G.R. No. L-29059 December 15, 1987
Collector
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June
21, 1961, as modified on appeal by the Supreme Court on February
27, 1965, the Commissioner of Internal Revenue was ordered to
refund to the Cebu Portland Cement Company the amount of P
359,408.98, representing overpayments of ad valorem taxes on
cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration
filed by both the petitioner and the private respondent, the latter moved
for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the
private respondent had an outstanding sales tax liability to which the
judgment debt had already been credited. In fact, it was stressed, there
was still a balance owing on the sales taxes in the amount of P
4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion,
holding that the alleged sales tax liability of the private respondent was
still being questioned and therefore could not be set-off against the
refund. 4
In his petition to review the said resolution, the Commissioner of
Internal Revenue claims that the refund should be charged against the
tax deficiency of the private respondent on the sales of cement under
Section 186 of the Tax Code. His position is that cement is a
manufactured and not a mineral product and therefore not exempt from
sales taxes. He adds that enforcement of the said tax deficiency was
properly effected through his power of distraint of personal property
under Sections 316 and 318 5 of the said Code and, moreover, the
collection of any national internal revenue tax may not be enjoined
under Section 305, 6 subject only to the exception prescribed in Rep.
Act No. 1125. 7 This is not applicable to the instant case. The petitioner
also denies that the sales tax assessments have already prescribed
because the prescriptive period should be counted from the filing of the
sales tax returns, which had not yet been done by the private
respondent.
For its part, the private respondent disclaims liability for the sales
taxes, on the ground that cement is not a manufactured product but a
mineral product. 8 As such, it was exempted from sales taxes under
Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299
on June 16, 1955, in accordance with Cebu Portland Cement Co. v.
Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio
Angeles declared that "before the effectivity of Rep. Act No. 1299,
amending Section 246 of the National Internal Revenue Code, cement
was taxable as a manufactured product under Section 186, in
connection with Section 194(4) of the said Code," thereby implying that
it was not considered a manufactured product afterwards. Also, the
alleged sales tax deficiency could not as yet be enforced against it
because the tax assessment was not yet final, the same being still
under protest and still to be definitely resolved on the merits. Besides,
the assessment had already prescribed, not having been made within
the reglementary five-year period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private
respondent for the reason that cement has always been considered a
manufactured product and not a mineral product. This matter was
extensively discussed and categorically resolved in Commissioner of
Internal Revenue v. Republic Cement Corporation, 11 decided on
August 10, 1983, where Justice Efren L. Plana, after an exhaustive
review of the pertinent cases, declared for a unanimous Court:
From all the foregoing cases, it is clear that
cement qua cement was never considered as a
mineral product within the meaning of Section 246
of the Tax Code, notwithstanding that at least 80%
of its components are minerals, for the simple
reason that cement is the product of
a manufacturing process and is no longer the
mineral product contemplated in the Tax Code
(i.e.; minerals subjected to simple treatments) for
the purpose of imposing the ad valorem tax.
What has apparently encouraged the herein
respondents to maintain their present posture is
the case of Cebu Portland Cement Co. v.
of Internal Revenue, L-20563, Oct. 29, 1968 (28
SCRA 789) penned by Justice Eugenio Angeles.
For some portions of that decision give the
impression that Republic Act No. 1299, which
amended Section 246, reclassified cement as a
mineral product that was not subject to sales tax.
...
xxx xxx xxx
After a careful study of the foregoing, we conclude
that reliance on the decision penned by Justice
Angeles is misplaced. The said decision is no
authority for the proposition that after the
enactment of Republic Act No. 1299 in 1955
(defining mineral product as things with at least
80% mineral content), cement became a 'mineral
product," as distinguished from a "manufactured
product," and therefore ceased to be subject to
sales tax. It was not necessary for the Court to so
rule. It was enough for the Court to say in effect
that even assuming Republic Act No. 1299 had
reclassified cement was a mineral product, the
reclassification could not be given retrospective
application (so as to justify the refund of sales
taxes paid before Republic Act 1299 was adopted)
because laws operate prospectively only, unless
the legislative intent to the contrary is manifest,
which was not so in the case of Republic Act
1266. [The situation would have been different if
the Court instead had ruled in favor of refund, in
which case it would have been absolutely
necessary (1) to make an unconditional ruling that
Republic Act 1299 re-classified cement as a
mineral product (not subject to sales tax), and (2)
to declare the law retroactive, as a basis for
granting refund of sales tax paid before Republic
Act 1299.]
In any event, we overrule the CEPOC decision of
October 29, 1968 (G.R. No. L-20563) insofar as its
pronouncements or any implication therefrom
conflict with the instant decision.
The above views were reiterated in the resolution 12 denying
reconsideration of the said decision, thus:
The nature of cement as a "manufactured product"
(rather than a "mineral product") is well-settled.
The issue has repeatedly presented itself as a
threshold question for determining the basis for
computing the ad valorem mining tax to be paid by
cement Companies. No pronouncement was
made in these cases that as a "manufactured
product" cement is subject to sales tax because
this was not at issue.
The decision sought to be reconsidered here
referred to the legislative history of Republic Act
No. 1299 which introduced a definition of the
terms "mineral" and "mineral products" in Sec. 246
of the Tax Code. Given the legislative intent, the
holding in the CEPOC case (G.R. No. L-20563)
that cement was subject to sales tax prior to the
effectivity f Republic Act No. 1299 cannot be
construed to mean that, after the law took effect,
cement ceased to be so subject to the tax. To
erase any and all misconceptions that may have
been spawned by reliance on the case of Cebu
Portland Cement Co. v. Collector of Internal
Revenue, L-20563, October 29, 1968 (28 SCRA
789) penned by Justice Eugenio Angeles, the
Court has expressly overruled it insofar as it may
conflict with the decision of August 10, 1983, now
subject of these motions for reconsideration.
On the question of prescription, the private respondent claims that the
five-year reglementary period for the assessment of its tax liability
started from the time it filed its gross sales returns on June 30, 1962.
Hence, the assessment for sales taxes made on January 16, 1968 and
March 4, 1968, were already out of time. We disagree. This contention
must fail for what CEPOC filed was not the sales returns required in
Section 183(n) but the ad valorem tax returns required under Section
245 of the Tax Code. As Justice Irene R. Cortes emphasized in the
aforestated resolution:
In order to avail itself of the benefits of the five-
year prescription period under Section 331 of the
 Tax Code, the taxpayer should have filed the
required return for the tax involved, that is, a sales
tax return. (Butuan Sawmill, Inc. v. CTA, et al.,
G.R. No. L-21516, April 29, 1966, 16 SCRA 277).
Thus CEPOC should have filed sales tax returns
of its gross sales for the subject periods. Both
parties admit that returns were made for the ad
valorem mining tax. CEPOC argues that said
returns contain the information necessary for the
assessment of the sales tax. The Commissioner
does not consider such returns as compliance with
the requirement for the filing of tax returns so as to
start the running of the five-year prescriptive
period.

We agree with the Commissioner. It has been held

in Butuan Sawmill Inc. v. CTA, supra, that the filing
of an income tax return cannot be considered as
substantial compliance with the requirement of
filing sales tax returns, in the same way that an
income tax return cannot be considered as a
return for compensating tax for the purpose of
computing the period of prescription under Sec.
331. (Citing Bisaya Land Transportation Co., Inc.
v. Collector of Internal Revenue, G.R. Nos. L-
12100 and L-11812, May 29, 1959). There being
no sales tax returns filed by CEPOC, the statute of
stations in Sec. 331 did not begin to run against
the government. The assessment made by the
Commissioner in 1968 on CEPOC's cement sales
during the period from July 1, 1959 to December
31, 1960 is not barred by the five-year prescriptive
period. Absent a return or when the return is false
or fraudulent, the applicable period is ten (10)
days from the discovery of the fraud, falsity or
omission. The question in this case is: When was
CEPOC's omission to file tha return deemed
discovered by the government, so as to start the
running of said period? 13

The argument that the assessment cannot as yet be enforced because

it is still being contested loses sight of the urgency of the need to
collect taxes as "the lifeblood of the government." If the payment of
taxes could be postponed by simply questioning their validity, the
machinery of the state would grind to a halt and all government
functions would be paralyzed. That is the reason why, save for the
exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain

collection of tax. No court shall have authority
to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge
imposed by this Code.

It goes without saying that this injunction is available not only when the
assessment is already being questioned in a court of justice but more
so if, as in the instant case, the challenge to the assessment is still-and
only-on the administrative level. There is all the more reason to apply
the rule here because it appears that even after crediting of the refund
against the tax deficiency, a balance of more than P 4 million is still
due from the private respondent.

To require the petitioner to actually refund to the private respondent

the amount of the judgment debt, which he will later have the right to
distrain for payment of its sales tax liability is in our view an Idle ritual.
We hold that the respondent Court of Tax Appeals erred in ordering
such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April

22, 1968, in CTA Case No. 786 is SET ASIDE, without any
pronouncement as to costs.

SO ORDERED.
G.R. Nos. 89898-99 October 1, 1990
MUNICIPALITY OF MAKATI, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON.
SALVADOR P. DE GUZMAN, JR., as Judge RTC of Makati,
Branch CXLII ADMIRAL FINANCE CREDITORS
CONSORTIUM, INC., and SHERIFF SILVINO R.
PASTRANA, respondents.
RESOLUTION
CORTS, J.:
The present petition for review is an off-shoot of expropriation proceedings
initiated by petitioner Municipality of Makati against private respondent
Admiral Finance Creditors Consortium, Inc., Home Building System &
Realty Corporation and one Arceli P. Jo, involving a parcel of land and
improvements thereon located at Mayapis St., San Antonio Village, Makati
and registered in the name of Arceli P. Jo under TCT No. S-5499.
It appears that the action for eminent domain was filed on May
20, 1986, docketed as Civil Case No. 13699. Attached to
petitioner's complaint was a certification that a bank account
(Account No. S/A 265-537154-3) had been opened with the
PNB Buendia Branch under petitioner's name containing the
sum of P417,510.00, made pursuant to the provisions of Pres.
Decree No. 42. After due hearing where the parties presented
their respective appraisal reports regarding the value of the
property, respondent RTC judge rendered a decision on June
4, 1987, fixing the appraised value of the property at
P5,291,666.00, and ordering petitioner to pay this amount
minus the advanced payment of P338,160.00 which was
earlier released to private respondent.
After this decision became final and executory, private
respondent moved for the issuance of a writ of execution. This
motion was granted by respondent RTC judge. After issuance
of the writ of execution, a Notice of Garnishment dated January
14, 1988 was served by respondent sheriff Silvino R. Pastrana
upon the manager of the PNB Buendia Branch. However,
respondent sheriff was informed that a "hold code" was placed
on the account of petitioner. As a result of this, private
respondent filed a motion dated January 27, 1988 praying that
an order be issued directing the bank to deliver to respondent
sheriff the amount equivalent to the unpaid balance due under
the RTC decision dated June 4, 1987.
Petitioner filed a motion to lift the garnishment, on the ground
that the manner of payment of the expropriation amount should
be done in installments which the respondent RTC judge failed
to state in his decision. Private respondent filed its opposition
to the motion.
Pending resolution of the above motions, petitioner filed on
July 20, 1988 a "Manifestation" informing the court that private
respondent was no longer the true and lawful owner of the
subject property because a new title over the property had
been registered in the name of Philippine Savings Bank, Inc.
(PSB) Respondent RTC judge issued an order requiring PSB
to make available the documents pertaining to its transactions
over the subject property, and the PNB Buendia Branch to
reveal the amount in petitioner's account which was garnished
by respondent sheriff. In compliance with this order, PSB filed
a manifestation informing the court that it had consolidated its
ownership over the property as mortgagee/purchaser at an
extrajudicial foreclosure sale held on April 20, 1987. After
several conferences, PSB and private respondent entered into
a compromise agreement whereby they agreed to divide
between themselves the compensation due from the
expropriation proceedings.
Respondent trial judge subsequently issued an order dated
September 8, 1988 which: (1) approved the compromise
agreement; (2) ordered PNB Buendia Branch to immediately
release to PSB the sum of P4,953,506.45 which corresponds
to the balance of the appraised value of the subject property
under the RTC decision dated June 4, 1987, from the
garnished account of petitioner; and, (3) ordered PSB and
private respondent to execute the necessary deed of
conveyance over the subject property in favor of petitioner.
Petitioner's motion to lift the garnishment was denied.
Petitioner filed a motion for reconsideration, which was duly
opposed by private respondent. On the other hand, for failure
of the manager of the PNB Buendia Branch to comply with the
order dated September 8, 1988, private respondent filed two
succeeding motions to require the bank manager to show
cause why he should not be held in contempt of court. During
the hearings conducted for the above motions, the general
manager of the PNB Buendia Branch, a Mr. Antonio Bautista,
informed the court that he was still waiting for proper
authorization from the PNB head office enabling him to make a
disbursement for the amount so ordered. For its part, petitioner
contended that its funds at the PNB Buendia Branch could
neither be garnished nor levied upon execution, for to do so
would result in the disbursement of public funds without the
proper appropriation required under the law, citing the case
of Republic of the Philippines v. Palacio [G.R. No. L-20322,
May 29, 1968, 23 SCRA 899].
Respondent trial judge issued an order dated December 21,
1988 denying petitioner's motion for reconsideration on the
ground that the doctrine enunciated in Republic v. Palacio did
not apply to the case because petitioner's PNB Account No.
S/A 265-537154-3 was an account specifically opened for the
expropriation proceedings of the subject property pursuant to
Pres. Decree No. 42. Respondent RTC judge likewise declared
Mr. Antonio Bautista guilty of contempt of court for his
inexcusable refusal to obey the order dated September 8,
1988, and thus ordered his arrest and detention until his
compliance with the said order.
Petitioner and the bank manager of PNB Buendia Branch then
filed separate petitions for certiorari with the Court of Appeals,
which were eventually consolidated. In a decision promulgated
on June 28, 1989, the Court of Appeals dismissed both
petitions for lack of merit, sustained the jurisdiction of
respondent RTC judge over the funds contained in petitioner's
PNB Account No. 265-537154-3, and affirmed his authority to
levy on such funds.
Its motion for reconsideration having been denied by the Court
of Appeals, petitioner now files the present petition for review
with prayer for preliminary injunction.
On November 20, 1989, the Court resolved to issue a
temporary restraining order enjoining respondent RTC judge,
respondent sheriff, and their representatives, from enforcing
and/or carrying out the RTC order dated December 21, 1988
and the writ of garnishment issued pursuant thereto. Private
respondent then filed its comment to the petition, while
petitioner filed its reply.
Petitioner not only reiterates the arguments adduced in its
petition before the Court of Appeals, but also alleges for the
first time that it has actually two accounts with the PNB
Buendia Branch, to wit:
xxx xxx xxx
(1) Account No. S/A 265-537154-3
exclusively for the expropriation of the
subject property, with an outstanding
balance of P99,743.94.
(2) Account No. S/A 263-530850-7 for
statutory obligations and other purposes of
the municipal government, with a balance of
P170,098,421.72, as of July 12, 1989.
xxx xxx xxx
[Petition, pp. 6-7; Rollo, pp. 11-12.]
Because the petitioner has belatedly alleged only in this Court
the existence of two bank accounts, it may fairly be asked
whether the second account was opened only for the purpose
of undermining the legal basis of the assailed orders of
respondent RTC judge and the decision of the Court of of his land while being made to wait for a
Appeals, and strengthening its reliance on the doctrine that decade or more before actually receiving the
public funds are exempted from garnishment or execution as amount necessary to cope with his loss
enunciated in Republic v. Palacio [supra.] At any rate, the [Cosculluela v. The Honorable Court of
Court will give petitioner the benefit of the doubt, and proceed Appeals, G.R. No. 77765, August 15, 1988,
to resolve the principal issues presented based on the factual 164 SCRA 393, 400. See also Provincial
circumstances thus alleged by petitioner. Government of Sorsogon v. Vda. de
Villaroya, G.R. No. 64037, August 27, 1987,
Admitting that its PNB Account No. S/A 265-537154-3 was 153 SCRA 291].
specifically opened for expropriation proceedings it had
initiated over the subject property, petitioner poses no The State's power of eminent domain should be exercised
objection to the garnishment or the levy under execution of the within the bounds of fair play and justice. In the case at bar,
funds deposited therein amounting to P99,743.94. However, it considering that valuable property has been taken, the
is petitioner's main contention that inasmuch as the assailed compensation to be paid fixed and the municipality is in full
orders of respondent RTC judge involved the net amount of possession and utilizing the property for public purpose, for
P4,965,506.45, the funds garnished by respondent sheriff in three (3) years, the Court finds that the municipality has had
excess of P99,743.94, which are public funds earmarked for more than reasonable time to pay full compensation.
the municipal government's other statutory obligations, are
exempted from execution without the proper appropriation WHEREFORE, the Court Resolved to ORDER petitioner
required under the law. Municipality of Makati to immediately pay Philippine Savings
Bank, Inc. and private respondent the amount of
There is merit in this contention. The funds deposited in the P4,953,506.45. Petitioner is hereby required to submit to this
second PNB Account No. S/A 263-530850-7 are public funds Court a report of its compliance with the foregoing order within
of the municipal government. In this jurisdiction, well-settled is a non-extendible period of SIXTY (60) DAYS from the date of
the rule that public funds are not subject to levy and execution, receipt of this resolution.
unless otherwise provided for by statute [Republic v.
Palacio, supra.; The Commissioner of Public Highways v. San The order of respondent RTC judge dated December 21, 1988,
Diego, G.R. No. L-30098, February 18, 1970, 31 SCRA 616]. which was rendered in Civil Case No. 13699, is SET ASIDE
More particularly, the properties of a municipality, whether real and the temporary restraining order issued by the Court on
or personal, which are necessary for public use cannot be November 20, 1989 is MADE PERMANENT.
attached and sold at execution sale to satisfy a money
judgment against the municipality. Municipal revenues derived
from taxes, licenses and market fees, and which are intended SO ORDERED.
primarily and exclusively for the purpose of financing the
governmental activities and functions of the municipality, are
exempt from execution [See Viuda De Tan Toco v. The
Municipal Council of Iloilo, 49 Phil. 52 (1926): The Municipality
of Paoay, Ilocos Norte v. Manaois, 86 Phil. 629 (1950);
Municipality of San Miguel, Bulacan v. Fernandez, G.R. No.
61744, June 25, 1984, 130 SCRA 56]. The foregoing rule finds
application in the case at bar. Absent a showing that the
municipal council of Makati has passed an ordinance
appropriating from its public funds an amount corresponding to
the balance due under the RTC decision dated June 4, 1987,
less the sum of P99,743.94 deposited in Account No. S/A 265-
537154-3, no levy under execution may be validly effected on
the public funds of petitioner deposited in Account No. S/A
263-530850-7.

Nevertheless, this is not to say that private respondent and

PSB are left with no legal recourse. Where a municipality fails
or refuses, without justifiable reason, to effect payment of a
final money judgment rendered against it, the claimant may
avail of the remedy of mandamus in order to compel the
enactment and approval of the necessary appropriation
ordinance, and the corresponding disbursement of municipal
funds therefor [See Viuda De Tan Toco v. The Municipal
Council of Iloilo, supra; Baldivia v. Lota, 107 Phil. 1099 (1960);
Yuviengco v. Gonzales, 108 Phil. 247 (1960)].

In the case at bar, the validity of the RTC decision dated June
4, 1987 is not disputed by petitioner. No appeal was taken
therefrom. For three years now, petitioner has enjoyed
possession and use of the subject property notwithstanding its
inexcusable failure to comply with its legal obligation to pay just
compensation. Petitioner has benefited from its possession of
the property since the same has been the site of Makati West
High School since the school year 1986-1987. This Court will
not condone petitioner's blatant refusal to settle its legal
obligation arising from expropriation proceedings it had in fact
initiated. It cannot be over-emphasized that, within the context
of the State's inherent power of eminent domain,

. . . [j]ust compensation means not only the

correct determination of the amount to be
paid to the owner of the land but also the
payment of the land within a reasonable time
from its taking. Without prompt payment,
compensation cannot be considered "just"
for the property owner is made to suffer the
consequence of being immediately deprived
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance On the other hand, such collection should
be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good,
may be achieved.
The main issue in this case is whether or not the Collector of
Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private
respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from
the petitioner assessing it in the total amount of P83,183.85 as
delinquency income taxes for the years 1958 and 1959. On 1 from this commission that the P75,000.00 promotional fees
January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same
day in the office of the petitioner. On March 12, 1965, a
2
warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr.,
who refused to receive it on the ground of the pending
protest. A search of the protest in the dockets of the case
3
proved fruitless. Atty. Guevara produced his file copy and gave
a photostat to BIR agent Ramon Reyes, who deferred service
of the warrant. On April 7, 1965, Atty. Guevara was finally
4
informed that the BIR was not taking any action on the protest
and it was only then that he accepted the warrant of distraint
and levy earlier sought to be served. Sixteen days later, on
5
April 23, 1965, Algue filed a petition for review of the decision
of the Commissioner of Internal Revenue with the Court of Tax
Appeals. 6
The above chronology shows that the petition was filed
seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or ruling
challenged. It is true that as a rule the warrant of distraint and
7
levy is "proof of the finality of the assessment" and renders 8
hopeless a request for reconsideration," being "tantamount to
9
an outright denial thereof and makes the said request deemed
rejected." But there is a special circumstance in the case at
10
bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter
of protest. This was apparently not taken into account before
the warrant of distraint and levy was issued; indeed, such
protest could not be located in the office of the petitioner. It
was only after Atty. Guevara gave the BIR a copy of the protest
that it was, if at all, considered by the tax authorities. During
the intervening period, the warrant was premature and could
therefore not be served.
As the Court of Tax Appeals correctly noted," the protest filed
11
by private respondent was not pro forma and was based on
strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment
was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of
the said protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965, only 20
days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of
P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The
Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid
by the private respondent for actual services rendered. The
payment was in the form of promotional fees. These were
collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.
Parenthetically, it may be observed that the petitioner had
Originally claimed these promotional fees to be personal
holding company income but later conformed to the decision
12
of the respondent court rejecting this assertion. In fact, as the
13
said court found, the amount was earned through the joint
efforts of the persons among whom it was distributed It has
been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto
Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith,
O'Farell, and Pablo Sanchez, worked for the formation of the
Vegetable Oil Investment Corporation, inducing other persons
to invest in it. Ultimately, after its incorporation largely through
14
the promotion of the said persons, this new corporation
purchased the PSEDC properties. For this sale, Algue
15
received as agent a commission of P126,000.00, and it was
were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their
respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon. The Court of Tax
17
Appeals also found, after examining the evidence, that no
distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious
because most of the payees are members of the same family
in control of Algue. It is argued that no indication was made as
to how such payments were made, whether by check or in
cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an
imaginary deduction.
We find that these suspicions were adequately met by the
private respondent when its President, Alberto Guevara, and
the accountant, Cecilia V. de Jesus, testified that the payments
were not made in one lump sum but periodically and in
different amounts as each payee's need arose. It should be 19
remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance
of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up
the total of P75,000.00. Admittedly, everything seemed to be
20
informal. This arrangement was understandable, however, in
view of the close relationship among the persons in the family
corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission paid
by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. After deducting the said fees,
21
Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering
that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following
provision of the Tax Code:
SEC. 30. Deductions from gross income.--In
computing net income there shall be allowed
as deductions
 (a) Expenses:
(1) In general.--All the ordinary and
necessary expenses paid or incurred during
the taxable year in carrying on any trade or
business, including a reasonable allowance
for salaries or other compensation for
personal services actually rendered; ...22
and Revenue Regulations No. 2, Section 70 (1), reading as
follows:
and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in
his tracks if the taxpayer can demonstrate, as it has here, that
the law has not been observed.
We hold that the appeal of the private respondent from the
decision of the petitioner was filed on time with the respondent
court in accordance with Rep. Act No. 1125. And we also find
that the claimed deduction by the private respondent was
permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.

