconada area

III
tax

is
on
Iriga

liable
gross
City

for
receipts
and

CASURECO III further argued that its liability to pay franchise tax, if any, should be limited to gross receipts received
from the supply of the electricity within the City of Iriga and not those from the Rinconada area.
Again, the Court is not convinced.
It should be stressed that what the petitioner seeks to collect from CASURECO III is a franchise tax, which as defined,
is a tax on the exercise of a privilege. As Section 137 35 of the LGC provides, franchise tax shall be based on gross
receipts precisely because it is a tax on business, rather than on persons or property.36 Since it partakes of the nature
of an excise tax/37 the situs of taxation is the place where the privilege is exercised, in this case in the City of Iriga,
where CASURECO III has its principal office and from where it operates, regardless of the place where its services or
products are delivered. Hence, franchise tax covers all gross receipts from Iriga City and the Rinconada area.
WHEREFORE, the petition is GRANTED. The assailed Decision dated February 11, 2010 and Resolution dated July
12, 2010 of the Court of Appeals are hereby SET ASIDE and the Decision of the Regional Trial Court oflriga City,
Branch 36, is REINSTATED.
SO ORDERED.

G.R. No. 180356

February 16, 2010

SOUTH
AFRICAN
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

AIRWAYS, Petitioner,

DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision 1 and October 30,
2007 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways
v. Commissioner of Internal Revenue. The assailed decision affirmed the Decision dated May 10, 2006 3 and Resolution
dated August 11, 20064 rendered by the CTA First Division.
The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the
Republic of South Africa. Its principal office is located at Airways Park, Jones Road, Johannesburg International
Airport, South Africa. In the Philippines, it is an internal air carrier having no landing rights in the country. Petitioner
has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents
for compensation or commission for petitioners off-line flights for the carriage of passengers and cargo between ports
or points outside the territorial jurisdiction of the Philippines. Petitioner is not registered with the Securities and
Exchange Commission as a corporation, branch office, or partnership. It is not licensed to do business in the
Philippines.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights,
summarized as follows:
Period

Date Filed

2.5%

Gross

Phil. Billings

For Passenger

1st
Quarter
2nd
Quarter
3rd
Quarter
4th Quarter

May
30,
August
29,
November
29,
April 16, 2000

2000
2000
2000

Sub-total

For Cargo

1st
Quarter
2nd
Quarter
3rd
Quarter
4th Quarter

May
30,
August
29,
November
29,
April 16, 2000

2000
2000
2000

Sub-total
TOTAL

PhP

222,531.25
424,046.95
422,466.00
453,182.91

PhP

1,522,227.11

PhP

81,531.00
50,169.65
36,383.74
37,454.88

PhP

205,539.27
1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District Office No. 47, a
claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for
the taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a Petition for Review with
the CTA for the refund of the abovementioned amount. The case was docketed as CTA Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA ruled that
petitioner is a resident foreign corporation engaged in trade or business in the Philippines. It further ruled that
petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National Internal Revenue Code
(NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its income derived from the
sales of passage documents in the Philippines. On this ground, the CTA denied petitioners claim for a refund.
Petitioners Motion for Reconsideration of the above decision was denied by the CTA First Division in a Resolution dated
August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax payment
on its GPB. This was denied by the CTA in its assailed decision. A subsequent Motion for Reconsideration by petitioner
was also denied in the assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues
Whether or not petitioner, as an off-line international carrier selling passage documents through an independent sales
agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by
Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of passage documents covering petitioners off-line
flights is Philippine-source income subject to Philippine income tax.
Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine Billings for
the taxable year 2000 in the amount of P1,727,766.38.5
The Courts Ruling
This petition must be denied.
Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income
Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale of passage
documents in the Philippines. Petitioner, however, failed to sufficiently prove such contention.