SEC. 70. Compensation for personal ACCORDINGLY, the appealed decision of the Court of Tax
services.--Among the ordinary and Appeals is AFFIRMED in toto, without costs.
necessary expenses paid or incurred in
carrying on any trade or business may be SO ORDERED.
included a reasonable allowance for salaries
or other compensation for personal services
actually rendered. The test of deductibility in
the case of compensation payments is
whether they are reasonable and are, in fact,
payments purely for service. This test and
deductibility in the case of compensation
payments is whether they are reasonable
and are, in fact, payments purely for service.
This test and its practical application may be
further stated and illustrated as follows:

Any amount paid in the form of

compensation, but not in fact as the
purchase price of services, is not deductible.
(a) An ostensible salary paid by a
corporation may be a distribution of a
dividend on stock. This is likely to occur in
the case of a corporation having few
stockholders, Practically all of whom draw
salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar
services, and the excessive payment
correspond or bear a close relationship to
the stockholdings of the officers of
employees, it would seem likely that the
salaries are not paid wholly for services
rendered, but the excessive payments are a
distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No.
18, 325.)

It is worth noting at this point that most of the payees were not
in the regular employ of Algue nor were they its controlling
stockholders. 23

The Solicitor General is correct when he says that the burden

is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus
has been discharged satisfactorily. The private respondent has
proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in
an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat
and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society.

Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to
must contribute his share in the running of the government.
The government for its part, is expected to respond in the form
of tangible and intangible benefits intended to improve the lives
of the people and enhance their moral and material values.
This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method
of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of

taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain
G.R. No. 122480 April 12, 2000 of P297,492.00 will be applied as tax
credit to the succeeding taxable year.
BPI-FAMILY SAVINGS BANK, Inc., petitioner,
vs. On October 11, 1990, petitioner filed a
COURT OF APPEALS, COURT OF TAX APPEALS and the written claim for refund in the amount of
COMMISSIONER OF INTERNAL REVENUE,respondents. P112,491.00 with the respondent
Commissioner of Internal Revenue alleging
PANGANIBAN, J.: that it did not apply the 1989 refundable
amount of P297,492.00 (including
P112,491.00) to its 1990 Annual Income Tax
If the State expects its taxpayers to observe fairness and Return or other tax liabilities due to the
honesty in paying their taxes, so must it apply the same alleged business losses it incurred for the
standard against itself in refunding excess payments. When it same year.
is undisputed that a taxpayer is entitled to a refund, the State
should not invoke technicalities to keep money not belonging
to it. No one, not even the State, should enrich oneself at the Without waiting for respondent
expense of another. Commissioner of Internal Revenue to act on
the claim for refund, petitioner filed a petition
for review with respondent Court of Tax
The Case Appeals, seeking the refund of the amount
of P112,491.00.
Before us is a Petition for Review assailing the March 31, 1995
Decision of the Court of Appeals (CA) in CA-GR SP No.
1
The respondent Court of Tax Appeals
34240, which affirmed the December 24, 1993 Decision of the2
dismissed petitioner's petition on the ground
Court of Tax Appeals (CTA). The CA disposed as follows: that petitioner failed to present as evidence
its corporate Annual Income Tax Return for
WHEREFORE, foregoing premises considered, the 1990 to establish the fact that petitioner had
petition is hereby DISMISSED for lack of merit. 3
not yet credited the amount of P297,492.00
(inclusive of the amount P112,491.00 which
On the other hand, the dispositive portion of the CTA Decision is the subject of the present controversy) to
affirmed by the CA reads as follows: its 1990 income tax liability.

WHEREFORE, in [view of] all the foregoing, Petitioner filed a motion for reconsideration,
Petitioner's claim for refund is hereby DENIED and however, the same was denied by
this Petition for Review is DISMISSED for lack of respondent court in its Resolution dated May
merit.4 6, 1994. 6

Also assailed is the November 8, 1995 CA Resolution denying

5 As earlier noted, the CA affirmed the CTA. Hence,
reconsideration. this Petition.
7

The Facts Ruling of the Court of Appeals

The facts of this case were summarized by the CA in this wise: In affirming the CTA, the Court of Appeals ruled as
follows:

This case involves a claim for tax refund in the

amount of P112,491.00 representing petitioner's tax It is incumbent upon the petitioner to show
withheld for the year 1989. proof that it has not credited to its 1990
Annual income Tax Return, the amount of
P297,492.00 (including P112,491.00), so as
In its Corporate Annual Income Tax Return for the to refute its previous declaration in the 1989
year 1989, the following items are reflected: Income Tax Return that the said amount will
be applied as a tax credit in the succeeding
Income P1,017,931,831.00 year of 1990. Having failed to submit such
requirement, there is no basis to grant the
claim for refund. . . .
Deductions P1,026,218,791.00

Tax refunds are in the nature of tax

Net Income (Loss) (P8,286,960.00)
exemptions. As such, they are regarded as
in derogation of sovereign authority and to
Taxable Income (Loss) (P8,286,960.00) be construed strictissimi juris against the
person or entity claiming the exemption. In
Less: other words, the burden of proof rests upon
the taxpayer to establish by sufficient and
competent evidence its entitlement to the
1988 Tax Credit P185,001.00
claim for refund. 8

1989 Tax Credit P112,491.00

Issue

TOTAL AMOUNT P297,492.00

In their Memorandum, respondents identify the issue in this
wise:
REFUNDABLE
The sole issue to be resolved is whether or not
It appears from the foregoing 1989 Income petitioner is entitled to the refund of P112,491.90,
Tax Return that petitioner had a total representing excess creditable withholding tax paid
refundable amount of P297,492 inclusive of for the taxable year 1989. 9

the P112,491.00 being claimed as tax refund

in the present case. However, petitioner
The Court's Ruling
declared in the same 1989 Income Tax
Return that the said total refundable amount
The Petition is meritorious.
 Main Issue:
Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for
the year 1989 and was thus entitled to a refund amounting to
P112,491. Pursuant to Section 69 of the 1986 Tax Code
10
which states that a corporation entitled to a refund may opt
either (1) to obtain such refund or (2) to credit said amount for
the succeeding taxable year, petitioner indicated in its 1989
Income Tax Return that it would apply the said amount as a tax
credit for the succeeding taxable year, 1990. Subsequently,
petitioner informed the Bureau of Internal Revenue (BIR) that it
would claim the amount as a tax refund, instead of applying it
as a tax credit. When no action from the BIR was forthcoming,
petitioner filed its claim with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund.
Since petitioner declared in its 1989 Income Tax Return that it
would apply the excess withholding tax as a tax credit for the
following year, the Tax Court held that petitioner was
presumed to have done so. The CTA and the CA ruled that
petitioner failed to overcome this presumption because it did
not present its 1990 Return, which would have shown that the
amount in dispute was not applied as a tax credit. Hence, the
CA concluded that petitioner was not entitled to a tax refund.
We disagree with the Court of Appeals. As a rule, the factual
findings of the appellate court are binding on this Court. This
rule, however, does not apply where, inter alia, 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. This case is one such
11
exception.
In the first place, petitioner presented evidence to prove its
claim that it did not apply the amount as a tax credit. During the
trial before the CTA, Ms. Yolanda Esmundo, the manager of
petitioner's accounting department, testified to this fact. It
likewise presented its claim for refund and a certification issued
by Mr. Gil Lopez, petitioner's vice-president, stating that the
amount of P112,491 "has not been and/or will not be
automatically credited/offset against any succeeding quarters'
income tax liabilities for the rest of the calendar year ending
December 31, 1990." Also presented were the quarterly
returns for the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to
controvert petitioner's claim. In fact, it presented no evidence at
all. Because it ought to know the tax records of all taxpayers,
the CIR could have easily disproved petitioner's claim. To
repeat, it did not do so.
More important, a copy of the Final Adjustment Return for 1990
was attached to petitioner's Motion for Reconsideration filed
before the CTA. A final adjustment return shows whether a
12
corporation incurred a loss or gained a profit during the taxable
year. In this case, that Return clearly showed that petitioner
incurred P52,480,173 as net loss in 1990. Clearly, it could not
have applied the amount in dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return.
It did not even file an opposition to petitioner's Motion and the
1990 Final Adjustment Return attached thereto. In denying the
Motion for Reconsideration, however, the CTA ignored the said
Return. In the same vein, the CA did not pass upon that
significant document.
True, strict procedural rules generally frown upon the
submission of the Return after the trial. The law creating the
1wphi 1
Court of Tax Appeals, however, specifically provides that
proceedings before it "shall not be governed strictly by the
technical rules of evidence." The paramount consideration
13
remains the ascertainment of truth. Verily, the quest for orderly
presentation of issues is not an absolute. It should not bar
courts from considering undisputed facts to arrive at a just
determination of a controversy.
In the present case, the Return attached to the Motion for
Reconsideration clearly showed that petitioner suffered a net
loss in 1990. Contrary to the holding of the CA and the CTA,
petitioner could not have applied the amount as a tax credit. In
failing to consider the said Return, as well as the other
documentary evidence presented during the trial, the appellate
court committed a reversible error.
It should be stressed that the rationale of the rules of
procedure is to secure a just determination of every action.
They are tools designed to facilitate the attainment of
justice. But there can be no just determination of the present
14
action if we ignore, on grounds of strict technicality, the Return
submitted before the CTA and even before this Court. To 15
repeat, the undisputed fact is that petitioner suffered a net loss
in 1990; accordingly, it incurred no tax liability to which the tax
credit could be applied. Consequently, there is no reason for
the BIR and this Court to withhold the tax refund which
rightfully belongs to the petitioner.
Public respondents maintain that what was attached to
petitioner's Motion for Reconsideration was not the final
adjustment Return, but petitioner's first two quarterly returns for
1990. This allegation is wrong. An examination of the records
16
shows that the 1990 Final Adjustment Return was attached to
the Motion for Reconsideration. On the other hand, the two
quarterly returns for 1990 mentioned by respondent were in
fact attached to the Petition for Review filed before the CTA.
Indeed, to rebut respondents' specific contention, petitioner
submitted before us its Surrejoinder, to which was attached the
Motion for Reconsideration and Exhibit "A" thereof, the Final
Adjustment Return for 1990. 17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done
before the CTA, to a Decision rendered by the Tax Court in
CTA Case No. 4897, involving its claim for refund for the year
1990. In that case, the Tax Court held that "petitioner suffered
a net loss for the taxable year 1990 . . . ." Respondent,
18
however, urges this Court not to take judicial notice of the said
case. 19
As a rule, "courts are not authorized to take judicial notice of
the contents of the records of other cases, even when such
cases have been tried or are pending in the same court, and
notwithstanding the fact that both cases may have been heard
or are actually pending before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may
take judicial notice of matters ought to be known to judges
because of their judicial functions. In this case, the Court notes
that a copy of the Decision in CTA Case No. 4897 was
attached to the Petition for Review filed before this Court.
Significantly, respondents do not claim at all that the said
Decision was fraudulent or nonexistent. Indeed, they do not
even dispute the contents of the said Decision, claiming merely
that the Court cannot take judicial notice thereof.
To our mind, respondents' reasoning underscores the
weakness of their case. For if they had really believed that
petitioner is not entitled to a tax refund, they could have easily
proved that it did not suffer any loss in 1990. Indeed, it is
noteworthy that respondents opted not to assail the fact
appearing therein that petitioner suffered a net loss in 1990
in the same way that it refused to controvert the same fact
established by petitioner's other documentary exhibits.
In any event, the Decision in CTA Case No. 4897 is not the
sole basis of petitioner's case. It is merely one more bit of
information showing the stark truth: petitioner did not use its
1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of
tax exemptions and are to be construed strictissimi
juris against the claimant. Under the facts of this case, we hold
that petitioner has established its claim. Petitioner may have
failed to strictly comply with the rules of procedure; it may have
even been negligent. These circumstances, however, should
not compel the Court to disregard this cold, undisputed fact:
that petitioner suffered a net loss in 1990, and that it could not
have applied the amount claimed as tax credits.

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 and thereby enrich itself at the expense of its
law-abiding citizens. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding excess
payments of such taxes. Indeed, the State must lead by its
own example of honor, dignity and uprightness.

WHEREFORE, the Petition is hereby GRANTED and the

assailed Decision and Resolution of the Court of Appeals
REVERSED and SET ASIDE. The Commissioner of Internal
Revenue is ordered to refund to petitioner the amount of
P112,491 as excess creditable taxes paid in 1989. No costs. 1wphi1.nt

SO ORDERED.
G.R. No. L-68252 May 26, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT
STEAMSHIP AGENCIES INC., and COURT OF TAX
APPEALS, respondents.
PUNO, J.:
For resolution is whether or not private respondent Tokyo
Shipping Co. Ltd., is entitled to a refund or tax credit for
amounts representing pre-payment of income and common
carrier's taxes under the National Internal Revenue Code,
section 24 (b) (2), as amended. 1
Private respondent is a foreign corporation represented in the
Philippines by Soriamont Steamship Agencies, Incorporated. It
owns and operates tramper vessel M/V Gardenia. In
December 1980, NASUTRA chartered M/V Gardenia to load
2
16,500 metric tons of raw sugar in the Philippines. On
3
December 23, 1980, Mr. Edilberto Lising, the operations
supervisor of Soriamont Agency, paid the required income and
4
common carrier's taxes in the respective sums of FIFTY-NINE
THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and
SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-
SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS
(P47,619.00), or a total of ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and
SEVENTY-FIVE CENTAVOS (P107,142.75) based on the
expected gross receipts of the vessel. Upon arriving, however,
5
at Guimaras Port of Iloilo, the vessel found no sugar for
loading. On January 10, 1981, NASUTRA and private
respondent's agent mutually agreed to have the vessel sail for
Japan without any cargo.
Claiming the pre-payment of income and common carrier's
taxes as erroneous since no receipt was realized from the
charter agreement, private respondent instituted a claim for tax
credit or refund of the sum ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and
SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner
Commissioner of Internal Revenue on March 23, 1981.
Petitioner failed to act promptly on the claim, hence, on May
14, 1981, private respondent filed a petition for review before
6
public respondent Court of Tax Appeals.
Petitioner contested the petition. As special and affirmative
defenses, it alleged the following: that taxes are presumed to
have been collected in accordance with law; that in an action
for refund, the burden of proof is upon the taxpayer to show
that taxes are erroneously or illegally collected, and the
taxpayer's failure to sustain said burden is fatal to the action for
refund; and that claims for refund are construed strictly against
tax claimants.7
After trial, respondent tax court decided in favor of the private
respondent. It held:
It has been shown in this case that 1) the
petitioner has complied with the mentioned
statutory requirement by having filed a
written claim for refund within the two-year
period from date of payment; 2) the
respondent has not issued any deficiency
assessment nor disputed the correctness of
the tax returns and the corresponding
amounts of prepaid income and percentage
taxes; and 3) the chartered vessel sailed out
of the Philippine port with absolutely no
cargo laden on board as cleared and
certified by the Customs authorities;
nonetheless 4) respondent's apparent bit of
reluctance in validating the legal merit of the
claim, by and large, is tacked upon the
"examiner who is investigating petitioner's
claim for refund which is the subject matter
of this case has not yet submitted his report.
Whether or not respondent will present his
evidence will depend on the said report of
the examiner." (Respondent's Manifestation
and Motion dated September 7, 1982). Be
that as it may the case was submitted for
decision by respondent on the basis of the
pleadings and records and by petitioner on
the evidence presented by counsel sans the
respective memorandum.
An examination of the records satisfies us
that the case presents no dispute as to
relatively simple material facts. The
circumstances obtaining amply justify
petitioner's righteous indignation to a more
expeditious action. Respondent has offered
no reason nor made effort to submit any
controverting documents to bash that patina
of legitimacy over the claim. But as might
well be, towards the end of some two and a
half years of seeming impotent anguish over
the pendency, the respondent Commissioner
of Internal Revenue would furnish the
satisfaction of ultimate solution by
manifesting that "it is now his turn to present
evidence, however, the Appellate Division of
the BIR has already recommended the
approval of petitioner's claim for refund
subject matter of this petition. The examiner
who examined this case has also
recommended the refund of petitioner's
claim. Without prejudice to withdrawing this
case after the final approval of petitioner's
claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9,
1983 Session of the Court) We need not
fashion any further issue into an apparently
settled legal situation as far be it from a
comedy of errors it would be too much of a
stretch to hold and deny the refund of the
amount of prepaid income and common
carrier's taxes for which petitioner could no
longer be made accountable.
On August 3, 1984, respondent court denied petitioner's
motion for reconsideration, hence, this petition for review
on certiorari.
Petitioner now contends: (1) private respondent has the burden
of proof to support its claim of refund; (2) it failed to prove that
it did not realize any receipt from its charter agreement; and (3)
it suppressed evidence when it did not present its charter
agreement.
We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b)
(2) of the National Internal Revenue Code which at that time
provides as follows:
A corporation organized, authorized, or
existing under the laws of any foreign
country, engaged in trade or business within
the Philippines, shall be taxable as provided
in subsection (a) of this section upon the
total net income derived 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 per cent (2 1/2%) on their gross
Philippine billings: "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. The gross revenue realized
from the said cargo or mail include the gross
freight charge up to final destination. Gross
revenue from chartered flights originating
from the Philippines shall likewise form part
of "Gross Philippine Billings" regardless of
 the place or payment of the passage
documents . . . . .
Pursuant to this provision, a resident foreign corporation
expected by our taxpayers from the BIR and the duty demands
that BIR should refund without any unreasonable delay what it
has erroneously collected. Our ruling in Roxas v. Court of Tax
Appeals is apropos to recall:
12

engaged in the transport of cargo is liable for taxes depending

on the amount of income it derives from sources within the The power of taxation is sometimes called
Philippines. Thus, before such a tax liability can be enforced also the power to destroy. Therefore it
the taxpayer must be shown to have earned income sourced should be exercised with caution to minimize
from the Philippines. injury to the proprietary rights of a taxpayer.
It must be exercised fairly, equally and
We agree with petitioner that a claim for refund is in the nature uniformly, lest the tax collector kill the "hen
of a claim for exemption and should be construed
8 that lays the golden egg." And, in order to
in strictissimi juris against the taxpayer. Likewise, there can be
9 maintain the general public's trust and
no disagreement with petitioner's stance that private confidence in the Government this power
respondent has the burden of proof to establish the factual must be used justly and not treacherously.
basis of its claim for tax refund.
IN VIEW HEREOF, the assailed decision of respondent Court
The pivotal issue involves a question of fact whether or not of Tax Appeals, dated September 15, 1983, is AFFIRMED in
the private respondent was able to prove that it derived no toto. No costs.
receipts from its charter agreement, and hence is entitled to a
refund of the taxes it pre-paid to the government. SO ORDERED.

The respondent court held that sufficient evidence has been

adduced by the private respondent proving that it derived no
receipt from its charter agreement with NASUTRA. This finding
of fact rests on a rational basis, and hence must be sustained.
Exhibits "E", "F," and "G" positively show that the tramper
vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but
found no raw sugar to load and returned to Japan without any
cargo laden on board. Exhibit "E" is the Clearance Vessel to a
Foreign Port issued by the District Collector of Customs, Port
of Iloilo while Exhibit "F" is the Certification by the Officer-in-
Charge, Export Division of the Bureau of Customs Iloilo. The
correctness of the contents of these documents regularly
issued by officials of the Bureau of Customs cannot be
doubted as indeed, they have not been contested by the
petitioner. The records also reveal that in the course of the
proceedings in the court a quo, petitioner hedged and hawed
when its turn came to present evidence. At one point, its
counsel manifested that the BIR examiner and the appellate
division of the BIR have both recommended the approval of
private respondent's claim for refund. The same counsel even
represented that the government would withdraw its opposition
to the petition after final approval of private respondents' claim.
The case dragged on but petitioner never withdrew its
opposition to the petition even if it did not present evidence at
all. The insincerity of petitioner's stance drew the sharp rebuke
of respondent court in its Decision and for good reason.
Taxpayers owe honesty to government just as government
owes fairness to taxpayers.

In its last effort to retain the money erroneously prepaid by the

private respondent, petitioner contends that private respondent
suppressed evidence when it did not present its charter
agreement with NASUTRA. The contention cannot succeed. It
presupposes without any basis that the charter agreement is
prejudicial evidence against the private
respondent. Allegedly, it will show that private respondent
10

earned a charter fee with or without transporting its supposed

cargo from Iloilo to Japan. The allegation simply remained an
allegation and no court of justice will regard it as truth.
Moreover, the charter agreement could have been presented
by petitioner itself thru the proper use of a subpoena duces
tecum. It never did either because of neglect or because it
knew it would be of no help to bolster its position. For
11

whatever reason, the petitioner cannot take to task the private

respondent for not presenting what it mistakenly calls
"suppressed evidence."