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, 6 we held, "Since an action for a tax
refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and
categorical language, it is strictly construed against the claimant who must discharge such burden convincingly."
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec. 28(A)(3)(a) of
the 1997 NIRC defining GPB. It is petitioners contention that, with the new definition of GPB, it is no longer liable
under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB is inapplicable to it, it is
thereby excluded from the imposition of any income tax.
Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. A corporation organized, authorized, or existing under the laws of a 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: Provided, however,
that international carriers shall pay a tax of two and one-half percent on their gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:
"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any international
carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or
mail, provided the cargo or mail originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:
"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the world and excess
baggage, cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the
passage documents were sold in the Philippines. Legislature departed from such concept in the 1997 NIRC where GPB
is now defined under Sec. 28(A)(3)(a):
"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.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the
Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, it is not
taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further posits
the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax
for its sale of passage documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways), 7 which was
decided under similar factual circumstances, this Court ruled that off-line air carriers having general sales agents in
the Philippines are engaged in or doing business in the Philippines and that their income from sales of passage
documents here is income from within the Philippines. Thus, in that case, we held the off-line air carrier liable for the
32% tax on its taxable income.
Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it does not apply
to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident
foreign corporations, such as itself, on all income from sources within the Philippines. Petitioners interpretation of Sec.
28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does not maintain flights to or from the
Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at all. In other words, the
existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.

First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of off-line air
carriers is more apparent than real.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air
carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislatures intentions been to
completely exclude all international air carriers from the application of the general rule under Sec. 28(A)(1), it would
have used the appropriate language to do so; but the legislature did not. Thus, the logical interpretation of such
provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not
apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier
or not, would be liable for the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner claims that the
former case does not apply. Thus, British Overseas Airways applies to the instant case. The findings therein that an
off-line air carrier is doing business in the Philippines and that income from the sale of passage documents here is
Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is to exempt
off-line air carriers from income tax by citing the pronouncements made by Senator Juan Ponce Enrile during the
deliberations on the provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on this Court.
We said in Espino v. Cleofe:8
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must be
sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary, commonlyaccepted and most obvious significations, according to good and approved usage and without resorting to forced or
subtle construction. Courts, therefore, as a rule, cannot presume that the law-making body does not know the
meaning of words and rules of grammar. Consequently, the grammatical reading of a statute must be presumed to
yield its correct sense. x x x It is also a well-settled doctrine in this jurisdiction that statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law. (Emphasis supplied.)
Moreover, an examination of the subject provisions of the law would show that petitioners interpretation of those
provisions is erroneous.
Sec. 28(A)(1) and (A)(3)(a) provides:
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%).
xxxx
(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.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all
income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as "that which would otherwise be included in the provision from which it is excepted. It is a
clause which exempts something from the operation of a statue by express words." 9 Further, "an exception need not
be introduced by the words except or unless. An exception will be construed as such if it removes something from
the operation of a provision of law."10
In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax on their
income from within the Philippines, except for resident foreign corporations that are international carriers that derive
income "from carriage of persons, excess baggage, cargo and mail originating from the Philippines" which shall be
taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating
from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This
principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule. 11
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to
and from the Philippines, it shall be taxed at the rate of 2 1/2% 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 will be taxed at the rate of 32% of such income.
As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that petitioner is liable for
income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether the existence of such
liability would preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioners
motion for reconsideration, the CTA First Division ruled in its Resolution dated August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a taxpayer
from claiming a tax refund since a refund claim can proceed independently of a tax assessment and that the
assessment cannot be offset by its claim for refund.
Petitioners argument is erroneous. Petitioner premises its argument on the existence of an assessment. In the
assailed Decision, this Court did not, in any way, assess petitioner of any deficiency corporate income tax. The power
to make assessments against taxpayers is lodged with the respondent. For an assessment to be made, respondent
must observe the formalities provided in Revenue Regulations No. 12-99. This Court merely pointed out that petitioner
is liable for the regular corporate income tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no
assessment to speak of.12
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under
Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, 13 thus:

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. 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. We find no cogent reason to deviate from
the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, 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,
which 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.
Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals, 14 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 petitioners supplemental motion for
reconsideration alleging bringing to said courts 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 accuracy of the facts stated in said return which, by itself and without unquestionable evidence,
cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of
Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in the
opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the
said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
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 muchneeded revenue for governmental operations.1avvphi1
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 others 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. (Emphasis supplied.)
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, petitioners 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)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for
a refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright
denial of petitioners claim for a refund. Even though petitioner is not entitled to a refund due to the question on the
propriety of petitioners tax return subject of the instant controversy, it would not be proper to deny such claim
without making a determination of petitioners liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable
income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that petitioners liabilities
under the two provisions would be the same. There is a need to make a determination of petitioners liability under
Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. The assailed decision
fails to mention having computed for the tax due under Sec. 28(A)(1) and the records are bereft of any evidence
sufficient to establish petitioners taxable income. There is a necessity to receive evidence to establish such amount
vis--vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be
correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc in CTA E.B.
Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En Banc for further proceedings and
appropriate action, more particularly, the reception of evidence for both parties and the corresponding disposition of
CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in this Decision.
SO ORDERED.
G.R. No. L-67649 June 28, 1988
ENGRACIO
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

FRANCIA, petitioner,

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate
Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover
a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San
Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is
described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the
Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property
was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464
known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest
bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his
name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had
been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill
of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January
24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in
favor of the defendant Ho Fernandez over the parcel of land including the
improvements thereon, subject to whatever encumbrances appearing at the back of
TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's
fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING
PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF
P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT
PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE
PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS
GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp.
10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was
sold at public auction without notice to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon
himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of
his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that
the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax
obligation had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on
the ground that the government owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not
be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes levied for general or
local governmental purposes. The reason on which the general rule is based, is that taxes are not in
the nature of contracts between the party and party but grow out of duty to, and are the positive acts
of the government to the making and enforcing of which, the personal consent of individual taxpayers
is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim
against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue
taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while
the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before

the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by
the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from
the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he
pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of
the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on
sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this issue,
the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to
show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and thegeneral
rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the
regularity of all proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This
is actually an exception to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with,
the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the lower
court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of
the auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated
November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further
that he was not present on December 5, 1977 the date of the auction sale because he went to Iligan
City. As long as there was substantial compliance with the requirements of the notice, the validity of
the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you
that the property in question shall be sold at public auction to the highest bidder on
December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you
received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by mail
carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt
thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice.
By his very own admission that he received the notice, his now coming to court assailing the validity of the auction
sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289;
Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we
held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as when
a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect
redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable
considering the wide divergence between their assessed values and the amounts for which they had
been actually sold. However, while in ordinary sales for reasons of equity a transaction may be
invalidated on the ground of inadequacy of price, or when such inadequacy shocks one's conscience as
to justify the courts to interfere, such does not follow when the law gives to the owner the right to
redeem, as when a sale is made at public auction, upon the theory that the lesser the price the easier
it is for the owner to effect the redemption. And so it was aptly said: "When there is the right to
redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the
property or also sell his right to redeem and thus recover the loss he claims to have suffered by
reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162,
61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in
this manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax
Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for taxes, the inadequacy
of the price given is not a valid objection to the sale." This rule arises from necessity, for, if a fair price
for the land were essential to the sale, it would be useless to offer the property. Indeed, it is notorious
that the prices habitually paid by purchasers at tax sales are grossly out of proportion to the value of
the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):
Like most cases of this character there is here a certain element of hardship from which we would be
glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in
the collection of taxes which are the life blood of the state. We are convinced that the present rules
are just, and that they bring hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely
because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas, real
estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny
the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the
date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act
of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine National
Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice sent by the
City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency. There is

furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The petitioner has
no standing to invoke equity in his attempt to regain the property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent
court is affirmed.
SO ORDERED.
G.R. No. L-18994

June 29, 1963

MELECIO
R.
DOMINGO,
as
Commissioner
of
Internal
Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price,respondents.
Office
of
the
Solicitor
General
Benedicto and Martinez for respondents.

and

Atty.