We cannot but bewail the unyielding stance taken by the

government in refusing to refund the sum of ONE HUNDRED
SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS
AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously
prepaid by private respondent. The tax was paid way back in
1980 and despite the clear showing that it was erroneously
paid, the government succeeded in delaying its refund for
fifteen (15) years. After fifteen (15) long years and the
expenses of litigation, the money that will be finally refunded to
the private respondent is just worth a damaged nickel. This is
not, however, the kind of success the government, especially
the BIR, needs to increase its collection of taxes. Fair deal is
G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS
CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX
APPEALS, respondents.
REGALADO, J.:
These cases, involving the same issue being contested by the
same parties and having originated from the same factual
antecedents generating the claims for tax credit of private
respondents, the same were consolidated by resolution of this
Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated
Mining and Development Corporation (hereinafter, Atlas)
entered into a Loan and Sales Contract with Mitsubishi Metal
Corporation (Mitsubishi, for brevity), a Japanese corporation
licensed to engage in business in the Philippines, for purposes
of the projected expansion of the productive capacity of the
former's mines in Toledo, Cebu. Under said contract,
Mitsubishi agreed to extend a loan to Atlas 'in the amount of
$20,000,000.00, United States currency, for the installation of a
new concentrator for copper production. Atlas, in turn
undertook to sell to Mitsubishi all the copper concentrates
produced from said machine for a period of fifteen (15) years. It
was contemplated that $9,000,000.00 of said loan was to be
used for the purchase of the concentrator machinery from
Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import
Bank of Japan (Eximbank for short) obviously for purposes of
its obligation under said contract. Its loan application was
approved on May 26, 1970 in the sum of 4,320,000,000.00, at
about the same time as the approval of its loan for
2,880,000,000.00 from a consortium of Japanese banks. The
total amount of both loans is equivalent to $20,000,000.00 in
United States currency at the then prevailing exchange rate.
The records in the Bureau of Internal Revenue show that the
approval of the loan by Eximbank to Mitsubishi was subject to
the condition that Mitsubishi would use the amount as a loan to
Atlas and as a consideration for importing copper concentrates
from Atlas, and that Mitsubishi had to pay back the total
amount of loan by September 30, 1981. 2 court, the corresponding 15% tax on the amount
Pursuant to the contract between Atlas and Mitsubishi, interest
payments were made by the former to the latter totalling
P13,143,966.79 for the years 1974 and 1975. The
corresponding 15% tax thereon in the amount of
P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and
Section 53 (b) (2) of the National Internal Revenue Code, as
amended by Presidential Decree No. 131, and duly remitted to
the Government. 3 1979, and, in a letter to private respondents dated November
On March 5, 1976, private respondents filed a claim for tax
credit requesting that the sum of P1,971,595.01 be applied
against their existing and future tax liabilities. Parenthetically, it
was later noted by respondent Court of Tax Appeals in its
decision that on August 27, 1976, Mitsubishi executed a waiver
and disclaimer of its interest in the claim for tax credit in favor
of Atlas. 4 denied by respondent court in a resolution dated September 7,
The petitioner not having acted on the claim for tax credit, on
April 23, 1976 private respondents filed a petition for review
with respondent court, docketed therein as CTA Case No.
2801. The petition was grounded on the claim that Mitsubishi
5
was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government.
Such governmental status of Eximbank, if it may be so called,
is the basis for private repondents' claim for exemption from
paying the tax on the interest payments on the loan as earlier
stated. It was further claimed that the interest payments on the
loan from the consortium of Japanese banks were likewise
exempt because said loan supposedly came from or were
financed by Eximbank. The provision of the National Internal
Revenue Code relied upon is Section 29 (b) (7) (A), which 6
excludes from gross income:
(A) Income received from their investments in the
Philippines in loans, stocks, bonds or other domestic
securities, or from interest on their deposits in banks
in the Philippines by (1) foreign governments, (2)
financing institutions owned, controlled, or enjoying
refinancing from them, and (3) international or
regional financing institutions established by
governments.
Petitioner filed an answer on July 9, 1976. The case was set
for hearing on April 6, 1977 but was later reset upon
manifestation of petitioner that the claim for tax credit of the
alleged erroneous payment was still being reviewed by the
Appellate Division of the Bureau of Internal Revenue. The
records show that on November 16, 1976, the said division
recommended to petitioner the approval of private
respondent's claim. However, before action could be taken
thereon, respondent court scheduled the case for hearing on
September 30, 1977, during which trial private respondents
presented their evidence while petitioner submitted his case on
the basis of the records of the Bureau of Internal Revenue and
the pleadings. 7
On April 18, 1980, respondent court promulgated its decision
ordering petitioner to grant a tax credit in favor of Atlas in the
amount of P1,971,595.01. Interestingly, the tax court held that
petitioner admitted the material averments of private
respondents when he supposedly prayed "for judgment on the
pleadings without off-spring proof as to the truth of his
allegations." Furthermore, the court declared that all papers
8
and documents pertaining to the loan of 4,320,000,000.00
obtained by Mitsubishi from Eximbank show that this was the
same amount given to Atlas. It also observed that the money
for the loans from the consortium of private Japanese banks in
the sum of 2,880,000,000.00 "originated" from Eximbank.
From these, respondent court concluded that the ultimate
creditor of Atlas was Eximbank with Mitsubishi acting as a
mere "arranger or conduit through which the loans flowed from
the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20,
1980, petitioner interposed an appeal to this Court, docketed
herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax
of
P439,167.95 on the P2,927,789.06 interest payments for the
years 1977 and 1978 was withheld and remitted to the
Government. Atlas again filed a claim for tax credit with the
petitioner, repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for
review with the Court of Tax Appeals docketed as CTA Case
No. 3015. Petitioner filed his answer thereto on August 14,
12, 1979, denied said claim for tax credit for lack of factual or
legal basis.10
On January 15, 1981, relying on its prior ruling in CTA Case
No. 2801, respondent court rendered judgment ordering the
petitioner to credit Atlas the aforesaid amount of tax paid. A
motion for reconsideration, filed on March 10, 1981, was
1987. A notice of appeal was filed on September 22, 1987 by
petitioner with respondent court and a petition for review was
filed with this Court on December 19, 1987. Said later case is
now before us as G.R. No. 80041 and is consolidated with
G.R. No. 54908.
The principal issue in both petitions is whether or not the
interest income from the loans extended to Atlas by Mitsubishi
is excludible from gross income taxation pursuant to Section
29 b) (7) (A) of the tax code and, therefore, exempt from
withholding tax. Apropos thereto, the focal question is whether
or not Mitsubishi is a mere conduit of Eximbank which will then
be considered as the creditor whose investments in the
Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in
holding in CTA Case No. 2801 that petitioner should be
deemed to have admitted the allegations of the private
respondents when it submitted the case on the basis of the
pleadings and records of the bureau. There is nothing to
indicate such admission on the part of petitioner nor can we
accept respondent court's pronouncement that petitioner did
not offer to prove the truth of its allegations. The records of the
Bureau of Internal Revenue relevant to the case were duly
submitted and admitted as petitioner's supporting evidence.
Additionally, a hearing was conducted, with presentation of
evidence, and the findings of respondent court were based not
only on the pleadings but on the evidence adduced by the
parties. There could, therefore, not have been a judgment on
the pleadings, with the theorized admissions imputed to
petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court
of Tax Appeals are entitled to the highest respect and can only
be disturbed on appeal if they are not supported by substantial
evidence or if there is a showing of gross error or abuse on the
part of the tax court. Thus, ordinarily, we could give due
11
consideration to the holding of respondent court that Mitsubishi
is a mere agent of Eximbank. Compelling circumstances
obtaining and proven in these cases, however, warrant a
departure from said general rule since we are convinced that
there is a misapprehension of facts on the part of the tax court
to the extent that its conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does
not contain any direct or inferential reference to Eximbank
whatsoever. The agreement is strictly between Mitsubishi as
creditor in the contract of loan and Atlas as the seller of the
copper concentrates. From the categorical language used in
the document, one prestation was in consideration of the other.
The specific terms and the reciprocal nature of their obligations
make it implausible, if not vacuous to give credit to the cavalier
assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper
concentrates since all that Mitsubishi stated in its loan
application with the former was that the amount being procured
would be used as a loan to and in consideration for importing
copper concentrates from Atlas. Such an innocuous
12
statement of purpose could not have been intended for, nor
could it legally constitute, a contract of agency. If that had been
the purpose as respondent court believes, said corporations
would have specifically so stated, especially considering their
experience and expertise in financial transactions, not to speak
of the amount involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these
cases impels us to give weight to the following arguments of
petitioner:
The nature of the above contract shows that the same
is not just a simple contract of loan. It is not a mere
creditor-debtor relationship. It is more of a reciprocal
obligation between ATLAS and MITSUBISHI where
the latter shall provide the funds in the installation of a
new concentrator at the former's Toledo mines in
Cebu, while ATLAS in consideration of which, shall
sell to MITSUBISHI, for a term of 15 years, the entire
copper concentrate that will be produced by the
installed concentrator.
Suffice it to say, the selling of the copper concentrate
to MITSUBISHI within the specified term was the
consideration of the granting of the amount of $20
million to ATLAS. MITSUBISHI, in order to fulfill its
part of the contract, had to obtain funds. Hence, it had
to secure a loan or loans from other sources. And
from what sources, it is immaterial as far as ATLAS in
concerned. In this case, MITSUBISHI obtained the
$20 million from the EXIMBANK, of Japan and the
consortium of Japanese banks financed through the
EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it
was in its own independent capacity as a private
entity and not as a conduit of the consortium of
Japanese banks or the EXIMBANK of Japan. While
the loans were secured by MITSUBISHI primarily "as
a loan to and in consideration for importing copper
concentrates from ATLAS," the fact remains that it
was a loan by EXIMBANK of Japan to MITSUBISHI
and not to ATLAS.
Thus, the transaction between MITSUBISHI and
EXIMBANK of Japan was a distinct and separate
contract from that entered into by MITSUBISHI and
ATLAS. Surely, in the latter contract, it is not
EXIMBANK, that was intended to be benefited. It is
MITSUBISHI which stood to profit. Besides, the Loan
and Sales Contract cannot be any clearer. The only
signatories to the same were MITSUBISHI and
ATLAS. Nowhere in the contract can it be inferred that
MITSUBISHI acted for and in behalf of EXIMBANK, of
Japan nor of any entity, private or public, for that
matter.
Corollary to this, it may well be stated that in this
jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be
the property of the former owner and becomes the
sole property of the obligor (Tolentino and Manio vs.
Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the
loan of $20 million from EXIMBANK, of Japan, said
amount ceased to be the property of the bank and
became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT
EXIMBANK, is the sole creditor of ATLAS, the former
being the owner of the $20 million upon completion of
its loan contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to
MITSUBISHI is therefore entirely different from the
interest income paid by MITSUBISHI to EXIMBANK,
of Japan. What was the subject of the 15%
withholding tax is not the interest income paid by
MITSUBISHI to EXIMBANK, but the interest income
earned by MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is
entirely different. It is complete in itself, does not appear to be
suppletory or collateral to another contract and is, therefore,
not to be distorted by other considerations aliunde. The
application for the loan was approved on May 20, 1970, or
more than a month after the contract between Mitsubishi and
Atlas was entered into on April 17, 1970. It is true that under
the contract of loan with Eximbank, Mitsubishi agreed to use
the amount as a loan to and in consideration for importing
copper concentrates from Atlas, but all that this proves is the
justification for the loan as represented by Mitsubishi, a
standard banking practice for evaluating the prospects of due
repayment. There is nothing wrong with such stipulation as the
parties in a contract are free to agree on such lawful terms and
conditions as they see fit. Limiting the disbursement of the
amount borrowed to a certain person or to a certain purpose is
not unusual, especially in the case of Eximbank which, aside
from protecting its financial exposure, must see to it that the
same are in line with the provisions and objectives of its
charter.
Respondents postulate that Mitsubishi had to be a conduit
because Eximbank's charter prevents it from making loans
except to Japanese individuals and corporations. We are not
impressed. Not only is there a failure to establish such
submission by adequate evidence but it posits the unfair and
unexplained imputation that, for reasons subject only of
surmise, said financing institution would deliberately
circumvent its own charter to accommodate an alien borrower
through a manipulated subterfuge, but with it as a principal and
the real obligee.
The allegation that the interest paid by Atlas was remitted in
full by Mitsubishi to Eximbank, assuming the truth thereof, is
too tenuous and conjectural to support the proposition that
Mitsubishi is a mere conduit. Furthermore, the remittance of
the interest payments may also be logically viewed as an
arrangement in paying Mitsubishi's obligation to Eximbank.
Whatever arrangement was agreed upon by Eximbank and
Mitsubishi as to the manner or procedure for the payment of
the latter's obligation is their own concern. It should also be
noted that Eximbank's loan to Mitsubishi imposes interest at
the rate of 75% per annum, while Mitsubishis contract with
Atlas merely states that the "interest on the amount of the loan
shall be the actual cost beginning from and including other
dates of releases against loan." 14

It is too settled a rule in this jurisdiction, as to dispense with the

need for citations, that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is
the exception. The burden of proof rests upon the party
claiming exemption to prove that it is in fact covered by the
exemption so claimed, which onus petitioners have failed to
discharge. Significantly, private respondents are not even
among the entities which, under Section 29 (b) (7) (A) of the
tax code, are entitled to exemption and which should
indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed

over on the basis of a supposed "broad, pragmatic analysis"
alone without substantial supportive evidence, lest
governmental operations suffer due to diminution of much
needed funds. Nor can we close this discussion without taking
cognizance of petitioner's warning, of pervasive relevance at
this time, that while international comity is invoked in this case
on the nebulous representation that the funds involved in the
loans are those of a foreign government, scrupulous care must
be taken to avoid opening the floodgates to the violation of our
tax laws. Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic
securities with private foreign entities, which in turn will
negotiate independently with their governments, could be
availed of to take advantage of the tax exemption law under
discussion.

WHEREFORE, the decisions of the Court of Tax Appeals in

CTA Cases Nos. 2801 and 3015, dated April 18, 1980 and
January 15, 1981, respectively, are hereby REVERSED and
SET ASIDE.

SO ORDERED.
G.R. No. 112024 January 28, 1999
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF
TAX APPEALS and COURT OF APPEALS, respondent.
QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of
Appeals dated September 22, 1993 affirming the Decision2 and
a Resolution 3 of the Court Of Tax Appeals which denied the
claims of the petitioner for tax refund and tax credits,
and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for
review, is DENIED due course. The Decision of the Court of
Tax Appeals dated May 20, 1993 and its resolution dated July
20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of
overpaid income tax for 1985 in the amount of P5,299,749.95
is hereby denied for having been filed beyond the reglementary
period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The
petition for review is dismissed for lack of merit.
SO ORDERED.5
The facts on record show the antecedent circumstances
pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a
commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for the first
and second quarters of 1985, reported profits, and paid the
total income tax of P5,016,954.00. The taxes due were settled
by applying PBCom's tax credit memos and accordingly, the
Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos.
0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00,
respectively.
Subsequently, however, PBCom suffered losses so that when
it filed its Annual Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise reported a net loss
of P14,129,602.00, and thus declared no tax payable for the
year.
But during these two years, PBCom earned rental income from
leased properties. The lessees withheld and remitted to the
BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the
first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund
of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of
Internal Revenue, petitioner instituted a Petition for Review on
November 18, 1988 before the Court of Tax Appeals (CTA).
The petition was docketed as CTA Case No. 4309 entitled:
"Philippine Bank of Communications vs. Commissioner of
Internal Revenue."
The losses petitioner incurred as per the summary of
petitioner's claims for refund and tax credit for 1985 and 1986,
filed before the Court of Tax Appeals, are as follows:
1985 1986
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as
P5,299,749.95. A forty five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as
stated on the outset, denied the request of petitioner for a tax
refund or credit in the sum amount of P5,299,749.95, on the
ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioner's claim for refund in
1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom
against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration
of the CTA's decision but the same was denied due course for
lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision
and resolution of the CTA with the Court of Appeals. However
on September 22, 1993, the Court of Appeals affirmed in
toto the CTA's resolution dated July 20, 1993. Hence this
petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom which relied in good faith on
the formal assurances of BIR in RMC No. 7-85 and did not
immediately file with the CTA a petition for review asking for
the refund/tax credit of its 1985-86 excess quarterly income tax
payments can be prejudiced by the subsequent BIR
rejection, applied retroactivity, of its assurances in RMC No. 7-
85 that the prescriptive period for the refund/tax credit of
excess quarterly income tax payments is not two years but ten
(10).7
II. Whether the Court of Appeals seriously erred in affirming the
CTA decision which denied PBCom's claim for the refund of
P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987
and that PBCom availed of tax-crediting that year.8
Simply stated, the main question is: Whether or not the Court
of Appeals erred in denying the plea for tax refund or tax
credits on the ground of prescription, despite petitioner's
reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years?
Petitioner argues that its claims for refund and tax credits are
not yet barred by prescription relying on the applicability of
Revenue Memorandum Circular No. 7-85 issued on April 1,
1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax Code
and that taxpayers may claim refund or tax credits for the
excess quarterly income tax with the BIR within ten (10) years
under Article 1144 of the Civil Code. The pertinent portions of
the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF
EXCESS CORPORATE INCOME TAX RESULTING FROM
THE FILING OF THE FINAL ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code
provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of
Revenue Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the excess tax
payments, corporations file claims for recovery of overpaid
income tax with the Court of Tax Appeals within the two-year
period from the date of payment, in accordance with sections
292 and 295 of the National Internal Revenue Code. It is
obvious that the filing of the case in court is to preserve the
judicial right of the corporation to claim the refund or tax credit.
It should he noted, however, that this is not a case of
erroneously or illegally paid tax under the provisions of
Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may
request for the refund of the overpaid income tax or claim for
automatic tax credit. To insure prompt action on corporate
annual income tax returns showing refundable amounts arising
from overpaid quarterly income taxes, this Office has
promulgated Revenue Memorandum Order No. 32-76 dated
June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-
audited which consist mainly of checking mathematical
accuracy of the figures of the return. After which, the refund or
tax credit is granted, and, this procedure was adopted to
facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for
review in the Court of Tax Appeals in order to preserve the
right to claim refund or tax credit the two year period. As
already stated, actions hereon by the Bureau are immediate
after only a cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the Bureau of Internal
Revenue excess income tax paid under the provisions of
Section 86 of the Tax Code within 10 years from the date of
payment considering that it is an obligation created by law
(Article 1144 of the Civil Code).9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting
a position contrary to its declared circular if it would result to
injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals 10 petitioner claims that
rulings or circulars promulgated by the Commissioner of
Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers, In ABS-CBN case, the Court held that
the government is precluded from adopting a position
inconsistent with one previously taken where injustice would
result therefrom or where there has been a misrepresentation
to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal
Revenue Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any
of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers
except in the following cases:
a). where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue;
b). where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through
Solicitor General, argues that the two-year prescriptive period
for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April
15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this
principle, to wit ACCRA Investments Corp. vs. Court of
Appeals, et al., 11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.. 12 Respondent
Commissioner also states that since the Final Adjusted Income
Tax Return of the petitioner for the taxable year 1985 was
supposed to be filed on April 15, 1986, the latter had only until
April 15, 1988 to seek relief from the court. Further, respondent
Commissioner stresses that when the petitioner filed the case
before the CTA on November 18, 1988, the same was filed
beyond the time fixed by law, and such failure is fatal to
petitioner's cause of action.
After a careful study of the records and applicable
jurisprudence on the matter, we find that, contrary to the
petitioner's contention, the relaxation of revenue regulations by
RMC 7-85 is not warranted as it disregards the two-year
prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation."
The primary purpose is to generate funds for the State to
finance the needs of the citizenry and to advance the common
weal. 13 Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily
be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of
utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered
with as little as possible. 14
From the same perspective, claims for refund or tax credit
should be exercised within the time fixed by law because the
BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by
incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of
1977 (now Sec. 229, NIRC of 1997) provides for the
prescriptive period for filing a court proceeding for the recovery
of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected.
No suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit
or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceedings shall begun after the
expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise
after payment; Provided however, That the Commissioner
may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously
paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or
credit with the Commissioner of Internal Revenue, within two
(2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should
be computed from the time of filing the Adjustment Return and
final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American
Life Insurance Co., 15 this Court explained the application of
Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence
to run only from the time that the refund is ascertained, which
can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. . . . As
we have earlier said in the TMX Sales case, Sections
68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax
Payment and Section 321 should be considered in conjunction
with it 19
When the Acting Commissioner of Internal Revenue issued
RMC 7-85, changing the prescriptive period of two years to ten
years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision of
Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It
is widely accepted that the interpretation placed upon a statute
by the executive officers, whose duty is to enforce it, is entitled
to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially
found to be erroneous. 20 Thus, courts will not countenance
administrative issuances that override, instead of remaining
consistent and in harmony with the law they seek to apply and
implement. 21
In the case of People vs. Lim, 22 it was held that rules and
regulations issued by administrative officials to implement a
law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void
because it is not only inconsistent with but is contrary to the
provisions and spirit of Act. No 4003 as amended, because
whereas the prohibition prescribed in said Fisheries Act was
for any single period of time not exceeding five years duration,
FAO No 37-1 fixed no period, that is to say, it establishes an
absolute ban for all time. This discrepancy between Act No.
4003 and FAO No. 37-1 was probably due to an oversight on
the part of Secretary of Agriculture and Natural Resources. Of
course, in case of discrepancy, the basic Act prevails, for the
reason that the regulation or rule issued to implement a law
cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men
in the offices of Department Heads who draft rules and
regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they
intended to implement, this to avoid any possible
misunderstanding or confusion as in the present case.23
Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or
agents. 24 As pointed out by the respondent courts, the
nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977
NIRC. for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal
Revenue, after promulgating RMC No. 7-85, is estopped by the
principle of non-retroactively of BIR rulings. Again We do not
agree. The Memorandum Circular, stating that a taxpayer may
recover the excess income tax paid within 10 years from date
of payment because this is an obligation created by law, was
issued by the Acting Commissioner of Internal Revenue. On
the other hand, the decision, stating that the taxpayer should
still file a claim for a refund or tax credit and corresponding
petition fro review within the
two-year prescription period, and that the lengthening of the
period of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive
mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the
Commissioner of Internal Revenue who denied petitioner's
claim of refund or tax credit. Rather, it was the Court of Tax
Appeals who denied (albeit correctly) the claim and in effect,
ruled that the RMC No. 7-85 issued by the Commissioner of
Internal Revenue is an administrative interpretation which is
out of harmony with or contrary to the express provision of a
statute (specifically Sec. 230, NIRC), hence, cannot be given
weight for to do so would in effect amend the statute.25
Art. 8 of the Civil Code 26 recognizes judicial decisions,
applying or interpreting statutes as part of the legal system of
the country. But administrative decisions do not enjoy that level
of recognition. A memorandum-circular of a bureau head could
not operate to vest a taxpayer with shield against judicial
action. For there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and
such wrong interpretation could not place the Government in
estoppel to correct or overrule the same. 27 Moreover, the non-
retroactivity of rulings by the Commissioner of Internal
Revenue is not applicable in this case because the nullity of
RMC No. 7-85 was declared by respondent courts and not by
the Commissioner of Internal Revenue. Lastly, it must be noted
that, as repeatedly held by this Court, a claim for refund is in
the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.28
On the second issue, the petitioner alleges that the Court of
Appeals seriously erred in affirming CTA's decision denying its
claim for refund of P234,077.69 (tax overpaid in 1986), based
on mere speculation, without proof, that PBCom availed of the
automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC)
provides that any excess of the total quarterly payments over
the actual income tax computed in the adjustment or final
corporate income tax return, shall either(a) be refunded to the
corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the
succeeding taxable year.
The corporation must signify in its annual corporate adjustment
return (by marking the option box provided in the BIR form) its
intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease
the administration of tax collection, these remedies are in the
alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in
1986 the Court of Tax Appeals, after examining the adjusted
final corporate annual income tax return for taxable year 1986,
found out that petitioner opted to apply for automatic tax credit.
This was the basis used (vis-avis the fact that the 1987 annual
corporate tax return was not offered by the petitioner as
evidence) by the CTA in concluding that petitioner had indeed
availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to
[sic] the two remedies of refund and tax credit are
alternative. 30
That the petitioner opted for an automatic tax credit in
accordance with Sec. 69 of the 1977 NIRC, as specified in its
1986 Final Adjusted Income Tax Return, is a finding of fact
which we must respect. Moreover, the 1987 annual corporate
tax return of the petitioner was not offered as evidence to
contovert said fact. Thus, we are bound by the findings of fact
by respondent courts, there being no showing of gross error or
abuse on their part to disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of
the Court of Appeals appealed from is AFFIRMED, with
COSTS against the petitioner.1wphi1.nt