G.

H.

Mantolino

for

petitioner.

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 Malacaang 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.1wph1.t
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 mayissue 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.

QUEZON CITY and THE CITY G.R. No. 166408

TREASURER OF QUEZON CITY,
Petitioners,
Present:
YNARES-SANTIAGO, J.,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,

Chairperson,
NACHURA, and

REYES, JJ.
ABS-CBN BROADCASTING Promulgated:
CORPORATION,
Respondent. October 6, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be made out of
inference or implication.

The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) and
that[2] of the Regional Trial Court (RTC) ordering the refund and declaring invalid the imposition and collection of local
franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local government unit duly organized and existing by virtue of Republic
Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City. Petitioner City Treasurer of Quezon City is
primarily responsible for the imposition and collection of taxes within the territorial jurisdiction of Quezon City.

Under Section 31, Article 13 of the Quezon City Revenue Code of 1993, [3] a franchise tax was imposed on
businesses operating within its jurisdiction. The provision states:
Section 31. Imposition of Tax. Any provision of special laws or grant of tax exemption to the
contrary notwithstanding, any person, corporation, partnership or association enjoying a franchise
whether issued by the national government or local government and, doing business in Quezon City,
shall pay a franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty
percent (20%) of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996
and the succeeding years thereafter, of gross receipts and sales derived from the operation of the
business in Quezon City during the preceding calendar year.

On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television broadcasting
stations in the Philippines under R.A. No. 7966.[4] Section 8 of R.A. No. 7966 provides the tax liabilities of ABSCBN which reads:
Section 8. 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 are now 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 radio/television business transacted under this franchise by the
grantee, its successors or assigns, and the said percentage tax 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 under Title II of the National Internal Revenue Code pursuant to

Section 2 of Executive No. 72 unless the latter enactment is amended or repealed, in which case the
amendment or repeal shall be applicable thereto. (Emphasis added)

ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above provision
in R.A. No. 9766 that it shall pay a franchise tax x x x in lieu of all taxes, the corporation developed the opinion that it
is not liable to pay the local franchise tax imposed by Quezon City. Consequently, ABS-CBN paid under protest the
local franchise tax imposed by Quezon City on the dates, in the amounts and under the official receipts as follows:
O.R. No. Date Amount Paid
2464274 07-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[5]

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City for 1996 and
for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred
Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as follows:
O.R. No Date Amount Paid
2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
Total P14,233,582.29[6]

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund of local franchise
taxes paid.

On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a
complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition of local franchise tax by
the City Government of Quezon City for being unconstitutional. It likewise prayed for the refund of local franchise tax
in the amount of Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos
(P19,944,672.66) broken down as follows:
O.R. No. Date Amount Paid
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[7]

Quezon City argued that the in lieu of all taxes provision in R.A. No. 9766 could not have been intended to
prevail over a constitutional mandate which ensures the viability and self-sufficiency of local government
units. Further, that taxes collectible by and payable to the local government were distinct from taxes collectible by and

payable to the national government, considering that the Constitution specifically declared that the taxes imposed by
local government units shall accrue exclusively to the local governments. Lastly, the City contended that the
exemption claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government Code
(LGC) was passed.[8] Section 193 of the LGC provides:
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. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local franchise tax
paid for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One Thousand One Hundred
Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of local franchise tax as may have been and
will be paid by ABS-CBN until the resolution of the case.

Quezon City insisted that the claim for refund must fail because of the absence of a prior written claim for it.

RTC and CA Dispositions

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and collection from ABSCBN of local franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No.
7966, and ordered the refund of all payments made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from
plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon City
Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and,
accordingly, the Court hereby orders the defendants to refund all its payments made after the
effectivity of its legislative franchise on May 3, 1995.
SO ORDERED.[9]

In its decision, the RTC ruled that the in lieu of all taxes provision contained in Section 8 of R.A. No. 7966 absolutely
excused ABS-CBN from the payment of local franchise tax imposed under Quezon City Ordinance No. SP-91, S93. The intent of the legislature to excuse ABS-CBN from payment of local franchise tax could be discerned from the
usage of the in lieu of all taxes provision and from the absence of any qualification except income taxes. Had Congress
intended to exclude taxes imposed from the exemption, it would have expressly mentioned so in a fashion similar to
the proviso on income taxes.