SO ORDERED.
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of
Internal Revenue; ROMULO VILLA, Deputy Commissioner,
Bureau of Internal Revenue; TOMAS TOLEDO Deputy
Commissioner, Bureau of Internal Revenue; MANUEL
ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A.
VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory
relief or prohibition proceeding 1 on the validity of Section I of Batas
Pambansa Blg. 135 depends upon a showing of its constitutional infirmity.
The assailed provision further amends Section 21 of the National Internal
Revenue Code of 1977, which provides for rates of tax on citizens or
residents on (a) taxable compensation income, (b) taxable net income, (c)
royalties, prizes, and other winnings, (d) interest from bank deposits and
yield or any other monetary benefit from deposit substitutes and from trust
fund and similar arrangements, (e) dividends and share of individual partner
in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would
be unduly discriminated against by the imposition of higher rates of tax
upon his income arising from the exercise of his profession vis-a-visthose
which are imposed upon fixed income or salaried individual taxpayers. 4 He
characterizes the above sction as arbitrary amounting to class legislation,
oppressive and capricious in character 5 For petitioner, therefore, there is a
transgression of both the equal protection and due process clauses 6 of the
Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required
respondents to file an answer within 10 days from notice. Such
an answer, after two extensions were granted the Office of the
Solicitor General, was filed on May 28, 1982. The facts as 8
alleged were admitted but not the allegations which to their
mind are "mere arguments, opinions or conclusions on the part
of the petitioner, the truth [for them] being those stated [in their]
Special and Affirmative Defenses." The answer then affirmed:
9
"Batas Pambansa Big. 135 is a valid exercise of the State's
power to tax. The authorities and cases cited while correctly
quoted or paraghraph do not support petitioner's stand." 10 The
prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition
must be dismissed.
1. It is manifest that the field of state activity has assumed a
much wider scope, The reason was so clearly set forth by
retired Chief Justice Makalintal thus: "The areas which used to
be left to private enterprise and initiative and which the
government was called upon to enter optionally, and only
'because it was better equipped to administer for the public
welfare than is any private individual or group of individuals,'
continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake
in its sovereign capacity if it is to meet the increasing social
challenges of the times." 11 Hence the need for more revenues. The
power to tax, an inherent prerogative, has to be availed of to assure the
performance of vital state functions. It is the source of the bulk of public
funds. To praphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an
attribute of sovereignty. It is the strongest of all the powers of of
government." 13 It is, of course, to be admitted that for all its plenitude 'the
power to tax is not unconfined. There are restrictions. The Constitution sets
forth such limits . Adversely affecting as it does properly rights, both the due
process and equal protection clauses inay properly be invoked, all petitioner
does, to invalidate in appropriate cases a revenue measure. if it were
otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14 In a
separate opinion in Graves v. New York, 15 Justice Frankfurter, after
referring to it as an 1, unfortunate remark characterized it as "a flourish of
rhetoric [attributable to] the intellectual fashion of the times following] a free
use of absolutes." 16 This is merely to emphasize that it is riot and there
cannot be such a constitutional mandate. Justice Frankfurter could rightfully
conclude: "The web of unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax
is not the power to destroy while this Court sits." 17 So it is in the
Philippines.
3. This Court then is left with no choice. The Constitution as
the fundamental law overrides any legislative or executive, act
that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision as
petitioner here alleges fails to abide by its command, then
this Court must so declare and adjudge it null. The injury thus
is centered on the question of whether the imposition of a
higher tax rate on taxable net income derived from business or
profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He
alleges arbitrariness. A mere allegation, as here. does not
suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would
condemn such a provision as void or its face, he has not made
out a case. This is merely to adhere to the authoritative
doctrine that were the due process and equal protection
clauses are invoked, considering that they arc not fixed rules
but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must
prevail. 18
5. It is undoubted that the due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to the confiscation of
property. That would be a clear abuse of power. It then becomes the duty of
this Court to say that such an arbitrary act amounted to the exercise of an
authority not conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose, or, in case
of a retroactive statute is so harsh and unreasonable, it is subject to attack
on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge
that there is a denial of this constitutional mandate whether the assailed act
is in the exercise of the lice power or the power of eminent domain is to
demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility,
or at the very least, discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under
similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred
and the liabilities imposed. Favoritism and undue preference cannot be
allowed. For the principle is that equal protection and security shall be given
to every person under circumtances which if not Identical are analogous. If
law be looked upon in terms of burden or charges, those that fall within a
class should be treated in the same fashion, whatever restrictions cast on
some in the group equally binding on the rest." 20 That same formulation
applies as well to taxation measures. The equal protection clause is, of
course, inspired by the noble concept of approximating the Ideal of the laws
benefits being available to all and the affairs of men being governed by that
serene and impartial uniformity, which is of the very essence of the Idea of
law. There is, however, wisdom, as well as realism in these words of
Justice Frankfurter: "The equality at which the 'equal protection' clause aims
is not a disembodied equality. The Fourteenth Amendment enjoins 'the
equal protection of the laws,' and laws are not abstract propositions. They
do not relate to abstract units A, B and C, but are expressions of policy
arising out of specific difficulties, address to the attainment of specific ends
by the use of specific remedies. The Constitution does not require things
which are different in fact or opinion to be treated in law as though they
were the same." 21 Hence the constant reiteration of the view that
classification if rational in character is allowable. As a matter of fact, in a
leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes,
went so far as to hold "at any rate, it is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been repeatedly
held that 'inequalities which result from a singling out of one particular class
for taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity.
According to the Constitution: "The rule of taxation shag be
uniform and equitable." This requirement is met according to
24
Justice Laurel in Philippine Trust Company v. Yatco, decided 25
in 1940, when the tax "operates with the same force and effect
in every place where the subject may be found. " He likewise 26
added: "The rule of uniformity does not call for perfect
uniformity or perfect equality, because this is hardly
attainable." The problem of classification did not present itself
27
in that case. It did not arise until nine years later, when the
Supreme Court held: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for
purposes of taxation, ... . As clarified by Justice Tuason,
28
where "the differentiation" complained of "conforms to the
practical dictates of justice and equity" it "is not discriminatory
within the meaning of this clause and is therefore
uniform." There is quite a similarity then to the standard of
29

equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar
situation."
30

8. Further on this point. Apparently, what misled petitioner is

his failure to take into consideration the distinction between a
tax rate and a tax base. There is no legal objection to a
broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable
tax rate. Taxpayers may be classified into different categories.
To repeat, it. is enough that the classification must rest upon
substantial distinctions that make real differences. In the case
of the gross income taxation embodied in Batas Pambansa
Blg. 135, the, discernible basis of classification is the
susceptibility of the income to the application of generalized
rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income
are set apart as a class. As there is practically no overhead
expense, these taxpayers are e not entitled to make
deductions for income tax purposes because they are in the
same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen,
there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the
Batasang Pambansa to adopt the gross system of income
taxation to compensation income, while continuing the system
of net income taxation as regards professional and business
income.

9. Nothing can be clearer, therefore, than that the petition is

without merit, considering the (1) lack of factual foundation to
show the arbitrary character of the assailed provision; (2) the
31

force of controlling doctrines on due process, equal protection,

and uniformity in taxation and (3) the reasonableness of the
distinction between compensation and taxable net income of
professionals and businessman certainly not a suspect
classification,

WHEREFORE, the petition is dismissed. Costs against

petitioner.
G.R. No. 115455 October 30, 1995 On the other hand, the Ninth Congress passed revenue laws
which were also the result of the consolidation of House and
ARTURO M. TOLENTINO, petitioner, Senate bills. These are the following, with indications of the
vs. dates on which the laws were approved by the President and
THE SECRETARY OF FINANCE and THE COMMISSIONER dates the separate bills of the two chambers of Congress were
OF INTERNAL REVENUE, respondents. respectively passed:

RESOLUTION 1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES

FOR TAX EVASION, AMENDING FOR THIS
PURPOSE THE PERTINENT SECTIONS
MENDOZA, J.: OF THE NATIONAL INTERNAL REVENUE
CODE (December 28, 1992).
These are motions seeking reconsideration of our decision
dismissing the petitions filed in these cases for the declaration House Bill No. 2165, October 5, 1992
of unconstitutionality of R.A. No. 7716, otherwise known as the
Expanded Value-Added Tax Law. The motions, of which there
Senate Bill No. 32, December 7, 1992
are 10 in all, have been filed by the several petitioners in these
cases, with the exception of the Philippine Educational
Publishers Association, Inc. and the Association of Philippine 2. R.A. NO. 7643
Booksellers, petitioners in G.R. No. 115931.
AN ACT TO EMPOWER THE
The Solicitor General, representing the respondents, filed a COMMISSIONER OF INTERNAL REVENUE
consolidated comment, to which the Philippine Airlines, Inc., TO REQUIRE THE PAYMENT OF THE
petitioner in G.R. No. 115852, and the Philippine Press VALUE-ADDED TAX EVERY MONTH AND
Institute, Inc., petitioner in G.R. No. 115544, and Juan T. TO ALLOW LOCAL GOVERNMENT UNITS
David, petitioner in G.R. No. 115525, each filed a reply. In turn TO SHARE IN VAT REVENUE, AMENDING
the Solicitor General filed on June 1, 1995 a rejoinder to the FOR THIS PURPOSE CERTAIN SECTIONS
PPI's reply. OF THE NATIONAL INTERNAL REVENUE
CODE (December 28, 1992)
On June 27, 1995 the matter was submitted for resolution.
House Bill No. 1503, September 3, 1992
I. Power of the Senate to propose amendments to revenue
bills. Some of the petitioners (Tolentino, Kilosbayan, Inc., Senate Bill No. 968, December 7, 1992
Philippine Airlines (PAL), Roco, and Chamber of Real Estate
and Builders Association (CREBA)) reiterate previous claims 3. R.A. NO. 7646
made by them that R.A. No. 7716 did not "originate
exclusively" in the House of Representatives as required by
Art. VI, 24 of the Constitution. Although they admit that H. No. AN ACT AUTHORIZING THE
11197 was filed in the House of Representatives where it COMMISSIONER OF INTERNAL REVENUE
passed three readings and that afterward it was sent to the TO PRESCRIBE THE PLACE FOR
Senate where after first reading it was referred to the Senate PAYMENT OF INTERNAL REVENUE
Ways and Means Committee, they complain that the Senate TAXES BY LARGE TAXPAYERS,
did not pass it on second and third readings. Instead what the AMENDING FOR THIS PURPOSE
Senate did was to pass its own version (S. No. 1630) which it CERTAIN PROVISIONS OF THE
approved on May 24, 1994. Petitioner Tolentino adds that what NATIONAL INTERNAL REVENUE CODE,
the Senate committee should have done was to amend H. No. AS AMENDED (February 24, 1993)
11197 by striking out the text of the bill and substituting it with
the text of S. No. 1630. That way, it is said, "the bill remains a House Bill No. 1470, October 20, 1992
House bill and the Senate version just becomes the text (only
the text) of the House bill." Senate Bill No. 35, November 19, 1992

The contention has no merit. 4. R.A. NO. 7649

The enactment of S. No. 1630 is not the only instance in which AN ACT REQUIRING THE GOVERNMENT
the Senate proposed an amendment to a House revenue bill OR ANY OF ITS POLITICAL
by enacting its own version of a revenue bill. On at least two SUBDIVISIONS, INSTRUMENTALITIES OR
occasions during the Eighth Congress, the Senate passed its AGENCIES INCLUDING GOVERNMENT-
own version of revenue bills, which, in consolidation with OWNED OR CONTROLLED
House bills earlier passed, became the enrolled bills. These CORPORATIONS (GOCCS) TO DEDUCT
were: AND WITHHOLD THE VALUE-ADDED TAX
DUE AT THE RATE OF THREE PERCENT
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS (3%) ON GROSS PAYMENT FOR THE
INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE PURCHASE OF GOODS AND SIX
(5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND PERCENT (6%) ON GROSS RECEIPTS
DUTY EXEMPTION AND TAX CREDIT ON CAPITAL FOR SERVICES RENDERED BY
EQUIPMENT) which was approved by the President on April CONTRACTORS (April 6, 1993)
10, 1992. This Act is actually a consolidation of H. No. 34254,
which was approved by the House on January 29, 1992, and House Bill No. 5260, January 26, 1993
S. No. 1920, which was approved by the Senate on February
3, 1992.
Senate Bill No. 1141, March 30, 1993
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO
WHOEVER SHALL GIVE REWARD TO ANY FILIPINO 5. R.A. NO. 7656
ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which
was approved by the President on May 22, 1992. This Act is a AN ACT REQUIRING GOVERNMENT-
consolidation of H. No. 22232, which was approved by the OWNED OR CONTROLLED
House of Representatives on August 2, 1989, and S. No. 807, CORPORATIONS TO DECLARE
which was approved by the Senate on October 21, 1991. DIVIDENDS UNDER CERTAIN
 CONDITIONS TO THE NATIONAL
GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE
STRUCTURE AND ADMINISTRATION OF
THE DOCUMENTARY STAMP TAX,
AMENDING FOR THE PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS
AMENDED, ALLOCATING FUNDS FOR
SPECIFIC PROGRAMS, AND FOR OTHER
PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE,
BARTER OR EXCHANGE OF SHARES OF
STOCK LISTED AND TRADED THROUGH
THE LOCAL STOCK EXCHANGE OR
THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE
NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, BY INSERTING A NEW
SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in
which the Senate, in the exercise of its power to propose
amendments to bills required to originate in the House, passed
its own version of a House revenue measure. It is noteworthy
that, in the particular case of S. No. 1630, petitioners Tolentino
and Roco, as members of the Senate, voted to approve it on
second and third readings.
On the other hand, amendment by substitution, in the manner
urged by petitioner Tolentino, concerns a mere matter of form.
Petitioner has not shown what substantial difference it would
make if, as the Senate actually did in this case, a separate bill
like S. No. 1630 is instead enacted as a substitute measure,
"taking into Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only
provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the
original amendment shall be considered.
No amendment by substitution shall be
entertained unless the text thereof is
submitted in writing.
Any of said amendments may be withdrawn
before a vote is taken thereon.
69. No amendment which seeks the
inclusion of a legislative provision foreign to
the subject matter of a bill (rider) shall be
entertained.
xxx xxx xxx
70-A. A bill or resolution shall not be
amended by substituting it with another
which covers a subject distinct from that
proposed in the original bill or resolution.
(emphasis added).
Nor is there merit in petitioners' contention that, with regard to
revenue bills, the Philippine Senate possesses less power than
the U.S. Senate because of textual differences between
constitutional provisions giving them the power to propose or
concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in
the House of Representatives; but the
Senate may propose or concur with
amendments as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills
of local application, and private bills shall
originate exclusively in the House of
Representatives, but the Senate may
propose or concur with amendments.
The addition of the word "exclusively" in the Philippine
Constitution and the decision to drop the phrase "as on other
Bills" in the American version, according to petitioners, shows
the intention of the framers of our Constitution to restrict the
Senate's power to propose amendments to revenue bills.
Petitioner Tolentino contends that the word "exclusively" was
inserted to modify "originate" and "the words 'as in any other
bills' (sic) were eliminated so as to show that these bills were
not to be like other bills but must be treated as a special kind."
The history of this provision does not support this contention.
The supposed indicia of constitutional intent are nothing but
the relics of an unsuccessful attempt to limit the power of the
Senate. It will be recalled that the 1935 Constitution originally
provided for a unicameral National Assembly. When it was
decided in 1939 to change to a bicameral legislature, it
became necessary to provide for the procedure for lawmaking
by the Senate and the House of Representatives. The work of
proposing amendments to the Constitution was done by the
National Assembly, acting as a constituent assembly, some of
whose members, jealous of preserving the Assembly's
lawmaking powers, sought to curtail the powers of the
proposed Senate. Accordingly they proposed the following
provision:
All bills appropriating public funds, revenue
or tariff bills, bills of local application, and
private bills shall originate exclusively in the
Assembly, but the Senate may propose or
concur with amendments. In case of
disapproval by the Senate of any such bills,
the Assembly may repass the same by a
two-thirds vote of all its members, and
thereupon, the bill so repassed shall be
deemed enacted and may be submitted to
the President for corresponding action. In the
event that the Senate should fail to finally act
on any such bills, the Assembly may, after
thirty days from the opening of the next
regular session of the same legislative term,
reapprove the same with a vote of two-thirds
of all the members of the Assembly. And
upon such reapproval, the bill shall be
 deemed enacted and may be submitted to
the President for corresponding action.
The special committee on the revision of laws of the Second
National Assembly vetoed the proposal. It deleted everything
after the first sentence. As rewritten, the proposal was
approved by the National Assembly and embodied in
Resolution No. 38, as amended by Resolution No. 73. (J.
ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The
proposed amendment was submitted to the people and ratified
by them in the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution,
from which Art. VI, 24 of the present Constitution was derived.
It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine
Constitution borrowed and why the phrase "as on other Bills"
was not copied. Considering the defeat of the proposal, the
power of the Senate to propose amendments must be
understood to be full, plenary and complete "as on other Bills."
Thus, because revenue bills are required to originate
exclusively in the House of Representatives, the Senate
cannot enact revenue measures of its own without such bills.
After a revenue bill is passed and sent over to it by the House,
however, the Senate certainly can pass its own version on the
same subject matter. This follows from the coequality of the
two chambers of Congress.
That this is also the understanding of book authors of the
scope of the Senate's power to concur is clear from the
following commentaries:
The power of the Senate to propose or
concur with amendments is apparently
without restriction. It would seem that by
virtue of this power, the Senate can
practically re-write a bill required to come
from the House and leave only a trace of the
original bill. For example, a general revenue
bill passed by the lower house of the United
States Congress contained provisions for the
imposition of an inheritance tax . This was
changed by the Senate into a corporation
tax. The amending authority of the Senate
was declared by the United States Supreme
Court to be sufficiently broad to enable it to
make the alteration. [Flint v. Stone Tracy
Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON,
POLITICAL LAW OF THE PHILIPPINES 247
(1961))
The above-mentioned bills are supposed to
be initiated by the House of Representatives
because it is more numerous in membership
and therefore also more representative of
the people. Moreover, its members are
presumed to be more familiar with the needs
of the country in regard to the enactment of
the legislation involved.
The Senate is, however, allowed much
leeway in the exercise of its power to
propose or concur with amendments to the
bills initiated by the House of
Representatives. Thus, in one case, a bill
introduced in the U.S. House of
Representatives was changed by the Senate
to make a proposed inheritance tax a
corporation tax. It is also accepted practice
for the Senate to introduce what is known as
an amendment by substitution, which may
entirely replace the bill initiated in the House
of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW
144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation,
revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills must "originate
exclusively in the House of Representatives," it also adds, "but
the Senate may propose or concur with amendments." In the
exercise of this power, the Senate may propose an entirely
new bill as a substitute measure. As petitioner Tolentino states
in a high school text, a committee to which a bill is referred
may do any of the following:
(1) to endorse the bill without changes; (2) to
make changes in the bill omitting or adding
sections or altering its language; (3) to make
and endorse an entirely new bill as a
substitute, in which case it will be known as
a committee bill; or (4) to make no report at
all.
(A. TOLENTINO, THE GOVERNMENT OF
THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which
are required to originate in the House by prescribing that the
number of the House bill and its other parts up to the enacting
clause must be preserved although the text of the Senate
amendment may be incorporated in place of the original body
of the bill is to insist on a mere technicality. At any rate there is
no rule prescribing this form. S. No. 1630, as a substitute
measure, is therefore as much an amendment of H. No. 11197
as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197.
Petitioners' basic error is that they assume that S. No. 1630 is
an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate
"in substitution of S.B. No. 1129, taking into consideration P.S.
Res. No. 734 and H.B. No. 11197," implying that there is
something substantially different between the reference to S.
No. 1129 and the reference to H. No. 11197. From this
premise, they conclude that R.A. No. 7716 originated both in
the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630
was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No.
1630, clearly appear to be mere amendments of the
corresponding provisions of H. No. 11197. The very tabular
comparison of the provisions of H. No. 11197 and S. No. 1630
attached as Supplement A to the basic petition of petitioner
Tolentino, while showing differences between the two bills, at
the same time indicates that the provisions of the Senate bill
were precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S.
No. 1630. Because the Senate bill was a mere amendment of
the House bill, H. No. 11197 in its original form did not have to
pass the Senate on second and three readings. It was enough
that after it was passed on first reading it was referred to the
Senate Committee on Ways and Means. Neither was it
required that S. No. 1630 be passed by the House of
Representatives before the two bills could be referred to the
Conference Committee.
There is legislative precedent for what was done in the case of
H. No. 11197 and S. No. 1630. When the House bill and
Senate bill, which became R.A. No. 1405 (Act prohibiting the
disclosure of bank deposits), were referred to a conference
committee, the question was raised whether the two bills could
be the subject of such conference, considering that the bill
from one house had not been passed by the other and vice
versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question
of order as to procedure: If a House bill is
passed by the House but not passed by the
Senate, and a Senate bill of a similar nature
is passed in the Senate but never passed in
the House, can the two bills be the subject of
a conference, and can a law be enacted
from these two bills? I understand that the
 Senate bill in this particular instance does
not refer to investments in government
securities, whereas the bill in the House,
which was introduced by the Speaker,
covers two subject matters: not only
investigation of deposits in banks but also
investigation of investments in government
securities. Now, since the two bills differ in
their subject matter, I believe that no law can
be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B.
Laurel, Jr.) said:
THE SPEAKER. The report of the
conference committee is in order. It is
precisely in cases like this where a
conference should be had. If the House bill
had been approved by the Senate, there
would have been no need of a conference;
but precisely because the Senate passed
another bill on the same subject matter, the
conference committee had to be created,
and we are now considering the report of
that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp.
3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H.
No. 11197 and S. No. 1630 are distinct and unrelated
measures also accounts for the petitioners' (Kilosbayan's and
PAL's) contention that because the President separately
certified to the need for the immediate enactment of these
measures, his certification was ineffectual and void. The
certification had to be made of the version of the same revenue
bill which at the moment was being considered. Otherwise, to
follow petitioners' theory, it would be necessary for the
President to certify as many bills as are presented in a house
of Congress even though the bills are merely versions of the
bill he has already certified. It is enough that he certifies the bill
which, at the time he makes the certification, is under
consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be
certified. For that matter on June 1, 1993 the President had
earlier certified H. No. 9210 for immediate enactment because
it was the one which at that time was being considered by the
House. This bill was later substituted, together with other bills,
by H. No. 11197.
As to what Presidential certification can accomplish, we have
already explained in the main decision that the phrase "except
when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, 26 (2) qualifies not only the
requirement that "printed copies [of a bill] in its final form [must
be] distributed to the members three days before its passage"
but also the requirement that before a bill can become a law it
must have passed "three readings on separate days." There is
not only textual support for such construction but historical
basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House
unless it shall have been printed and copies
thereof in its final form furnished its Members
at least three calendar days prior to its
passage, except when the President shall
have certified to the necessity of its
immediate enactment. Upon the last reading
of a bill, no amendment thereof shall be
allowed and the question upon its passage
shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in
Art. VIII, 19 (2):
(2) No bill shall become a law unless it has
passed three readings on separate days,
and printed copies thereof in its final form
have been distributed to the Members three
days before its passage, except when the
Prime Minister certifies to the necessity of its
immediate enactment to meet a public
calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall
be allowed, and the vote thereon shall be
taken immediately thereafter, and
the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification,
was adopted in Art. VI, 26 (2) of the present Constitution,
thus:
(2) No bill passed by either House shall
become a law unless it has passed three
readings on separate days, and printed
copies thereof in its final form have been
distributed to its Members three days before
its passage, except when the President
certifies to the necessity of its immediate
enactment to meet a public calamity or
emergency. Upon the last reading of a bill,
no amendment thereto shall be allowed, and
the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in
the Journal.
The exception is based on the prudential consideration that if
in all cases three readings on separate days are required and
a bill has to be printed in final form before it can be passed, the
need for a law may be rendered academic by the occurrence
of the very emergency or public calamity which it is meant to
address.
Petitioners further contend that a "growing budget deficit" is not
an emergency, especially in a country like the Philippines
where budget deficit is a chronic condition. Even if this were
the case, an enormous budget deficit does not make the need
for R.A. No. 7716 any less urgent or the situation calling for its
enactment any less an emergency.
Apparently, the members of the Senate (including some of the
petitioners in these cases) believed that there was an urgent
need for consideration of S. No. 1630, because they
responded to the call of the President by voting on the bill on
second and third readings on the same day. While the judicial
department is not bound by the Senate's acceptance of the
President's certification, the respect due coequal departments
of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave
abuse of discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received
thorough consideration in the Senate where it was discussed
for six days. Only its distribution in advance in its final printed
form was actually dispensed with by holding the voting on
second and third readings on the same day (March 24, 1994).
Otherwise, sufficient time between the submission of the bill on
February 8, 1994 on second reading and its approval on March
24, 1994 elapsed before it was finally voted on by the Senate
on third reading.
The purpose for which three readings on separate days is
required is said to be two-fold: (1) to inform the members of
Congress of what they must vote on and (2) to give them
notice that a measure is progressing through the enacting
process, thus enabling them and others interested in the
measure to prepare their positions with reference to it. (1 J. G.
SUTHERLAND, STATUTES AND STATUTORY
CONSTRUCTION 10.04, p. 282 (1972)). These purposes
were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended
(principally by Kilosbayan, Inc. and the Movement of Attorneys
for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that
in violation of the constitutional policy of full public disclosure
and the people's right to know (Art. II, 28 and Art. III, 7) the
Conference Committee met for two days in executive session
with only the conferees present.
As pointed out in our main decision, even in the United States
it was customary to hold such sessions with only the conferees
and their staffs in attendance and it was only in 1975 when a
new rule was adopted requiring open sessions. Unlike its
American counterpart, the Philippine Congress has not
adopted a rule prescribing open hearings for conference
committees.
It is nevertheless claimed that in the United States, before the
adoption of the rule in 1975, at least staff members were
present. These were staff members of the Senators and
Congressmen, however, who may be presumed to be their
confidential men, not stenographers as in this case who on the
last two days of the conference were excluded. There is no
showing that the conferees themselves did not take notes of
their proceedings so as to give petitioner Kilosbayan basis for
claiming that even in secret diplomatic negotiations involving
state interests, conferees keep notes of their meetings. Above
all, the public's right to know was fully served because the
Conference Committee in this case submitted a report showing
the changes made on the differing versions of the House and
the Senate.
Petitioners cite the rules of both houses which provide that
conference committee reports must contain "a detailed,
sufficiently explicit statement of the changes in or other
amendments." These changes are shown in the bill attached to
the Conference Committee Report. The members of both
houses could thus ascertain what changes had been made in
the original bills without the need of a statement detailing the
changes.
The same question now presented was raised when the bill
which became R.A. No. 1400 (Land Reform Act of 1955) was
reported by the Conference Committee. Congressman
Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is
out of order to consider the report of the
conference committee regarding House Bill
No. 2557 by reason of the provision of
Section 11, Article XII, of the Rules of this
House which provides specifically that the
conference report must be accompanied by
a detailed statement of the effects of the
amendment on the bill of the House. This
conference committee report is not
accompanied by that detailed statement, Mr.
Speaker. Therefore it is out of order to
consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just
like to say a few words in connection with the
point of order raised by the gentleman from
Pangasinan.
There is no question about the provision of
the Rule cited by the gentleman from
Pangasinan, but this provision applies to
those cases where only portions of the bill
have been amended. In this case before us
an entire bill is presented; therefore, it can
be easily seen from the reading of the bill
what the provisions are. Besides, this
procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr.
Speaker, we have to look into the reason for
the provisions of the Rules, and the reason
for the requirement in the provision cited by
the gentleman from Pangasinan is when
there are only certain words or phrases
inserted in or deleted from the provisions of
the bill included in the conference report, and
we cannot understand what those words and
phrases mean and their relation to the bill. In
that case, it is necessary to make a detailed
statement on how those words and phrases
will affect the bill as a whole; but when the
entire bill itself is copied verbatim in the
conference report, that is not necessary. So
when the reason for the Rule does not exist,
the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis
added))
Congressman Tolentino was sustained by the chair. The
record shows that when the ruling was appealed, it was upheld
by viva voce and when a division of the House was called, it
was sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference
committee to insert new provisions as long as these are
germane to the subject of the conference. As this Court held
in Philippine Judges Association v. Prado, 227 SCRA 703
(1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to
resolving differences between the Senate and the House. It
may propose an entirely new provision. What is important is
that its report is subsequently approved by the respective
houses of Congress. This Court ruled that it would not
entertain allegations that, because new provisions had been
added by the conference committee, there was thereby a
violation of the constitutional injunction that "upon the last
reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to
look into the petitioners' charges that an
amendment was made upon the last reading
of the bill that eventually became R.A. No.
7354 and that copies thereof in its final
form were not distributed among the
members of each House. Both the enrolled
bill and the legislative journals certify that the
measure was duly enacted i.e., in
accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official
assurances from a coordinate department of
the government, to which we owe, at the
very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference
committees in the Philippines in a 1979 study:
Conference committees may be of two
types: free or instructed. These committees
may be given instructions by their parent
bodies or they may be left without
instructions. Normally the conference
committees are without instructions, and this
is why they are often critically referred to as
"the little legislatures." Once bills have been
sent to them, the conferees have almost
unlimited authority to change the clauses of
the bills and in fact sometimes introduce new
measures that were not in the original
legislation. No minutes are kept, and
members' activities on conference
committees are difficult to determine. One
congressman known for his idealism put it
this way: "I killed a bill on export incentives
for my interest group [copra] in the
conference committee but I could not have
done so anywhere else." The conference
committee submits a report to both houses,
and usually it is accepted. If the report is not
accepted, then the committee is discharged
and new members are appointed.
 (R. Jackson, Committees in the Philippine
Congress, in COMMITTEES AND
LEGISLATURES: A COMPARATIVE
ANALYSIS 163 (J. D. LEES AND M. SHAW,
eds.)).
In citing this study, we pass no judgment on the methods of
conference committees. We cite it only to say that conference
committees here are no different from their counterparts in the
United States whose vast powers we noted in Philippine
Judges Association v. Prado, supra. At all events, under Art.
VI, 16(3) each house has the power "to determine the rules of
its proceedings," including those of its committees. Any
meaningful change in the method and procedures of Congress
or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains
that R.A. No. 7716 violates Art. VI, 26 (1) of the Constitution
which provides that "Every bill passed by Congress shall
embrace only one subject which shall be expressed in the title
thereof." PAL contends that the amendment of its franchise by
the withdrawal of its exemption from the VAT is not expressed
in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of
2% on its gross revenue "in lieu of all other taxes, duties,
royalties, registration, license and other fees and charges of
any kind, nature, or description, imposed, levied, established,
assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."
PAL was exempted from the payment of the VAT along with
other entities by 103 of the National Internal Revenue Code,
which provides as follows:
103. Exempt transactions. The following
shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under
special laws or international agreements to
which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including
that granted to PAL, by amending 103, as follows:
103. Exempt transactions. The following
shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under
special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491,
1590. . . .
The amendment of 103 is expressed in the title of R.A. No.
7716 which reads:
AN ACT RESTRUCTURING THE VALUE-
ADDED TAX (VAT) SYSTEM, WIDENING
ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, AND FOR OTHER
PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE
VALUE-ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS
TAX BASE AND ENHANCING ITS ADMINISTRATION, AND
FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED AND FOR OTHER
PURPOSES," Congress thereby clearly expresses its intention
to amend any provision of the NIRC which stands in the way of
accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be
reflected in the title of the law by specific reference to P.D. No.
1590. It is unnecessary to do this in order to comply with the
constitutional requirement, since it is already stated in the title
that the law seeks to amend the pertinent provisions of the
NIRC, among which is 103(q), in order to widen the base of
the VAT. Actually, it is the bill which becomes a law that is
required to express in its title the subject of legislation. The
titles of H. No. 11197 and S. No. 1630 in fact specifically
referred to 103 of the NIRC as among the provisions sought
to be amended. We are satisfied that sufficient notice had been
given of the pendency of these bills in Congress before they
were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar
argument as that now made by PAL was rejected. R.A. No.
7354 is entitled AN ACT CREATING THE PHILIPPINE
POSTAL CORPORATION, DEFINING ITS POWERS,
FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER
PURPOSES CONNECTED THEREWITH. It contained a
provision repealing all franking privileges. It was contended
that the withdrawal of franking privileges was not expressed in
the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the
repeal of franking privileges, this Court held:
To require every end and means necessary
for the accomplishment of the general
objectives of the statute to be expressed in
its title would not only be unreasonable but
would actually render legislation impossible.
[Cooley, Constitutional Limitations, 8th Ed.,
p. 297] As has been correctly explained:
The details of a legislative
act need not be
specifically stated in its
title, but matter germane to
the subject as expressed
in the title, and adopted to
the accomplishment of the
object in view, may
properly be included in the
act. Thus, it is proper to
create in the same act the
machinery by which the
act is to be enforced, to
prescribe the penalties for
its infraction, and to
remove obstacles in the
way of its execution. If
such matters are properly
connected with the subject
as expressed in the title, it
is unnecessary that they
should also have special
mention in the title.
(Southern Pac. Co. v.
Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held
that, as a general proposition, the press is not exempt from the
taxing power of the State and that what the constitutional
guarantee of free press prohibits are laws which single out the
press or target a group belonging to the press for special
treatment or which in any way discriminate against the press
on the basis of the content of the publication, and R.A. No.
7716 is none of these.
Now it is contended by the PPI that by removing the exemption
of the press from the VAT while maintaining those granted to
others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally
guaranteed freedom is unconstitutional."
With respect to the first contention, it would suffice to say that
since the law granted the press a privilege, the law could take
back the privilege anytime without offense to the Constitution.
The reason is simple: by granting exemptions, the State does
not forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects
the press to the same tax burden to which other businesses
have long ago been subject. It is thus different from the tax
involved in the cases invoked by the PPI. The license tax
in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed.
660 (1936) was found to be discriminatory because it was laid
on the gross advertising receipts only of newspapers whose
weekly circulation was over 20,000, with the result that the tax
applied only to 13 out of 124 publishers in Louisiana. These
large papers were critical of Senator Huey Long who controlled
the state legislature which enacted the license tax. The
censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune
Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed.
2d 295 (1983), the tax was found to be discriminatory because
although it could have been made liable for the sales tax or, in
lieu thereof, for the use tax on the privilege of using, storing or
consuming tangible goods, the press was not. Instead, the
press was exempted from both taxes. It was, however, later
made to pay a special use tax on the cost of paper and ink
which made these items "the only items subject to the use tax
that were component of goods to be sold at retail." The U.S.
Supreme Court held that the differential treatment of the press
"suggests that the goal of regulation is not related to
suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that
favors the press is constitutionally suspect. (See the dissent of
Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by
E.O. No. 273 are withdrawn "absolutely and unqualifiedly" by
R.A. No. 7716. Other exemptions from the VAT, such as those
previously granted to PAL, petroleum concessionaires,
enterprises registered with the Export Processing Zone
Authority, and many more are likewise totally withdrawn, in
addition to exemptions which are partially withdrawn, in an
effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is
highlighted by the fact that transactions, which are profit
oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show
that by and large this is not so and that the exemptions are
granted for a purpose. As the Solicitor General says, such
exemptions are granted, in some cases, to encourage
agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt
transactions are:
(a) Goods for consumption or use which are
in their original state (agricultural, marine
and forest products, cotton seeds in their
original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane
and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the
manufacture of feeds).
(b) Goods used for personal consumption or
use (household and personal effects of
citizens returning to the Philippines) or for
professional use, like professional
instruments and implements, by persons
coming to the Philippines to settle here.
(c) Goods subject to excise tax such as
petroleum products or to be used for
manufacture of petroleum products subject
to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental,
hospital and veterinary services, and
services rendered under employer-employee
relationship.
(e) Works of art and similar creations sold by
the artist himself.
(f) Transactions exempted under special
laws, or international agreements.
(g) Export-sales by persons not VAT-
registered.
(h) Goods or services with gross annual sale
or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on
the Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does
not discriminate against the press because "even
nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional." PPI cites in support of this
assertion the following statement in Murdock v. Pennsylvania,
319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is
"nondiscriminatory" is immaterial. The
protection afforded by the First Amendment
is not so restricted. A license tax certainly
does not acquire constitutional validity
because it classifies the privileges protected
by the First Amendment along with the
wares and merchandise of hucksters and
peddlers and treats them all alike. Such
equality in treatment does not save the
ordinance. Freedom of press, freedom of
speech, freedom of religion are in preferred
position.
The Court was speaking in that case of a license tax, which,
unlike an ordinary tax, is mainly for regulation. Its imposition on
the press is unconstitutional because it lays a prior restraint on
the exercise of its right. Hence, although its application to
others, such those selling goods, is valid, its application to the
press or to religious groups, such as the Jehovah's Witnesses,
in connection with the latter's sale of religious books and
pamphlets, is unconstitutional. As the U.S. Supreme Court put
it, "it is one thing to impose a tax on income or property of a
preacher. It is quite another thing to exact a tax on him for
delivering a sermon."
A similar ruling was made by this Court in American Bible
Society v. City of Manila, 101 Phil. 386 (1957) which
invalidated a city ordinance requiring a business license fee on
those engaged in the sale of general merchandise. It was held
that the tax could not be imposed on the sale of bibles by the
American Bible Society without restraining the free exercise of
its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a
tax on the exercise of a privilege, much less a constitutional
right. It is imposed on the sale, barter, lease or exchange of
goods or properties or the sale or exchange of services and
the lease of properties purely for revenue purposes. To subject
the press to its payment is not to burden the exercise of its
right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom
under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that
although it sells bibles, the proceeds derived from the sales are
used to subsidize the cost of printing copies which are given
free to those who cannot afford to pay so that to tax the sales
would be to increase the price, while reducing the volume of
sale. Granting that to be the case, the resulting burden on the
exercise of religious freedom is so incidental as to make it
difficult to differentiate it from any other economic imposition
that might make the right to disseminate religious doctrines
costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an
impermissible burden on the right of the preacher to make a
sermon.
On the other hand the registration fee of P1,000.00 imposed by
107 of the NIRC, as amended by 7 of R.A. No. 7716,
although fixed in amount, is really just to pay for the expenses
of registration and enforcement of provisions such as those
relating to accounting in 108 of the NIRC. That the PBS
distributes free bibles and therefore is not liable to pay the VAT
does not excuse it from the payment of this fee because it also
sells some copies. At any rate whether the PBS is liable for the
VAT must be decided in concrete cases, in the event it is
assessed this tax by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and
contract clauses and the rule on taxation. CREBA asserts that
R.A. No. 7716 (1) impairs the obligations of contracts, (2)
classifies transactions as covered or exempt without
reasonable basis and (3) violates the rule that taxes should be
uniform and equitable and that Congress shall "evolve a
progressive system of taxation."
With respect to the first contention, it is claimed that the
application of the tax to existing contracts of the sale of real
property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to
be paid because of the 10% VAT. The additional amount, it is
pointed out, is something that the buyer did not anticipate at
the time he entered into the contract.
The short answer to this is the one given by this Court in an
early case: "Authorities from numerous sources are cited by
the plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a
contract or impairs its obligation, within the meaning of the
Constitution. Even though such taxation may affect particular
contracts, as it may increase the debt of one person and
lessen the security of another, or may impose additional
burdens upon one class and release the burdens of another,
still the tax must be paid unless prohibited by the Constitution,
nor can it be said that it impairs the obligation of any existing
contract in its true legal sense." (La Insular v. Machuca Go-
Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed
not only existing laws but also "the reservation of the essential
attributes of sovereignty, is . . . read into contracts as a
postulate of the legal order." (Philippine-American Life Ins. Co.
v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must
be understood as having been made in reference to the
possible exercise of the rightful authority of the government
and no obligation of contract can extend to the defeat of that
authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885
(1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts
such transactions as the sale of agricultural products, food
items, petroleum, and medical and veterinary services, it
grants no exemption on the sale of real property which is
equally essential. The sale of real property for socialized and
low-cost housing is exempted from the tax, but CREBA claims
that real estate transactions of "the less poor," i.e., the middle
class, who are equally homeless, should likewise be
exempted.
The sale of food items, petroleum, medical and veterinary
services, etc., which are essential goods and services was
already exempt under 103, pars. (b) (d) (1) of the NIRC
before the enactment of R.A. No. 7716. Petitioner is in error in
claiming that R.A. No. 7716 granted exemption to these
transactions, while subjecting those of petitioner to the
payment of the VAT. Moreover, there is a difference between
the "homeless poor" and the "homeless less poor" in the
example given by petitioner, because the second group or
middle class can afford to rent houses in the meantime that
they cannot yet buy their own homes. The two social classes
are thus differently situated in life. "It is inherent in the power to
tax that the State be free to select the subjects of taxation, and
it has been repeatedly held that 'inequalities which result from
a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil.
148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil.
912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A.
No. 7716 also violates Art. VI, 28(1) which provides that "The
rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable
articles or kinds of property of the same class be taxed at the
same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation.
To satisfy this requirement it is enough that the statute or
ordinance applies equally to all persons, forms and
corporations placed in similar situation. (City of Baguio v. De
Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long
before R.A. No. 7716 was enacted. R.A. No. 7716 merely
expands the base of the tax. The validity of the original VAT
Law was questioned in Kapatiran ng Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988)
on grounds similar to those made in these cases, namely, that
the law was "oppressive, discriminatory, unjust and regressive
in violation of Art. VI, 28(1) of the Constitution." (At 382)
Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the
requirements of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied
similarly on all goods and services sold to
the public, which are not exempt, at the
constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is
imposed only on sales of goods or services
by persons engaged in business with an
aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores
are consequently exempt from its
application. Likewise exempt from the tax
are sales of farm and marine products, so
that the costs of basic food and other
necessities, spared as they are from the
incidence of the VAT, are expected to be
relatively lower and within the reach of the
general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim
is made by the Cooperative Union of the Philippines, Inc.
(CUP), while petitioner Juan T. David argues that the law
contravenes the mandate of Congress to provide for a
progressive system of taxation because the law imposes a flat
rate of 10% and thus places the tax burden on all taxpayers
without regard to their ability to pay.
The Constitution does not really prohibit the imposition of
indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall "evolve a progressive
system of taxation." The constitutional provision has been
interpreted to mean simply that "direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be
minimized." (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate
to Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest
form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17(1) of the 1973 Constitution from
which the present Art. VI, 28(1) was taken. Sales taxes are
also regressive.
Resort to indirect taxes should be minimized but
not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers'
ability to pay. In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, 3, amending
102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4, amending 103 of the NIRC).
Thus, the following transactions involving basic and essential
goods and services are exempted from the VAT:
(a) Goods for consumption or use which are
in their original state (agricultural, marine
and forest products, cotton seeds in their
original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance
agriculture (milling of palay, corn sugar cane
and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the
manufacture of feeds).
(b) Goods used for personal consumption or
use (household and personal effects of
citizens returning to the Philippines) and or
professional use, like professional
instruments and implements, by persons
coming to the Philippines to settle here.
(c) Goods subject to excise tax such as
petroleum products or to be used for
manufacture of petroleum products subject
to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental,
hospital and veterinary services, and
services rendered under employer-employee
relationship.
(e) Works of art and similar creations sold by
the artist himself.
(f) Transactions exempted under special
laws, or international agreements.
(g) Export-sales by persons not VAT-
registered.
(h) Goods or services with gross annual sale
or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on
the Motions for Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the
VAT are those which involve goods and services which are
used or availed of mainly by higher income groups. These
include real properties held primarily for sale to customers or
for lease in the ordinary course of trade or business, the right
or privilege to use patent, copyright, and other similar property
or right, the right or privilege to use industrial, commercial or
scientific equipment, motion picture films, tapes and discs,
radio, television, satellite transmission and cable television
time, hotels, restaurants and similar places, securities, lending
investments, taxicabs, utility cars for rent, tourist buses, and
other common carriers, services of franchise grantees of
telephone and telegraph.
The problem with CREBA's petition is that it presents broad
claims of constitutional violations by tendering issues not at
retail but at wholesale and in the abstract. There is no fully
developed record which can impart to adjudication the impact
of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and
exemplify its effect on property rights. For the fact is that
petitioner's members have not even been assessed the VAT.
Petitioner's case is not made concrete by a series of
hypothetical questions asked which are no different from those
dealt with in advisory opinions.
The difficulty confronting petitioner is thus
apparent. He alleges arbitrariness. A mere
allegation, as here, does not suffice. There
must be a factual foundation of such
unconstitutional taint. Considering that
petitioner here would condemn such a
provision as void on its face, he has not
made out a case. This is merely to adhere to
the authoritative doctrine that where the due
process and equal protection clauses are
invoked, considering that they are not fixed
rules but rather broad standards, there is a
need for proof of such persuasive character
as would lead to such a conclusion. Absent
such a showing, the presumption of validity
must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development
of a concrete case. It may be that postponement of
adjudication would result in a multiplicity of suits. This need not
be the case, however. Enforcement of the law may give rise to
such a case. A test case, provided it is an actual case and not
an abstract or hypothetical one, may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for
adjudicating abstract issues. Otherwise, adjudication would be
no different from the giving of advisory opinion that does not
really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide
whenever a claim is made that "there has been a grave abuse
of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of the government." This
duty can only arise if an actual case or controversy is before
us. Under Art . VIII, 5 our jurisdiction is defined in terms of
"cases" and all that Art. VIII, 1, 2 can plausibly mean is that
in the exercise of that jurisdiction we have the judicial power to
determine questions of grave abuse of discretion by any
branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is
"judicial power," which is "the power of a court to hear and
decide cases pending between parties who have the right to
sue and be sued in the courts of law and equity" (Lamb v.
Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly
appropriated until it is apportioned among several courts either
by the Constitution, as in the case of Art. VIII, 5, or by statute,
as in the case of the Judiciary Act of 1948 (R.A. No. 296) and
the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The
power thus apportioned constitutes the court's "jurisdiction,"
defined as "the power conferred by law upon a court or judge
to take cognizance of a case, to the exclusion of all others."
(United States v. Arceo, 6 Phil. 29 (1906)) Without an actual
case coming within its jurisdiction, this Court cannot inquire
into any allegation of grave abuse of discretion by the other
departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the
other hand, the Cooperative Union of the Philippines (CUP),
after briefly surveying the course of legislation, argues that it
was to adopt a definite policy of granting tax exemption to
cooperatives that the present Constitution embodies provisions
on cooperatives. To subject cooperatives to the VAT would
therefore be to infringe a constitutional policy. Petitioner claims
that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales
taxes but in 1984, because of the crisis which menaced the
national economy, this exemption was withdrawn by P.D. No.
1955; that in 1986, P.D. No. 2008 again granted cooperatives
exemption from income and sales taxes until December 31,
1991, but, in the same year, E.O. No. 93 revoked the
exemption; and that finally in 1987 the framers of the
Constitution "repudiated the previous actions of the
government adverse to the interests of the cooperatives, that
is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening
the cooperatives by way of the grant of tax exemptions," by
providing the following in Art. XII:
 1. The goals of the national economy are a
more equitable distribution of opportunities,
income, and wealth; a sustained increase in
the amount of goods and services produced
by the nation for the benefit of the people;
and an expanding productivity as the key to
raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and
full employment based on sound agricultural
development and agrarian reform, through
industries that make full and efficient use of
human and natural resources, and which are
competitive in both domestic and foreign
markets. However, the State shall protect
Filipino enterprises against unfair foreign
competition and trade practices.
pending resolution of these cases. We have now come to the
conclusion that the law suffers from none of the infirmities
attributed to it by petitioners and that its enactment by the other
branches of the government does not constitute a grave abuse
of discretion. Any question as to its necessity, desirability or
expediency must be addressed to Congress as the body which
is electorally responsible, remembering that, as Justice Holmes
has said, "legislators are the ultimate guardians of the liberties
and welfare of the people in quite as great a degree as are the
courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S.
267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should
enforce the public accountability of legislators, that those who
took part in passing the law in question by voting for it in
Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court does
not sit as a third branch of the legislature, much less exercise a
veto power over legislation.