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric Power and Light
Company, Inc. (CEPALCO).[10] In said case, the exemption of respondent electric company CEPALCO from payment of
provincial franchise tax was upheld on the ground that the franchise of CEPALCO was a special law, while the Local Tax
Code, on which the provincial ordinance imposing the local franchise tax was based, was a general law. Further, it was

held that whenever there is a conflict between two laws, one special and particular and the other general, the special
law must be taken as intended to constitute an exception to the general act.

The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the
LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since the legislature
ought to be presumed to have enacted it with the knowledge and awareness of the existence and prior enactment of
Section 137[11] of the LGC.

In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power and Light
Company, Inc. (CEPALCO),[12] ruled that the imposition of the local franchise tax was an impairment of ABS-CBNs
contract with the government. The imposition of another franchise on the corporation by the local authority would
constitute an impairment of the formers charter, which is in the nature of a private contract between it and the
government.

As to the amounts to be refunded, the RTC rejected Quezon Citys position that a written claim for refund pursuant to
Section 196 of the LGC was a condition sine qua non before filing the case in court. The RTC ruled that although
Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos ( P14,233,582.29)
was the only amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN should nonetheless
be also refunded of all payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on the
claim for refund of ABS-CBN legally rendered any further claims for refund on the part of plaintiff absurd and futile in
relation to the succeeding payments.

The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied by
the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed the petition of Quezon City and
its Treasurer. According to the appellate court, the issues raised were purely legal questions cognizable only by the
Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Courts consideration are more of legal
query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.
xxxx
The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric
and Power Co., Inc. to be a legal one. There is no more argument to this.
The next issue although it may need the reexamination of the pertinent provisions of the local
franchise and the legislative franchise given to appellee, also needs no evaluation of facts.It suffices
that there may be a conflict which may need to be reconciled, without regard to the factual backdrop
of the case.
The last issue deals with a legal question, because whether or not there is a prior written claim
for refund is no longer in dispute. Rather, the question revolves on whether the said requirement may
be dispensed with, which obviously is not a factual issue. [13]

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by the CA in its
Resolution dated December 16, 2004. Hence, the present recourse.

Issues

Petitioner submits the following issues for resolution:

I.
Whether or not the phrase in lieu of all taxes indicated in the franchise of the respondent appellee
(Section 8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the
petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court of
Appeals.[14]

Our Ruling

The second issue, being procedural in nature, shall be dealt with immediately. But there are other resultant issues
linked to the first.

I. The dismissal by the CA of petitioners appeal is in order because it raised purely legal issues,
namely:

1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall be
in lieu of all taxes in this franchise or earnings thereof, is absolutely excused from paying the
franchise tax imposed by appellants;

2) Whether appellants imposition of local franchise tax is a violation of appellees legislative franchise;
and

3) Whether one can do away with the requirement on prior written claim for refund. [15]

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other courts. There is a
question of law when the doubt or difference arises as to what the law is pertaining to a certain state of facts. [16]

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising only
questions of law is erroneous and shall be dismissed, issues of pure law not being within its jurisdiction.
[17]

Consequently, the dismissal by the CA of petitioners appeal was in order.