In the pursuit of these goals, all sectors of WHEREFORE, the motions for reconsideration are denied with
the economy and all regions of the country finality and the temporary restraining order previously issued is
shall be given optimum opportunity to hereby lifted.
develop. Private enterprises, including
corporations, cooperatives, and similar SO ORDERED.
collective organizations, shall be encouraged
to broaden the base of their ownership.

15. The Congress shall create an agency to

promote the viability and growth of
cooperatives as instruments for social justice
and economic development.

Petitioner's contention has no merit. In the first place, it is not

true that P.D. No. 1955 singled out cooperatives by
withdrawing their exemption from income and sales taxes
under P.D. No. 175, 5. What P.D. No. 1955, 1 did was to
withdraw the exemptions and preferential treatments
theretofore granted to private business enterprises in general,
in view of the economic crisis which then beset the nation. It is
true that after P.D. No. 2008, 2 had restored the tax
exemptions of cooperatives in 1986, the exemption was again
repealed by E.O. No. 93, 1, but then again cooperatives were
not the only ones whose exemptions were withdrawn. The
withdrawal of tax incentives applied to all, including
government and private entities. In the second place, the
Constitution does not really require that cooperatives be
granted tax exemptions in order to promote their growth and
viability. Hence, there is no basis for petitioner's assertion that
the government's policy toward cooperatives had been one of
vacillation, as far as the grant of tax privileges was concerned,
and that it was to put an end to this indecision that the
constitutional provisions cited were adopted. Perhaps as a
matter of policy cooperatives should be granted tax
exemptions, but that is left to the discretion of Congress. If
Congress does not grant exemption and there is no
discrimination to cooperatives, no violation of any constitutional
policy can be charged.

Indeed, petitioner's theory amounts to saying that under the

Constitution cooperatives are exempt from taxation. Such
theory is contrary to the Constitution under which only the
following are exempt from taxation: charitable institutions,
churches and parsonages, by reason of Art. VI, 28 (3), and
non-stock, non-profit educational institutions by reason of Art.
XIV, 4 (3).

CUP's further ground for seeking the invalidation of R.A. No.

7716 is that it denies cooperatives the equal protection of the
law because electric cooperatives are exempted from the VAT.
The classification between electric and other cooperatives
(farmers cooperatives, producers cooperatives, marketing
cooperatives, etc.) apparently rests on a congressional
determination that there is greater need to provide cheaper
electric power to as many people as possible, especially those
living in the rural areas, than there is to provide them with other
necessities in life. We cannot say that such classification is
unreasonable.