In the recent case of Sevilleno v. Carilo,[18] this Court ruled that the dismissal of the appeal of petitioner was
valid, considering the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong
mode of appeal. The appellate court held that since the issue being raised is whether the RTChas
jurisdiction over the subject matter of the case, which is a question of law, the appeal should have
been elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as
amended. Section 2, Rule 41 of the same Rules which governs appeals from judgments and final
orders of the RTC to the Court of Appeals, provides:
SEC. 2. Modes of appeal.
(a) Ordinary appeal. The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its original jurisdiction shall be taken
by filing a notice of appeal with the court which rendered the judgment or final
order appealed from and serving a copy thereof upon the adverse party. No
record on appeal shall be required except in special proceedings and other cases
of multiple or separate appeals where the law or these Rules so require. In such
cases, the record on appeal shall be filed and served in like manner.
(b) Petition for review. The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition
for review in accordance with Rule 42.
(c) Appeal by certiorari. In all cases where only questions of law are raised or
involved, the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the
rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal
may be made to the Court of Appeals by mere notice of appeal where the
appellant raises questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the
appellant raises only questions of law, the appeal must be taken to the Supreme
Court on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its appellate
jurisdiction, regardless of whether the appellant raises questions of fact,
questions of law, or mixed questions of fact and law, shall be brought to the Court
of Appeals by filing a petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the Court of Appeals involves the
jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a courts
jurisdiction over the subject matter of an action is conferred only by the Constitution or by
statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of
law. Consequently, issues which deal with the jurisdiction of a court over the subject matter of a case
are pure questions of law. As petitioners appeal solely involves a question of law, they should have
directly taken their appeal to this Court by filing a petition for review on certiorari under Rule 45, not
an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did not err in
holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners appeal. Section 2, Rule 50 of
the same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of
law shall be dismissed; and that an appeal erroneously taken to the Court of Appeals shall be
dismissed outright, x x x.[19] (Emphasis added)

However, to serve the demands of substantial justice and equity, the Court opts to relax procedural rules and
rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation,[20] this Court stated:

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. In Aguam v. Court of Appeals, the Court
explained:
The court has the discretion to dismiss or not to dismiss an appellants
appeal. It is a power conferred on the court, not a duty. The discretion must be a
sound one, to be exercised in accordance with the tenets of justice and fair play,
having in mind the circumstances obtaining in each case. Technicalities, however, must
be avoided. The law abhors technicalities that impede the cause of justice. The courts
primary duty is to render or dispense justice. A litigation is not a game of
technicalities. Lawsuits unlike duels are not to be won by a rapiers thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. Litigations must be
decided on their merits and not on technicality. Every party litigant must be afforded
the amplest opportunity for the proper and just determination of his cause, free from
the unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical
grounds is frowned upon where the policy of the court is to encourage hearings of
appeals on their merits and the rules of procedure ought not to be applied in a very
rigid, technical sense; rules of procedure are used only to help secure, not override
substantial justice. It is a far better and more prudent course of action for the court to
excuse a technical lapse and afford the parties a review of the case on appeal to attain
the ends of justice rather than dispose of the case on technicality and cause a grave
injustice to the parties, giving a false impression of speedy disposal of cases while
actually resulting in more delay, if not a miscarriage of justice. [21]

II. The in lieu of all taxes provision in its franchise does not exempt ABS-CBN from payment of
local franchise tax.

A. The present controversy essentially boils down to a dispute between the inherent taxing power of Congress and the
delegated authority to tax of local governments under the 1987 Constitution and effected under the LGC of 1991.

The power of the local government of Quezon City to impose franchise tax is based on Section 151 in relation to
Section 137 of the LGC, to wit:
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. x x x
xxxx
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 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. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can enact
legislation granting exemptions. This principle was upheld in City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc.[22] Said this Court:

This thus raises the question of whether or not the Citys Revenue Code pursuant to which the
city treasurer of Quezon City levied real property taxes against Bayantels real properties located within
the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only liable to pay the
same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its
franchise.
Bayantels posture is well-taken. While the system of local government taxation has changed
with the onset of the 1987 Constitution, the power of local government units to tax is still limited . As
we explained in Mactan Cebu International Airport Authority:
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue
of a valid delegation as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution. Under the latter, the exercise of the power may be
subject to such guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy. x x x
Clearly then, while a new slant on the subject of local taxation now prevails in the sense that
the former doctrine of local government units delegated power to tax had been effectively modified
with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation
remains essentially the same. For as the Court stressed in Mactan, the power to tax is [still] primarily
vested in the Congress.
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner
of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:
What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that municipal corporations do
not possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these powers. The power
of the legislative authority relative to the fiscal powers of local governments has been
reduced to the authority to impose limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of local autonomy. The important
legal effect of Section 5 is thus to reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must be within the
jurisdiction of the local unit to pass.
In net effect, the controversy presently before the Court involves, at bottom, a clash between
the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the
local governments delegated power to tax under the aegis of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real
properties within the citys territory and removed exemptions theretofore previously granted to, or
presently enjoyed by all persons, whether natural or juridical [x x x] there can really be no dispute
that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which
expressly provides that a province or city or municipality within the Metropolitan Manila Area may levy
an annual ad valorem tax on real property such as land, building, machinery, and other improvement
not hereinafter specifically exempted. Under this law, the Legislature highlighted its power to
thereafter exempt certain realties from the taxing power of local government units. An interpretation
denying Congress such power to exempt would reduce the phrase not hereinafter specifically
exempted as a pure jargon, without meaning whatsoever. Needless to state, such absurd situation is
unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this
Court has upheld the power of Congress to grant exemptions over the power of local government units
to impose taxes. There, the Court wrote:

Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant exemptions
to certain persons, pursuant to a declared national policy. The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations.[23] (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995, subsequent to the
effectivity of the LGC on January 1, 1992. Under it, ABS-CBNwas granted the franchise to install and operate radio and
television broadcasting stations in the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying 3%
franchise tax. It bears stressing, however, that payment of the percentage franchise tax shall be in lieu of all taxes on
the said franchise.[24]

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the
power of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly
provides that notwithstanding any exemption granted by any law or other special law, the City may impose a franchise
tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. As earlier discussed,
this Court in City Government of Quezon City v. Bayan Telecommunications, Inc. [25] sustained the power of Congress
to grant tax exemptions over and above the power of the local governments delegated power to tax.

B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains the in
lieu of all taxes provision, Congress intended to exemptABS-CBN from local franchise tax.

Petitioners argue that the in lieu of all taxes provision in ABS-CBNs franchise does not expressly exempt it from
payment of local franchise tax. They contend that a tax exemption cannot be created by mere implication and that
one who claims tax exemptions must be able to justify his claim by clearest grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing
authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption is the exception. [26] The burden of proof rests upon the
party claiming the exemption to prove that it is in fact covered by the exemption so claimed. [27]

The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to
minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers. [28] He who
claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt
him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must
be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that
exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot
be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is
the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and
unambiguous terms.[29]

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all gross
receipts of the radio/television business transacted under the franchise and the franchise tax shall be in lieu of all
taxes on the franchise or earnings thereof.

The in lieu of all taxes provision in the franchise of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal,
city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax
and income taxes under Title II of the NIRC. But whether the in lieu of all taxes provision would include exemption
from local tax is not unequivocal.

As adverted to earlier, the right to exemption from local franchise tax must be clearly established and cannot
be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the in
lieu of all taxes provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact
covered by the exemption so claimed. ABS-CBN miserably failed in this regard.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,[30] Manila Railroad v.
Rafferty,[31] Philippine Railway Co. v. Collector of Internal Revenue,[32] and Visayan Electric Co. v. David[33] to support
its claim that that the in lieu of all taxes clause includes exemption from all taxes.

However, a review of the foregoing case law reveals that the grantees respective franchises expressly exempt
them from municipal and provincial taxes. Said the Court inManila Railroad v. Rafferty:[34]
On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was
granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510) provides
that:
In consideration of the premises and of the granting of this concession or
franchise, there shall be paid by the grantee to the Philippine Government, annually,
for the period of thirty (30) years from the date hereof, an amount equal to one-half
(1/2) of one per cent of the gross earnings of the grantee in respect of the lines
covered hereby for the preceding year; after said period of thirty (30) years, and for
the fifty (50) years thereafter, the amount so to be paid annually shall be an amount
equal to one and one-half (1) per cent of such gross earnings for the preceding year;
and after such period of eighty (80) years, the percentage and amount so to be paid
annually by the grantee shall be fixed by the Philippine Government.
Such annual payments, when promptly and fully made by the grantee, shall be
in lieu of all taxes of every name and nature municipal, provincial or central upon its
capital stock, franchises, right of way, earnings, and all other property owned or
operated by the grantee under this concession or franchise. [35] (Underscoring supplied)

In the case under review, ABS-CBNs franchise did not embody an exemption similar to those in Carcar, Manila
Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether municipal, provincial, or national. In fine, since ABS-CBNfailed to
justify its claim for exemption from local franchise tax, by a grant expressed in terms too plain to be mistaken its
claim for exemption for local franchise tax must fail.

C. The in lieu of all taxes clause in the franchise of ABS-CBN has become functus officio with the abolition of
the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos.

In its decision dated January 20, 1999, the RTC held that pursuant to the in lieu of all taxes provision
contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the local franchise
tax. The RTC further pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross receipts
in lieu of all other taxes.

On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the grant
of ABS-CBNs franchise, the corporation should now be subject to VAT, instead of the 3% franchise tax.

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax under
Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. Any provision of general or special laws to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the
gross receipts from the business covered by the law granting the franchise, a tax in accordance with
the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three
(3%) percent
(c) On other franchises Five (5%) percent. (Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law, [36] took effect
and subjected to VAT those services rendered by radio and/or broadcasting stations. Section 3 of R.A. No. 7716
provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further
amended to read as follows:
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, as valueadded 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 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; x x
x 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; x x x (Emphasis supplied)

Notably, under the same law, telephone and/or telegraph systems, broadcasting stations and other franchise
grantees were omitted from the list of entities subject to franchise tax. The impression was that these entities were
subject to 10% VAT but not to franchise tax. Only the franchise tax on electric, gas and water utilities
remained.Section 12 of R.A. No. 7716 provides:

Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
SEC. 117. Tax on Franchises. Any provision of general or special law to the
contrary notwithstanding there shall be levied, assessed and collected in respect to all
franchises on electric, gas and water utilities a tax of two percent (2%) on the gross
receipts derived from the business covered by the law granting the franchise.
(Emphasis added)

Subsequently, R.A. No. 8241[37] took effect on January 1, 1997[38] containing more amendments to the NIRC.
Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the
option to choose between paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:
Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
Sec. 117. Tax on franchise. Any provision of general or special law to the
contrary, notwithstanding, there shall be levied, assessed and collected in respect to
allfranchises on radio and/or television broadcasting companies whose annual gross
receipts
of
the
preceding
year does
not
exceed
Ten
million
pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three
percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the
gross receipts derived from the business covered by the law granting the franchise:
Provided, however, That radio and television broadcasting companies referred to in
this section, shall have an option to be registered as a value-added tax payer and pay
the tax due thereon: Provided, further, That once the option is exercised, it shall not
be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were
subject to 10% VAT, pursuant to Section 102 of the NIRC.

On January 1, 1998, R.A. No. 8424 [39] was passed confirming the 10% VAT liability of radio and/or television
companies with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the
NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved
from January 1, 2006 to February 1, 2006.

In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the payment of
VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting
company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade
or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every
importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the

value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax
and can be passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is imposed
under Section 119 of the Tax Code and is a direct liability of the franchise grantee.

The clause in lieu of all taxes does not pertain to VAT or any other tax. It cannot apply when what is paid is a
tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts
exceeding ten million pesos has been abolished, the in lieu of all taxes clause has now become functus officio,
rendered inoperative.

In sum, ABS-CBNs claims for exemption must fail on twin grounds. First, the in lieu of all taxes clause in its
franchise failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the
jurisdiction from which the taxing power is withheld. Second, the clause has become functus officio because as the law
now stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The petition in the
trial court for refund of local franchise tax isDISMISSED.