We have carefully read the various arguments raised against

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

The creation of such conference committee was apparently in

response to a problem, not addressed by any constitutional concern of Congress to instill discipline among the members of
provision, where the two houses of Congress find themselves its conference committee if it believes that said members
in disagreement over changes or amendments introduced by violated any of its rules of proceedings. Even the expanded
the other house in a legislative bill. Given that one of the most jurisdiction of this Court cannot apply to questions regarding
basic powers of the legislative branch is to formulate and only the internal operation of Congress, thus, the Court is wont
implement its own rules of proceedings and to discipline its to deny a review of the internal proceedings of a co-equal
members, may the Court then delve into the details of how branch of government.
Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present Moreover, as far back as 1994 or more than ten years ago, in
petitions, the issue is not whether provisions of the rules of the case of Tolentino vs. Secretary of Finance,23 the Court
both houses creating the bicameral conference committee are already made the pronouncement that "[i]f a change is
unconstitutional, but whether the bicameral conference desired in the practice [of the Bicameral Conference
committee has strictly complied with the rules of both Committee] it must be sought in Congress since this
houses, thereby remaining within the jurisdiction question is not covered by any constitutional provision
conferred upon it by Congress. but is only an internal rule of each house." 24 To date,
Congress has not seen it fit to make such changes adverted to
In the recent case of Farias vs. The Executive Secretary,20 the by the Court. It seems, therefore, that Congress finds the
Court En Banc, unanimously reiterated and emphasized its practices of the bicameral conference committee to be very
adherence to the "enrolled bill doctrine," thus, declining therein useful for purposes of prompt and efficient legislative action.
petitioners plea for the Court to go behind the enrolled copy of
the bill. Assailed in said case was Congresss creation of two Nevertheless, just to put minds at ease that no blatant
sets of bicameral conference committees, the lack of records irregularities tainted the proceedings of the bicameral
of said committees proceedings, the alleged violation of said conference committees, the Court deems it necessary to dwell
committees of the rules of both houses, and the disappearance on the issue. The Court observes that there was a necessity
or deletion of one of the provisions in the compromise bill for a conference committee because a comparison of the
submitted by the bicameral conference committee. It was provisions of House Bill Nos. 3555 and 3705 on one hand, and
argued that such irregularities in the passage of the law Senate Bill No. 1950 on the other, reveals that there were
nullified R.A. No. 9006, or the Fair Election Act. indeed disagreements. As pointed out in the petitions, said
disagreements were as follows:
Striking down such argument, the Court held thus:
House Bill No. House Bill No.3705 Senate Bill No.
Under the "enrolled bill doctrine," the signing of a bill by the 3555 1950
Speaker of the House and the Senate President and the With regard to "Stand-By Authority" in favor of President
certification of the Secretaries of both Houses of Congress that Provides for 12% Provides for 12% Provides for a
it was passed are conclusive of its due enactment. A review of VAT on every VAT in general on single rate of 10%
cases reveals the Courts consistent adherence to the sale of goods or sales of goods or VAT on sale of
rule. The Court finds no reason to deviate from the properties properties and goods or
salutary rule in this case where the irregularities alleged (amending Sec. reduced rates for properties
by the petitioners mostly involved the internal rules of 106 of NIRC); sale of certain (amending Sec.
Congress, e.g., creation of the 2nd or 3rd Bicameral 12% VAT on locally 106 of NIRC),
Conference Committee by the House. This Court is not the importation of manufactured goods 10% VAT on sale
proper forum for the enforcement of these internal rules of goods (amending and petroleum of services
Congress, whether House or Senate. Parliamentary rules Sec. 107 of products and raw including sale of
are merely procedural and with their observance the NIRC); and 12% materials to be used electricity by
courts have no concern. Whatever doubts there may be as VAT on sale of in the manufacture generation
to the formal validity of Rep. Act No. 9006 must be services and use thereof (amending companies,
resolved in its favor.The Court reiterates its ruling in Arroyo or lease of Sec. 106 of NIRC); transmission and
vs. De Venecia, viz.: properties 12% VAT on distribution
(amending Sec. importation of goods companies, and
But the cases, both here and abroad, in varying forms of 108 of NIRC) and reduced rates use or lease of
expression, all deny to the courts the power to inquire into for certain imported properties
allegations that, in enacting a law, a House of Congress products including (amending Sec.
petroleum products 108 of NIRC)
 (amending Sec. 107 corporate income taxes, percentage, franchise and excise
of NIRC); and 12% taxes should be amended.
VAT on sale of
services and use or There being differences and/or disagreements on the foregoing
lease of properties provisions of the House and Senate bills, the Bicameral
and a reduced rate Conference Committee was mandated by the rules of both
for certain services houses of Congress to act on the same by settling said
including power differences and/or disagreements. The Bicameral Conference
generation Committee acted on the disagreeing provisions by making the
(amending Sec. 108 following changes:
of NIRC)
With regard to the "no pass-on" provision
1. With regard to the disagreement on the rate of VAT to be
No similar Provides that the Provides that the imposed, it would appear from the Conference Committee
provision VAT imposed on VAT imposed on Report that the Bicameral Conference Committee tried to
power generation sales of electricity bridge the gap in the difference between the 10% VAT rate
and on the sale of by generation proposed by the Senate, and the various rates with 12% as the
petroleum products companies and highest VAT rate proposed by the House, by striking a
shall be absorbed services of compromise whereby the present 10% VAT rate would be
by generation transmission retained until certain conditions arise, i.e., the value-added tax
companies or companies and collection as a percentage of gross domestic product (GDP) of
sellers, respectively, distribution the previous year exceeds 2 4/5%, or National Government
and shall not be companies, as deficit as a percentage of GDP of the previous year exceeds
passed on to well as those of 1%, when the President, upon recommendation of the
consumers franchise grantees Secretary of Finance shall raise the rate of VAT to 12%
of electric utilities effective January 1, 2006.
shall not apply to
residential
2. With regard to the disagreement on whether only the VAT
imposed on electricity generation, transmission and distribution
end-users. VAT companies should not be passed on to consumers or whether
shall be absorbed both the VAT imposed on electricity generation, transmission
by generation, and distribution companies and the VAT imposed on sale of
transmission, and petroleum products may be passed on to consumers, the
distribution Bicameral Conference Committee chose to settle such
companies. disagreement by altogether deleting from its Report any no
With regard to 70% limit on input tax credit pass-on provision.
Provides that the No similar provision Provides that the
input tax credit for input tax credit for 3. With regard to the disagreement on whether input tax credits
capital goods on capital goods on should be limited or not, the Bicameral Conference Committee
which a VAT has which a VAT has decided to adopt the position of the House by putting a
been paid shall been paid shall be limitation on the amount of input tax that may be credited
be equally equally distributed against the output tax, although it crafted its own language as
distributed over 5 over 5 years or to the amount of the limitation on input tax credits and the
years or the the depreciable manner of computing the same by providing thus:
depreciable life of life of such capital
such capital goods; the input
goods; the input tax credit for (A) Creditable Input Tax. . . .
tax credit for goods and
goods and services other ...
services other than capital goods
than capital shall not exceed
Provided, The input tax on goods purchased or imported in a
goods shall not 90% of the output
calendar month for use in trade or business for which
exceed 5% of the VAT.
deduction for depreciation is allowed under this Code, shall be
total amount of
spread evenly over the month of acquisition and the fifty-nine
such goods and
(59) succeeding months if the aggregate acquisition cost for
services; and for
such goods, excluding the VAT component thereof, exceeds
persons engaged
one million Pesos (1,000,000.00): PROVIDED, however, that
in retail trading of
if the estimated useful life of the capital good is less than five
goods, the
(5) years, as used for depreciation purposes, then the input
allowable input
VAT shall be spread over such shorter period: . . .
tax credit shall
not exceed 11%
of the total (B) Excess Output or Input Tax. If at the end of any taxable
amount of goods quarter the output tax exceeds the input tax, the excess shall
purchased. be paid by the VAT-registered person. If the input tax exceeds
the output income
With regard to amendments to be made to NIRC provisions regarding tax, the excess shall taxes
and excise be carried over to the
succeeding quarter or quarters: PROVIDED that the input tax
No similar provision No similar provision Provided for amendments to
inclusive of input VAT carried over from the previous quarter
several NIRC provisions regarding
that may be credited in every quarter shall not exceed seventy
corporate income, percentage,
percent (70%) of the output VAT: PROVIDED, HOWEVER,
franchise and excise taxes
THAT any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited
The disagreements between the provisions in the House bills against other internal revenue taxes, . . .
and the Senate bill were with regard to (1) what rate of VAT is
to be imposed; (2) whether only the VAT imposed on electricity
4. With regard to the amendments to other provisions of the
generation, transmission and distribution companies should not
NIRC on corporate income tax, franchise, percentage and
be passed on to consumers, as proposed in the Senate bill, or
excise taxes, the conference committee decided to include
both the VAT imposed on electricity generation, transmission
such amendments and basically adopted the provisions found
and distribution companies and the VAT imposed on sale of
in Senate Bill No. 1950, with some changes as to the rate of
petroleum products should not be passed on to consumers, as
the tax to be imposed.
proposed in the House bill; (3) in what manner input tax credits
should be limited; (4) and whether the NIRC provisions on
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill.
The term "settle" is synonymous to "reconcile" and
"harmonize."25 To reconcile or harmonize disagreeing
provisions, the Bicameral Conference Committee may then (a)
adopt the specific provisions of either the House bill or Senate
bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at
a compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant
only to reconcile and harmonize the disagreeing provisions for
it did not inject any idea or intent that is wholly foreign to the
subject embraced by the original provisions.
The so-called stand-by authority in favor of the President,
whereby the rate of 10% VAT wanted by the Senate is retained
until such time that certain conditions arise when the 12% VAT
wanted by the House shall be imposed, appears to be a
compromise to try to bridge the difference in the rate of VAT
proposed by the two houses of Congress. Nevertheless, such
compromise is still totally within the subject of what rate of VAT
should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the
transcripts of the proceedings of the Bicameral Conference
Committee held on May 10, 2005, Sen. Ralph Recto,
Chairman of the Senate Panel, explained the reason for
deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill
simple. And we were thinking that no sector should be a
beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-
tax. And lets keep it plain and simple. Lets not confuse the bill
and put a no pass-on provision. Two-thirds of the world have a
VAT system and in this two-thirds of the globe, I have yet to
see a VAT with a no pass-though provision. So, the thinking of
the Senate is basically simple, lets keep the VAT
simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that
the no pass-on provision "never really enjoyed the support of
either House."27
With regard to the amount of input tax to be credited against
output tax, the Bicameral Conference Committee came to a
compromise on the percentage rate of the limitation or cap on
such input tax credit, but again, the change introduced by the
Bicameral Conference Committee was totally within the intent
of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the
subject revenue bill in the House of Representatives, one of
the major objectives was to "plug a glaring loophole in the tax
policy and administration by creating vital restrictions on the
claiming of input VAT tax credits . . ." and "[b]y introducing
limitations on the claiming of tax credit, we are capping a major
leakage that has placed our collection efforts at an apparent
disadvantage."28
As to the amendments to NIRC provisions on taxes other than
the value-added tax proposed in Senate Bill No. 1950, since
said provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the
version of the Senate.
Thus, all the changes or modifications made by the Bicameral
Conference Committee were germane to subjects of the
provisions referred
to it for reconciliation. Such being the case, the Court does not
see any grave abuse of discretion amounting to lack or excess
of jurisdiction committed by the Bicameral Conference
Committee. In the earlier cases of Philippine Judges
Association vs. Prado29 and Tolentino vs. Secretary of
Finance,30 the Court recognized the long-standing legislative
practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House.
Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include
in its report an entirely new provision that is not found either in
the House bill or in the Senate bill. If the committee can
propose an amendment consisting of one or two provisions,
there is no reason why it cannot propose several provisions,
collectively considered as an "amendment in the nature of a
substitute," so long as such amendment is germane to the
subject of the bills before the committee. After all, its report
was not final but needed the approval of both houses of
Congress to become valid as an act of the legislative
department. The charge that in this case the Conference
Committee acted as a third legislative chamber is thus
without any basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of
the Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it
has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to its
Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading
of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas
and nays entered in the Journal.
Petitioners argument that the practice where a bicameral
conference committee is allowed to add or delete provisions in
the House bill and the Senate bill after these had passed three
readings is in effect a circumvention of the "no amendment
rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to
convince the Court to deviate from its ruling in
the Tolentino case that:
Nor is there any reason for requiring that the Committees
Report in these cases must have undergone three readings in
each of the two houses. If that be the case, there would be no
end to negotiation since each house may seek modification of
the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring
only to bills introduced for the first time in either house of
Congress, not to the conference committee
report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule"
refers only to the procedure to be followed by each house
of Congress with regard to bills initiated in each of said
respective houses, before said bill is transmitted to the
other house for its concurrence or amendment. Verily, to
construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to
absurdity as this would mean that the other house of Congress
would be deprived of its constitutional power to amend or
introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by
the Bicameral Conference Committee of amendments and
modifications to disagreeing provisions in bills that have been
acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made
regarding the NIRC provisions on corporate income taxes and
percentage, excise taxes. Petitioners refer to the following
provisions, to wit:
Section 27 Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries senators, who are elected at large, are expected to
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of
the NIRC did not at all originate from the House. They aver that
House Bill No. 3555 proposed amendments only regarding
Sections 106, 107, 108, 110 and 114 of the NIRC, while House
Bill No. 3705 proposed amendments only to Sections 106,
107,108, 109, 110 and 111 of the NIRC; thus, the other
sections of the NIRC which the Senate amended but which
amendments were not found in the House bills are not
intended to be amended by the House of Representatives.
Hence, they argue that since the proposed amendments did
not originate from the House, such amendments are a violation
of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with
amendments.
In the present cases, petitioners admit that it was indeed
House Bill Nos. 3555 and 3705 that initiated the move for
amending provisions of the NIRC dealing mainly with the
value-added tax. Upon transmittal of said House bills to the
Senate, the Senate came out with Senate Bill No. 1950
proposing amendments not only to NIRC provisions on the
value-added tax but also amendments to NIRC provisions on
other kinds of taxes. Is the introduction by the Senate of
provisions not dealing directly with the value- added tax, which
is the only kind of tax being amended in the House bills, still
within the purview of the constitutional provision authorizing the
Senate to propose or concur with amendments to a revenue
bill that originated from the House?
The foregoing question had been squarely answered in
the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill
which is required by the Constitution to "originate exclusively"
in the House of Representatives. It is important to emphasize
this, because a bill originating in the House may undergo such
extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to
note is that, as a result of the Senate action, a distinct bill may
be produced. To insist that a revenue statute and not only
the bill which initiated the legislative process culminating
in the enactment of the law must substantially be the
same as the House bill would be to deny the Senates
power not only to "concur with amendments" but also to
"propose amendments." It would be to violate the coequality
of legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version
even with respect to bills which are required by the
Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative
for filing revenue, tariff or tax bills, bills authorizing an increase
of the public debt, private bills and bills of local application
must come from the House of Representatives on the theory
that, elected as they are from the districts, the members of
the House can be expected to be more sensitive to the
local needs and problems. On the other hand, the
approach the same problems from the national
perspective. Both views are thereby made to bear on the
enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate was
acting within its
constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the Constitution does not
contain any prohibition or limitation on the extent of the
amendments that may be introduced by the Senate to the
House revenue bill.
Furthermore, the amendments introduced by the Senate to the
NIRC provisions that had not been touched in the House bills
are still in furtherance of the intent of the House in initiating the
subject revenue bills. The Explanatory Note of House Bill No.
1468, the very first House bill introduced on the floor, which
was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is
the urgent and daunting task of solving the countrys serious
financial problems. To do this, government expenditures must
be strictly monitored and controlled and revenues must be
significantly increased. This may be easier said than done, but
our fiscal authorities are still optimistic the government will be
operating on a balanced budget by the year 2009. In fact,
several measures that will result to significant expenditure
savings have been identified by the administration. It is
supported with a credible package of revenue measures
that include measures to improve tax administration and
control the leakages in revenues from income taxes and
the value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill
No. 3555, declared that:
In the budget message of our President in the year 2005, she
reiterated that we all acknowledged that on top of our agenda
must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector
deficit and eventually achieve a balanced budget by the year
2009, we need to seize windows of opportunities which
might seem poignant in the beginning, but in the long run
prove effective and beneficial to the overall status of our
economy. One such opportunity is a review of existing tax
rates, evaluating the relevance given our present
conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from
the House of Representatives is to bring in sizeable revenues
for the government
to supplement our countrys serious financial problems, and
improve tax administration and control of the leakages in
revenues from income taxes and value-added taxes. As these
house bills were transmitted to the Senate, the latter,
approaching the measures from the point of national
perspective, can introduce amendments within the purposes of
those bills. It can provide for ways that would soften the impact
of the VAT measure on the consumer, i.e., by distributing the
burden across all sectors instead of putting it entirely on the
shoulders of the consumers. The sponsorship speech of Sen.
Ralph Recto on why the provisions on income tax on
corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and
Means will raise 64.3 billion in additional revenues annually
even while by mitigating prices of power, services and
petroleum products.
However, not all of this will be wrung out of VAT. In fact, only
48.7 billion amount is from the VAT on twelve goods and
services. The rest of the tab 10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing between
corporate Philippines and the consumer. Why should the latter
bear all the pain? Why should the fiscal salvation be only on
the burden of the consumer?
The corporate worlds equity is in form of the increase in the
corporate income tax from 32 to 35 percent, but up to 2008
only. This will raise 10.5 billion a year. After that, the rate will
slide back, not to its old rate of 32 percent, but two notches
lower, to 30 percent.
Clearly, we are telling those with the capacity to pay,
corporations, to bear with this emergency provision that will be
in effect for 1,200 days, while we put our fiscal house in order.
This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We
intend to keep the length of their sacrifice brief. We would like
to assure them that not because there is a light at the end of
the tunnel, this government will keep on making the tunnel
long.
The responsibility will not rest solely on the weary shoulders of
the small man. Big business will be there to share the burden. 35
As the Court has said, the Senate can propose amendments
and in fact, the amendments made on provisions in the tax on
income of corporations are germane to the purpose of the
house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other
percentage and excise taxes germane to the reforms to the
VAT system, as these sections would cushion the effects of
VAT on consumers. Considering that certain goods and
services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be
burdened more as they would be paying the VAT in addition to
these taxes. Thus, there is a need to amend these sections to
soften the impact of VAT. Again, in his sponsorship speech,
Sen. Recto said:
However, for power plants that run on oil, we will reduce to
zero the present excise tax on bunker fuel, to lessen the effect
of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise
tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil
products, so as not to destroy the VAT chain, we will however
bring down the excise tax on socially sensitive products such
as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions
of giving to the left hand what was taken from the right. Rather,
these sprang from our concern of softening the impact of VAT,
so that the people can cushion the blow of higher prices they
will have to pay as a result of VAT.36
The other sections amended by the Senate pertained to
matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are
germane to the subject matter and purposes of the house bills,
which is to supplement our countrys fiscal deficit, among
others. Thus, the Senate acted within its power to propose
those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et
al., and Escudero, et al. contend in common that Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC giving the President the stand-by
authority to raise the VAT rate from 10% to 12% when a
certain condition is met, constitutes undue delegation of the
legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed
and collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to ten percent (10%)
of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor: provided, that the President, upon
the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax
to twelve percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%).
SEC. 5. Section 107 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected
on every importation of goods a value-added tax equivalent to
ten percent (10%) based on the total value used by the Bureau
of Customs in determining tariff and customs duties, plus
customs duties, excise taxes, if any, and other charges, such
tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the
customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on
the landed cost plus excise taxes, if any: provided, further,
that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%) after
any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%).
SEC. 6. Section 108 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or
Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed
and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the
recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax
to twelve percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the
President to increase the VAT rate is a virtual abdication by
Congress of its exclusive power to tax because such
delegation is not within the purview of Section 28 (2), Article VI
of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within
specified limits, and may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development
program of the government.
They argue that the VAT is a tax levied on the sale, barter or
exchange of goods and properties as well as on the sale or
exchange of services, which cannot be included within the
purview of tariffs under the exempted delegation as the latter
refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods
or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend
that delegating to the President the legislative power to tax is
contrary to republicanism. They insist that accountability,
responsibility and transparency should dictate the actions of
Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also
effectively nullified the Presidents power of control, which
includes the authority to set aside and nullify the acts of her
subordinates like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample
powers to cause, influence or create the conditions provided by
the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and
revolting the situation that the imposition of the 12% rate would
be subject to the whim of the Secretary of Finance, an
unelected bureaucrat, contrary to the principle of no taxation
without representation. They submit that the Secretary of
Finance is not mandated to give a favorable recommendation
and he may not even give his recommendation. Moreover, they
allege that no guiding standards are provided in the law on
what basis and as to how he will make his recommendation.
They claim, nonetheless, that any recommendation of the
Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter,
such that, ultimately, it is the President who decides whether to
impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers
is instructive.
The principle of separation of powers ordains that each of the
three great branches of government has exclusive cognizance
of and is supreme in matters falling within its own
constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the principle
of non-delegation of powers, as expressed in the Latin
maxim: potestas delegata non delegari potest which means
"what has been delegated, cannot be delegated." 38 This
doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his
own judgment and not through the intervening mind of
another.39
With respect to the Legislature, Section 1 of Article VI of the
Constitution provides that "the Legislative power shall be
vested in the Congress of the Philippines which shall consist of
a Senate and a House of Representatives." The powers which
Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been
described as the authority to make a complete law
complete as to the time when it shall take effect and as to
whom it shall be applicable and to determine the
expediency of its enactment.40 Thus, the rule is that in order
that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must
appear that the power involved is purely legislative in nature
that is, one appertaining exclusively to the legislative
department. It is the nature of the power, and not the liability of
its use or the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of legislative
powers is subject to the following recognized limitations or
exceptions:
(1) Delegation of tariff powers to the President under Section
28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under
Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if the
law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate; 41 and
(b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must
conform in the performance of his functions.42 A sufficient
standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency
to apply it. It indicates the circumstances under which the
legislative command is to be effected.43 Both tests are intended
to prevent a total transference of legislative authority to the
delegate, who is not allowed to step into the shoes of the
legislature and exercise a power essentially legislative. 44
In People vs. Vera,45 the Court, through eminent Justice Jose
P. Laurel, expounded on the concept and extent of delegation
of power in this wise:
In testing whether a statute constitutes an undue delegation of
legislative power or not, it is usual to inquire whether the
statute was complete in all its terms and provisions when it left
the hands of the legislature so that nothing was left to the
judgment of any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the
delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring
an authority or discretion as to its execution, to be
exercised under and in pursuance of the law. The first
cannot be done; to the latter no valid objection can be
made.
...
It is contended, however, that a legislative act may be made to
the effect as law after it leaves the hands of the legislature. It is
true that laws may be made effective on certain contingencies,
as by proclamation of the executive or the adoption by the
people of a particular community. In Wayman vs. Southard, the
Supreme Court of the United States ruled that the legislature
may delegate a power not legislative which it may itself
rightfully exercise. The power to ascertain facts is such a
power which may be delegated. There is nothing
essentially legislative in ascertaining the existence of
facts or conditions as the basis of the taking into effect of
a law. That is a mental process common to all branches of
the government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative
authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in
the following language speaking of declaration of legislative
power to administrative agencies: The principle which
permits the legislature to provide that the administrative
agent may determine when the circumstances are such as
require the application of a law is defended upon the
ground that at the time this authority is granted, the rule of
public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the
legislature, as it is its duty to do, determines that, under
given circumstances, certain executive or administrative
action is to be taken, and that, under other circumstances,
different or no action at all is to be taken. What is thus left
to the administrative official is not the legislative
determination of what public policy demands, but simply
the ascertainment of what the facts of the case require to
be done according to the terms of the law by which he is
governed. The efficiency of an Act as a declaration of
legislative will must, of course, come from Congress, but
the ascertainment of the contingency upon which the Act
shall take effect may be left to such agencies as it may
designate. The legislature, then, may provide that a law
shall take effect upon the happening of future specified
contingencies leaving to some other person or body the
power to determine when the specified contingency has
arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the
Constitution to make laws and to alter and repeal them; the
test is the completeness of the statute in all its terms and
provisions when it leaves the hands of the legislature. To
determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope and
definiteness of the measure enacted. The legislative does
not abdicate its functions when it describes what job must
be done, who is to do it, and what is the scope of his
authority. For a complex economy, that may be the only way
in which the legislative process can go forward. A distinction
has rightfully been made between delegation of power to
make the laws which necessarily involves a discretion as
to what it shall be, which constitutionally may not be done,
and delegation of authority or discretion as to its
execution to be exercised under and in pursuance of the
law, to which no valid objection can be made. The
Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and
practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or
bodies the power to determine certain facts or conditions, or
the happening of contingencies, on which the operation of a
statute is, by its terms, made to depend, but the legislature
must prescribe sufficient standards, policies or limitations on
their authority.49 While the power to tax cannot be delegated to
executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to
them, including the power to determine the existence of facts
on which its operation depends.50
The rationale for this is that the preliminary ascertainment of
facts as basis for the enactment of legislation is not of itself a
legislative function, but is simply ancillary to legislation. Thus,
the duty of correlating information and making
recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may
delegate to others to perform. Intelligent legislation on the
complicated problems of modern society is impossible in the
absence of accurate information on the part of the legislators,
and any reasonable method of securing such information is
proper.51 The Constitution as a continuously operative charter
of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or
that it make for itself detailed determinations which it has
declared to be prerequisite to application of legislative policy to
particular facts and circumstances impossible for Congress
itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is
the common proviso in Sections 4, 5 and 6 which reads as
follows:
That the President, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %).
The case before the Court is not a delegation of legislative
power. It is simply a delegation of ascertainment of facts upon
which enforcement and administration of the increase rate
under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent
upon a specified fact or condition. It leaves the entire operation
or non-operation of the 12% rate upon factual matters outside
of the control of the executive.
No discretion would be exercised by the President. Highlighting
the absence of discretion is the fact that the word shall is used
in the common proviso. The use of the word shall connotes a
mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of
discretion.53 Where the law is clear and unambiguous, it must
be taken to mean exactly what it says, and courts have no
choice but to see to it that the mandate is obeyed. 54
Thus, it is the ministerial duty of the President to immediately
impose the 12% rate upon the existence of any of the
conditions specified by Congress. This is a duty which cannot
be evaded by the President. Inasmuch as the law specifically
uses the word shall, the exercise of discretion by the President
does not come into play. It is a clear directive to impose the
12% VAT rate when the specified conditions are present. The
time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or
body other than the legislature itself.
The Court finds no merit to the contention of
petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the
Secretary of Finance by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of
Finance. The Court cannot also subscribe to the position of
petitioners
Pimentel, et al. that the word shall should be interpreted to
mean may in view of the phrase "upon the recommendation of
the Secretary of Finance." Neither does the Court find
persuasive the submission of petitioners Escudero, et al. that
any recommendation by the Secretary of Finance can easily be
brushed aside by the President since the former is a mere alter
ego of the latter.
When one speaks of the Secretary of Finance as the alter ego
of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of the
Chief Executive. The multifarious executive and administrative
functions of the Chief Executive are performed by and through
the executive departments, and the acts of the secretaries of
such departments, such as the Department of Finance,
performed and promulgated in the regular course of business,
are, unless disapproved or reprobated by the Chief Executive,
presumptively the acts of the Chief Executive. The Secretary of
Finance, as such, occupies a political position and holds office
in an advisory capacity, and, in the language of Thomas
Jefferson, "should be of the President's bosom confidence"
and, in the language of Attorney-General Cushing, is "subject
to the direction of the President."55
In the present case, in making his recommendation to the
President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. In such instance, he is not
subject to the power of control and direction of the President.
He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will
is to take effect.56 The Secretary of Finance becomes the
means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to
gather data and information and has a much broader
perspective to properly evaluate them. His function is to gather
and collate statistical data and other pertinent information and
verify if any of the two conditions laid out by Congress is
present. His personality in such instance is in reality but a
projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter
or modify or nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former for that of
the latter.
Congress simply granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely, whether
by December 31, 2005, the value-added tax collection as a
percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1%). If either of
these two instances has occurred, the Secretary of Finance, by
legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no undue
delegation of legislative power but only of the discretion
as to the execution of a law. This is constitutionally
permissible.57 Congress does not abdicate its functions or
unduly delegate power when it describes what job must be
done, who must do it, and what is the scope of his authority; in
our complex economy that is frequently the only way in which
the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party
List, et al. that delegating to the President the legislative power
to tax is contrary to the principle of republicanism, the same
deserves scant consideration. Congress did not delegate the
power to tax but the mere implementation of the law. The intent
and will to increase the VAT rate to 12% came from Congress
and the task of the President is to simply execute the
legislative policy. That Congress chose to do so in such a
manner is not within the province of the Court to inquire into, its
task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the
President has ample powers to cause, influence or create the
conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist at all.
The Court deals with facts, not fancies; on realities, not
appearances. When the Court acts on appearances instead of
realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair
and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the
VAT rate imposes an unfair and additional tax burden on the
people. Petitioners also argue that the 12% increase,
dependent on any of the 2 conditions set forth in the contested
provisions, is ambiguous because it does not state if the VAT
rate would be returned to the original 10% if the rates are no
longer satisfied. Petitioners also argue that such rate is unfair
and unreasonable, as the people are unsure of the applicable
VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No.
9337, if any of the two conditions set forth therein are satisfied,
the President shall increase the VAT rate to 12%. The
provisions of the law are clear. It does not provide for a return
to the 10% rate nor does it empower the President to so revert
if, after the rate is increased to 12%, the VAT collection goes
below the 24/5 of the GDP of the previous year or that the
national government deficit as a percentage of GDP of the
previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none
is provided for. Rewriting the law is a forbidden ground that
only Congress may tread upon.60
Thus, in the absence of any provision providing for a return to
the 10% rate, which in this case the Court finds none,
petitioners argument is, at best, purely speculative. There is
no basis for petitioners fear of a fluctuating VAT rate because
the law itself does not provide that the rate should go back to
10% if the conditions provided in Sections 4, 5 and 6 are no
longer present. The rule is that where the provision of the law
is clear and unambiguous, so that there is no occasion for the
court's seeking the legislative intent, the law must be taken as
it is, devoid of judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate,
which was allegedly an incentive to the President to raise the
VAT collection to at least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT
collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage
of GDP of the previous year exceeds one and one-half percent
(1 %).
Respondents explained the philosophy behind these
alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have
economic or fiscal meaning. If VAT/GDP is less than 2.8%, it
means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the
function of the tax collection. Therefore, there is no value to
increase it to 12% because such action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5%
or less means the fiscal condition of government has reached
a relatively sound position or is towards the direction of a
balanced budget position. Therefore, there is no need to
increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.62
That the first condition amounts to an incentive to the President
to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which
the law was passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the need for a raise
in revenue.
The principle of fiscal adequacy as a characteristic of a sound
tax system was originally stated by Adam Smith in his Canons
of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and
to keep out of the pockets of the people as little as possible
over and above what it brings into the public treasury of the
state.63
It simply means that sources of revenues must be adequate to
meet government expenditures and their variations. 64
The dire need for revenue cannot be ignored. Our country is in
a quagmire of financial woe. During the Bicameral Conference
Committee hearing, then Finance Secretary Purisima bluntly
depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself
in right now. We are in a position where 90 percent of our
revenue is used for debt service. So, for every peso of revenue
that we currently raise, 90 goes to debt service. Thats interest
plus amortization of our debt. So clearly, this is not a
sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from that
international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows you that
this is not a sustainable situation.
The third thing that Id like to point out is the environment that
we are presently operating in is not as benign as what it used
to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were
operating in a period of basically global growth and low interest
rates. The past few months, we have seen an inching up, in
fact, a rapid increase in the interest rates in the leading
economies of the world. And, therefore, our ability to borrow at
reasonable prices is going to be challenged. In fact, ultimately,
the question is our ability to access the financial markets.
When the President made her speech in July last year, the
environment was not as bad as it is now, at least based on the
forecast of most financial institutions. So, we were assuming
that raising 80 billion would put us in a position where we can
then convince them to improve our ability to borrow at lower
rates. But conditions have changed on us because the interest
rates have gone up. In fact, just within this room, we tried to
access the market for a billion dollars because for this year
alone, the Philippines will have to borrow 4 billion dollars. Of
that amount, we have borrowed 1.5 billion. We issued last
January a 25-year bond at 9.7 percent cost. We were trying to
access last week and the market was not as favorable and up
to now we have not accessed and we might pull back because
the conditions are not very good.
So given this situation, we at the Department of Finance
believe that we really need to front-end our deficit reduction.
Because it is deficit that is causing the increase of the debt and
we are in what we call a debt spiral. The more debt you have,
the more deficit you have because interest and debt service
eats and eats more of your revenue. We need to get out of this
debt spiral. And the only way, I think, we can get out of this
debt spiral is really have a front-end adjustment in our revenue
base.65
The image portrayed is chilling. Congress passed the law
hoping for rescue from an inevitable catastrophe. Whether the
law is indeed sufficient to answer the states economic
dilemma is not for the Court to judge. In the Farias case, the
Court refused to consider the various arguments raised therein
that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The
Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court.
Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to
look into the wisdom or propriety of legislative determination.
Indeed, whether an enactment is wise or unwise, whether it is
based on sound economic theory, whether it is the best means
to achieve the desired results, whether, in short, the legislative
discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the
legislature, and the serious conflict of opinions does not suffice
to bring them within the range of judicial cognizance. 66
In the same vein, the Court in this case will not dawdle on the
purpose of Congress or the executive policy, given that it is not
for the judiciary to "pass upon questions of wisdom, justice or
expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et
al. argue that Section 8 of R.A. No. 9337, amending Sections
110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337,
amending Section 114 (C) of the NIRC are arbitrary,
oppressive, excessive and confiscatory. Their argument is
premised on the constitutional right against deprivation of life,
liberty of property without due process of law, as embodied in
Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal
protection clauses are invoked, considering that they are not
fixed rules but rather broad standards, there is a need for proof
of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity
must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the
NIRC imposes a limitation on the amount of input tax that may
be credited against the output tax. It states, in part: "[P]rovided,
that the input tax inclusive of the input VAT carried over from
the previous quarter that may be credited in every quarter shall
not exceed seventy percent (70%) of the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as
amended, as the value-added tax due from or paid by a VAT-
registered person on the importation of goods or local
purchase of good and services, including lease or use of
property, in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-added
tax due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under
the law.
Petitioners claim that the contested sections impose limitations
on the amount of input tax that may be claimed. In effect, a
portion of the input tax that has already been paid cannot now
be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input
tax exceeds 70% of the output tax, and therefore, the input tax
in excess of 70% remains uncredited. However, to the extent
that the input tax is less than 70% of the output tax, then 100%
of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a
businesss books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that "if the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter
or quarters." In addition, Section 112(B) allows a VAT-
registered person to apply for the issuance of a tax credit
certificate or refund for any unused input taxes, to the extent
that such input taxes have not been applied against the output
taxes. Such unused input tax may be used in payment of his
other internal revenue taxes.
The non-application of the unutilized input tax in a given
quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there
will be unapplied/unutilized inputs VAT for a given quarter. It
does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a
tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to
comprehend the operation of the 70% limitation on the input
tax. According to petitioner, the limitation on the creditable
input tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public
purposes and expenditures
As earlier stated, the input tax is the tax paid by a person,
passed on to him by the seller, when he buys goods. Output
tax meanwhile is the tax due to the person when he sells
goods. In computing the VAT payable, three possible
scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged
by the seller are equal to the input taxes that he paid and
passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the
person shall be liable for the excess, which has to be paid to
the Bureau of Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or quarters.
Should the input taxes result from zero-rated or effectively
zero-rated transactions, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other
internal revenue taxes, at the taxpayers option. 70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation
on the input tax. Thus, a person can credit his input tax only up
to the extent of 70% of the output tax. In laymans term, the
value-added taxes that a person/taxpayer paid and passed on
to him by a seller can only be credited up to 70% of the value-
added taxes that is due to him on a taxable transaction. There
is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a
seller, and the seller will subsequently remit such input tax to
the BIR. The party directly liable for the payment of the tax is
the seller.71 What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as
evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et
al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited
without due process of law.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-
registered persons entitlement to the creditable input tax is a
mere statutory privilege.
The distinction between statutory privileges and vested rights
must be borne in mind for persons have no vested rights in
statutory privileges. The state may change or take away rights,
which were created by the law of the state, although it may not
take away property, which was vested by virtue of such
rights.72
Under the previous system of single-stage taxation, taxes paid
at every level of distribution are not recoverable from the taxes
payable, although it becomes part of the cost, which is
deductible from the gross revenue. When Pres. Aquino issued
E.O. No. 273 imposing a 10% multi-stage tax on all sales, it
was then that the crediting of the input tax paid on purchase or
importation of goods and services by VAT-registered persons
against the output tax was introduced.73 This was adopted by
the Expanded VAT Law (R.A. No. 7716),74 and The Tax
Reform Act of 1997 (R.A. No. 8424).75 The right to credit input
tax as against the output tax is clearly a privilege created by
law, a privilege that also the law can remove, or in this case,
limit.
Petitioners also contest as arbitrary, oppressive, excessive and
confiscatory, Section 8 of R.A. No. 9337, amending Section
110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in
a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be
spread evenly over the month of acquisition and the fifty-nine
(59) succeeding months if the aggregate acquisition cost for
such goods, excluding the VAT component thereof, exceeds
One million pesos (1,000,000.00): Provided, however, That if
the estimated useful life of the capital goods is less than five
(5) years, as used for depreciation purposes, then the input
VAT shall be spread over such a shorter
period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which
to amortize the creditable input tax on purchase or importation
of capital goods with acquisition cost of 1 Million pesos,
exclusive of the VAT component. Such spread out only poses
a delay in the crediting of the input tax. Petitioners argument is
without basis because the taxpayer is not permanently
deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-
out of the creditable input tax in this case amounts to a 4-year
interest-free loan to the government.76 In the same breath,
Congress also justified its move by saying that the provision
was designed to raise an annual revenue of 22.6 billion. 77 The
legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other
tax incentives provided by law, and citing the case of China,
where despite a 17.5% non-creditable VAT, foreign
investments were not deterred.78 Again, for whatever is the
purpose of the 60-month amortization, this involves executive
economic policy and legislative wisdom in which the Court
cannot intervene.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions,
Section 12 of R.A. No. 9337, which amended Section 114 of
the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any
of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each
purchase of goods and services which are subject to the value-
added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at the rate of five
percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this
Section, the payor or person in control of the payment shall be
considered as the withholding agent.
The value-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the month the
withholding was made.
Section 114(C) merely provides a method of collection, or as
stated by respondents, a more simplified VAT withholding
system. The government in this case is constituted as a
withholding agent with respect to their payments for goods and
services.
Prior to its amendment, Section 114(C) provided for different
rates of value-added taxes to be withheld -- 3% on gross
payments for purchases of goods; 6% on gross payments for
services supplied by contractors other than by public works
contractors; 8.5% on gross payments for services supplied by
public work contractors; or 10% on payment for the lease or
use of properties or property rights to nonresident owners.
Under the present Section 114(C), these different rates, except
for the 10% on lease or property rights payment to
nonresidents, were deleted, and a uniform rate of 5% is
applied.
The Court observes, however, that the law the used the
word final. In tax usage, final, as opposed to creditable, means
full. Thus, it is provided in Section 114(C): "final value-added
tax at the rate of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No.
8424 (The Tax Reform Act of 1997), the concept of final
withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax
system the amount of income tax withheld by the withholding
agent is constituted as full and final payment of the income
tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the
tax or in case of underwithholding, the deficiency tax shall be
collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable
withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the tax
due of the payee on said income. Taxes withheld on income
payments covered by the expanded withholding tax (referred to
in Sec. 2.57.2 of these regulations) and compensation income
(referred to in Sec. 2.78 also of these regulations) are
creditable in nature.
As applied to value-added tax, this means that taxable
transactions with the government are subject to a 5% rate,
which constitutes as full payment of the tax payable on the
transaction. This represents the net VAT payable of the seller.
The other 5% effectively accounts for the standard input VAT
(deemed input VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.79
The Court need not explore the rationale behind the provision.
It is clear that Congress intended to treat differently taxable
transactions with the government.80 This is supported by the
fact that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the
seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The
Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment
on account of each purchase of goods from sellers and
services rendered by contractors which are subject to the
value-added tax imposed in Sections 106 and 108 of this
Code, deduct and withhold the value-added tax due at the rate
of three percent (3%) of the gross payment for the purchase of
goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment
which shall be creditable against the value-added tax
liability of the seller or contractor: Provided, however, That
in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%):
Provided, further, That the payment for lease or use of
properties or property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at the time of
payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the month the
withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the
word creditable exhibits Congresss intention to treat
transactions with the government differently. Since it has not
been shown that the class subject to the 5% final withholding
tax has been unreasonably narrowed, there is no reason to
invalidate the provision. Petitioners, as petroleum dealers, are
not the only ones subjected to the 5% final withholding tax. It
applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable,
as petitioners believe. Revenue Regulations No. 14-2005 or
the Consolidated Value-Added Tax Regulations 2005 issued
by the BIR, provides that should the actual input tax exceed
5% of gross payments, the excess may form part of the cost.
Equally, should the actual input tax be less than 5%, the
difference is treated as income.81
Petitioners also argue that by imposing a limitation on the
creditable input tax, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and
again, one-sided. The Court will not engage in a legal joust
where premises are what ifs, arguments, theoretical and facts,
uncertain. Any disquisition by the Court on this point will only
be, as Shakespeare describes life in Macbeth,82 "full of sound
and fury, signifying nothing."
Whats more, petitioners contention assumes the proposition
that there is no profit or value-added. It need not take an astute
businessman to know that it is a matter of exception that a
business will sell goods or services without profit or value-
added. It cannot be overstressed that a business is created
precisely for profit.
The equal protection clause under the Constitution means that
"no person or class of persons shall be deprived of the same
protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances." 83
The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the
kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection,
the States power is entitled to presumption of validity. As a
rule, the judiciary will not interfere with such power absent a
clear showing of unreasonableness, discrimination, or
arbitrariness.84
Petitioners point out that the limitation on the creditable input
tax if the entity has a high ratio of input tax, or invests in capital
equipment, or has several transactions with the government, is
not based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law
does not make any classification in the subject of taxation, the
kind of property, the rates to be levied or the amounts to be
raised, the methods of assessment, valuation and collection.
Petitioners alleged distinctions are based on variables that
bear different consequences. While the implementation of the
law may yield varying end results depending on ones profit
margin and value-added, the Court cannot go beyond what the
legislature has laid down and interfere with the affairs of
business.
The equal protection clause does not require the universal
application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals
as determined according to a valid classification. By
classification is meant the grouping of persons or things similar
to each other in certain particulars and different from all others
in these same particulars.85
Petitioners brought to the Courts attention the introduction of
Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana
Consuelo A.S. Madrigal on June 6, 2005, and House Bill No.
4493 by Rep. Eric D. Singson. The proposed legislation seeks
to amend the 70% limitation by increasing the same to 90%.
This, according to petitioners, supports their stance that the
70% limitation is arbitrary and confiscatory. On this score,
suffice it to say that these are still proposed legislations. Until
Congress amends the law, and absent any unequivocal basis
for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided
that the rate is uniform on the same class everywhere with all
people at all times.86
In this case, the tax law is uniform as it provides a standard
rate of 0% or 10% (or 12%) on all goods and services.
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the NIRC, provide for a rate of
10% (or 12%) on sale of goods and properties, importation of
goods, and sale of services and use or lease of properties.
These same sections also provide for a 0% rate on certain
sales and transaction.
Neither does the law make any distinction as to the type of
industry or trade that will bear the 70% limitation on the
creditable input tax, 5-year amortization of input tax paid on
purchase of capital goods or the 5% final withholding tax by the
government. It must be stressed that the rule of uniform
taxation does not deprive Congress of the power to classify
subjects of taxation, and only demands uniformity within the
particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a
threshold margin. The VAT rate of 0% or 10% (or 12%) does
not apply to sales of goods or services with gross annual sales
or receipts not exceeding 1,500,000.00.88Also, basic marine
and agricultural food products in their original state are still not
subject to the tax,89 thus ensuring that prices at the grassroots
level will remain accessible. As was stated in Kapatiran ng
mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on
sales of goods or services by persons engaged in business
with an aggregate gross annual sales exceeding 200,000.00.
Small corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and
marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT,
are expected to be relatively lower and within the reach of the
general public.
It is admitted that R.A. No. 9337 puts a premium on
businesses with low profit margins, and unduly favors those
with high profit margins. Congress was not oblivious to this.
Thus, to equalize the weighty burden the law entails, the law,
under Section 116, imposed a 3% percentage tax on VAT-
exempt persons under Section 109(v), i.e., transactions with
gross annual sales and/or receipts not exceeding 1.5 Million.
This acts as a equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers
stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion
the impact of the imposition of the tax on those previously
exempt. Excise taxes on petroleum products 91 and natural
gas92 were reduced. Percentage tax on domestic carriers was
removed.93 Power producers are now exempt from paying
franchise tax.94
Aside from these, Congress also increased the income tax
rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations are
now subject to a 35% income tax rate, from a previous
32%.95 Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax but
the tax credit allowed on the corporations domicile was
increased to 20%.96 The Philippine Amusement and Gaming
Corporation (PAGCOR) is not exempt from income taxes
anymore.97 Even the sale by an artist of his works or services
performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the
burden of taxation, which would otherwise rest largely on the
consumers. It cannot therefore be gainsaid that R.A. No. 9337
is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable
input tax is anything but regressive. It is the smaller business
with higher input tax-output tax ratio that will suffer the
consequences.
Progressive taxation is built on the principle of the taxpayers
ability to pay. This principle was also lifted from Adam
Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the
support of the government, as nearly as possible, in proportion
to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on
the resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very
nature, it is regressive. The principle of progressive taxation
has no relation with the VAT system inasmuch as the VAT paid
by the consumer or business for every goods bought or
services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by
a person or profit margin marked by a business, such that the
higher the income or profit margin, the smaller the portion of
the income or profit that is eaten by VAT. A converso, the
lower the income or profit margin, the bigger the part that the
VAT eats away. At the end of the day, it is really the lower
income group or businesses with low-profit margins that is
always hardest hit.
Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive system of
taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of

indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall evolve a progressive
system of taxation. The constitutional provision has been
interpreted to mean simply that direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be
minimized. (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest
form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17 (1) of the 1973 Constitution from
which the present Art. VI, 28 (1) was taken. Sales taxes are
also regressive.

Resort to indirect taxes should be minimized but not avoided

entirely because it is difficult, if not impossible, to avoid them
by imposing such taxes according to the taxpayers' ability to
pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain
transactions (R.A. No. 7716, 3, amending 102 (b) of the
NIRC), while granting exemptions to other transactions. (R.A.
No. 7716, 4 amending 103 of the NIRC)99

CONCLUSION

It has been said that taxes are the lifeblood of the government.
In this case, it is just an enema, a first-aid measure to
resuscitate an economy in distress. The Court is neither blind
nor is it turning a deaf ear on the plight of the masses. But it
does not have the panacea for the malady that the law seeks
to remedy. As in other cases, the Court cannot strike down a
law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong
there is a remedy, and that the judiciary should stand ready to
afford relief. There are undoubtedly many wrongs the
judicature may not correct, for instance, those involving
political questions. . . .

Let us likewise disabuse our minds from the notion that the
judiciary is the repository of remedies for all political or social
ills; We should not forget that the Constitution has judiciously
allocated the powers of government to three distinct and
separate compartments; and that judicial interpretation has
tended to the preservation of the independence of the three,
and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for
official wrong-doing, each may be brought to account, either by
impeachment, trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then,
as it still holds true now. All things considered, there is
no raison d'tre for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being

unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full

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

SO ORDERED.
G.R. No. 88291 June 8, 1993
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as
Executive Secretary, Office of the President, HON.
VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas
Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
NOCON, J.:
Just like lightning which does strike the same place twice in
some instances, this matter of indirect tax exemption of the
private respondent National Power Corporation (NPC) is
brought to this Court a second time. Unfazed by the Decision
We promulgated on May 31, 1991 petitioner Ernesto Maceda
1
asks this Court to reconsider said Decision. Lest We be
criticized for denying due process to the petitioner. We have
decided to take a second look at the issues. In the process, a
hearing was held on July 9, 1992 where all parties presented
their respective arguments. Etched in this Court's mind are the
paradoxical claims by both petitioner and private respondents
that their respective positions are for the benefit of the Filipino
people.
I withdraw NPC's tax exemption for real estate taxes. As
A Chronological review of the relevant NPC laws, specially with
respect to its tax exemption provisions, at the risk of being
repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was
enacted creating the National Power Corporation, a public
corporation, mainly to develop hydraulic power from all water
sources in the Philippines. The sum of P250,000.00 was
2
appropriated out of the funds in the Philippine Treasury for the
purpose of organizing the NPC and conducting its preliminary
work. The main source of funds for the NPC was the flotation
3
of bonds in the capital markets and these bonds
4
. . . issued under the authority of this Act
shall be exempt from the payment of all
taxes by the Commonwealth of the
Philippines, or by any authority, branch,
division or political subdivision thereof and
subject to the provisions of the Act of
Congress, approved March 24, 1934,
otherwise known as the Tydings McDuffle
Law, which facts shall be stated upon the
face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to
P550,000.00 the funds needed for the initial operations of the
NPC and reiterating the provision of the flotation of bonds as
soon as the first construction of any hydraulic power project
was to be decided by the NPC Board. The provision on tax
6
exemption in relation to the issuance of the NPC bonds was
neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing
the provision on the payment of the bond's principal and
interest in "gold coins" but adding that payment could be made
in United States dollars. The provision on tax exemption in
7
relation to the issuance of the NPC bonds was neither
amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted
authorizing the President of the Philippines to guarantee,
absolutely and unconditionally, as primary obligor, the payment
of any and all NPC loans. He was also authorized to contract
8
on behalf of the NPC with the International Bank for
Reconstruction and Development (IBRD) for NPC loans for the
accomplishment of NPC's corporate objectives and for the 9
reconstruction and development of the economy of the
country. It was expressly stated that:
10
Any such loan or loans shall be exempt from
taxes, duties, fees, imposts, charges,
contributions and restrictions of the Republic
of the Philippines, its provinces, cities and
municipalities.11
On the same date, R.A. No. 358 was enacted expressly
authorizing the NPC, for the first time, to incur other types of
indebtedness, aside from indebtedness incurred by flotation of
bonds. As to the pertinent tax exemption provision, the law
12
stated as follows:
To facilitate payment of its indebtedness, the
National Power Corporation shall be exempt
from all taxes, duties, fees, imposts,
charges, and restrictions of the Republic of
the Philippines, its provinces, cities and
municipalities.13
On July 10, 1952, R.A. No. 813 was enacted amending R.A.
No. 357 in that, aside from the IBRD, the President of the
Philippines was authorized to negotiate, contract and
guarantee loans with the Export-Import Bank of of Washigton,
D.C., U.S.A., or any other international financial
institution. The tax provision for repayment of these loans, as
14
stated in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to
enacted, the law states as follows:
To facilitate payment of its indebtedness, the
National Power Corporation shall be exempt
from all taxes, except real property tax, and
from all duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines,
its provinces, cities, and municipalities.
15
On September 8, 1955, R.A. No. 1397 was enacted directing
that the NPC projects to be funded by the increased
indebtedness should bear the National Economic Council's
16
stamp of approval. The tax exemption provision related to the
payment of this total indebtedness was not amended nor
deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the
total amount of foreign loans NPC was authorized to incur to
US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A.
No. 357. The tax provision related to the repayment of these
17
loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the
corporate life of NPC to December 31, 2000. All laws or 18
provisions of laws and executive orders contrary to said R.A.
No. 2058 were expressly repealed. 19
On June 18, 1960, R.A. No 2641 was enacted converting the
NPC from a public corporation into a stock corporation with an
authorized capital stock of P100,000,000.00 divided into
1,000.000 shares having a par value of P100.00 each, with
said capital stock wholly subscribed to by the
Government. No tax exemption was incorporated in said Act.
20
On June 17, 1961, R.A. No. 3043 was enacted increasing the
above-mentioned authorized capital stock to P250,000,000.00
with the increase to be wholly subscribed by the
Government. No tax provision was incorporated in said Act.
21
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital
stock was increased again to P300,000,000.00, the increase to
be wholly subscribed by the Government. No tax provision was
incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising
the charter of the NPC, C.A. No. 120, as amended. Declared
as primary objectives of the nation were:
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 the
government, including the financial
institutions.
23
Section 4 of C.A. No. 120, was renumbered as Section 8, and
divided into sections 8 (a) (Authority to incur Domestic
Indebtedness) and Section 8 (b) (Authority to Incur Foreign
Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of
Section 8(a), states as follows:
The bonds issued under the authority of this
subsection shall be exempt from the
payment of all taxes by the Republic of the
Philippines, or by any authority, branch,
division or political subdivision thereof which
facts shall be stated upon the face of said
bonds. . . .
24
As to the foreign loans the NPC was authorized to contract,
Paragraph No. 5, Section 8(b), states as follows:
The loans, credits and indebtedness
contracted under this subsection and the
payment of the principal, interest and other
charges thereon, as well as the importation
of machinery, equipment, materials and
supplies by the Corporation, paid from the
proceeds of any loan, credit or
indebtedeness incurred under this Act, shall
also be exempt from all taxes, fees, imposts,
other charges and restrictions, including
import restrictions, by the Republic of the
Philippines, or any of its agencies and
political subdivisions.25
A new section was added to the charter, now known as
Section 13, R.A. No. 6395, which declares the non-profit
character and tax exemptions of NPC as follows:
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 one 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, and
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 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. 26
On November 7, 1972, Presidential Decree
No. 40 was issued declaring that the
electrification of the entire country was one
of the primary concerns of the country. And
in connection with this, it was specifically
stated that:
The setting up of transmission line grids and
the construction of associated generation
facilities in Luzon, Mindanao and major
islands of the country, including the Visayas,
shall be the responsibility of the National
Power Corporation (NPC) as the authorized
implementing agency of the State. 27
xxx xxx xxx
It is the ultimate objective of the State for the
NPC to own and operate as a single
integrated system all generating facilities
supplying electric power to the entire area
embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra
powers to the NPC to enable it to fulfill its role under aforesaid
P.D. No. 40. Its authorized capital stock was raised to
P2,000,000,000.00, its total domestic indebtedness was
29
pegged at a maximum of P3,000,000,000.00 at any one
time, and the NPC was authorized to borrow a total of
30
US$1,000,000,000.00 in foreign loans.
31
The relevant tax exemption provision for these foreign loans
states as follows:
The loans, credits and indebtedness
contracted under this subsection and the
payment of the principal, interest and other
charges thereon, as well as the importation
of machinery, equipment, materials, supplies
and services, by the Corporation, paid from
the proceeds of any loan, credit or
indebtedness incurred under this Act, shall
also be exempt from all direct and indirect
taxes, fees, imposts, other charges and
restrictions, including import restrictions
previously and presently imposed, and to be
imposed by the Republic of the Philippines,
or any of its agencies and political
subdivisions. (Emphasis supplied)
32
Section 13(a) and 13(d) of R.A. No 6395 were amended to
read as follows:
(a) From the payment of all taxes, duties,
fees, imposts, charges and restrictions to the
Republic of the Philippines, its provinces,
cities, municipalities and other government
agencies and instrumentalities including the
taxes, duties, fees, imposts and other
charges provided for under the Tariff and
Customs Code of the Philippines, Republic
Act Numbered Nineteen Hundred Thirty-
Seven, as amended, and as further
 amended by Presidential Decree No. 34
dated October 27, 1972, and Presidential
Decree No. 69, dated November 24, 1972,
and costs and service fees in any court or
administrative proceedings in which it may
be a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and
all other charges imposed directly or
indirectly 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. (Emphasis supplied)
33
On February 26, 1970, P.D. No. 395 was issued removing
certain restrictions in the NPC's sale of electricity to its different
customers. No tax exemption provision was amended,
34
deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that
P200,000,000.00 would be appropriated annually to cover the
unpaid subscription of the Government in the NPC authorized
capital stock, which amount would be taken from taxes
accruing to the General Funds of the Government, proceeds
from loans, issuance of bonds, treasury bills or notes to be
issued by the Secretary of Finance for this particular purpose.
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion
programs for generation and transmission
facilities which includes nuclear power
generation, the present capitalization of
National Power Corporation (NPC) and the
ceilings for domestic and foreign borrowings
are deemed insufficient; 36
xxx xxx xxx
(I)n the application of the tax exemption
provisions of the Revised Charter, the non-
profit character of NPC has not been fully
utilized because of restrictive interpretation
of the taxing agencies of the government on
said provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated expansion
program and attain the declared objective of
total electrification of the country, further
amendments of certain sections of Republic
Act No. 6395, as amended by Presidential
Decrees Nos. 380, 395 and 758, have
become imperative; 38
Thus NPC's capital stock was raised to
P8,000,000,000.00, the total domestic indebtedness ceiling
39
was increased to P12,000,000,000.00, the total foreign loan
40
ceiling was raised to US$4,000,000,000.00 and Section 13 of
41
R.A. No. 6395, was amended to read as follows:
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 to its indebtedness and
obligations and in furtherance and effective
implementation of the policy enunciated in
Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared
exempt from the payment of all forms of
taxes, duties, fees, imposts as well as costs
and service fees including filing fees, appeal
bonds, supersedeas bonds, in any court or
administrative proceedings. 42
II
On the other hand, the pertinent tax laws involved in this
controversy are P.D. Nos. 882, 1177, 1931 and Executive
Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing
the tax exemption of NPC with regard to imports as follows:
WHEREAS, importations by certain
government agencies, including government-
owned or controlled corporation, are exempt
from the payment of customs duties and
compensating tax; and
WHEREAS, in order to reduce foreign
exchange spending and to protect domestic
industries, it is necessary to restrict and
regulate such tax-free importations.
NOW THEREFORE, I, FERDINAND E.
MARCOS, President of the Philippines, by
virtue of the powers vested in me by the
Constitution, and do hereby decree and
order the following:
35
Sec. 1. All importations of any government
agency, including government-owned or
controlled corporations which are exempt
from the payment of customs duties and
internal revenue taxes, shall be subject to
the prior approval of an Inter-Agency
Committee which shall insure compliance
with the following conditions:
(a) That no such article of local manufacture
are available in sufficient quantity and
comparable quality at reasonable prices;
(b) That the articles to be imported are
directly and actually needed and will be used
exclusively by the grantee of the exemption
for its operations and projects or in the
conduct of its functions; and
(c) The shipping documents covering the
importation are in the name of the grantee to
whom the goods shall be delivered directly
by customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power
to regulate and control the tax-free
importation of government agencies in
accordance with the conditions set forth in
Section 1 hereof and the regulations to be
promulgated to implement the provisions of
this Decree. Provided, however, That any
government agency or government-owned or
controlled corporation, or any local
manufacturer or business firm adversely
affected by any decision or ruling of the
Inter-Agency Committee may file an appeal
with the Office of the President within ten
days from the date of notice thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No.
6395; . . .. and all similar provisions of all
general and special laws and decrees are
hereby amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to
formulate and implement a National Budget
that is an instrument of national
development, reflective of national
objectives, strategies and plans. The budget
shall be supportive of and consistent with the
socio-economic development plan and shall
be oriented towards the achievement of
explicit objectives and expected results, to
ensure that funds are utilized and operations
are conducted effectively, economically and
efficiently. The national budget shall be
formulated within a context of a regionalized
government structure and of the totality of
revenues and other receipts, expenditures
and borrowings of all levels of government-
owned or controlled corporations. The
budget shall likewise be prepared within the
context of the national long-term plan and of
a long-term budget program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or
controlled corporations, shall pay income taxes, customs
duties and other taxes and fees are imposed under revenues
laws: provided, that organizations otherwise exempted by law
from the payment of such taxes/duties may ask for a subsidy
from the General Fund in the exact amount of taxes/duties
due: provided, further, that a procedure shall be established by
the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as
both revenue and expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules
and regulations or parts thereof which are
inconsistent with the provisions of the
Decree are hereby repealed and/or modified
accordingly. 45
On July 11, 1984, most likely due to the economic morass the
Government found itself in after the Aquino assassination, P.D.
No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177
has already expressly repealed the grant of
tax privileges to any government-owned or
controlled corporation and all other units of
government; 46
and since there was a
. . . need for government-owned or controlled
corporations and all other units of
government enjoying tax privileges to share
in the requirements of development, fiscal or
otherwise, by paying the duties, taxes and
other charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general
law to the contrary notwithstanding, all
exemptions from the payment of duties,
taxes, fees, imposts and other charges
heretofore granted in favor of government-
owned or controlled corporations including
their subsidiaries, are hereby withdrawn.
Sec. 2. The President of the Philippines
and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives
Review Board created under Presidential
Decree No. 776, is hereby empowered to
restore, partially or totally, the exemptions
withdrawn by Section 1 above, any
applicable tax and duty, taking into account,
among others, any or all of the following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation
to the revenue generation effort;
3) The nature of the activity in which the
corporation is engaged in; or
4) In general the greater national interest to
be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential
Decree No. 1177 as well as all other laws,
decrees, executive orders, administrative
orders, rules, regulations or parts thereof
which are inconsistent with this Decree are
hereby repealed, amended or modified
accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a
view to correct presidential restoration or grant of tax
exemption to other government and private entities without
benefit of review by the Fiscal Incentives Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931
and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the
tax and duty exemption privileges, including
the preferential tax treatment, of government
and private entities with certain exceptions,
in order that the requirements of national
economic development, in terms of fiscals
and other resources, may be met more
adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty
exemption privileges were restored by the
Fiscal Incentives Review Board (FIRB), a
number of affected entities, government and
private, had their tax and duty exemption
privileges restored or granted by Presidential
action without benefit or review by the Fiscal
Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private
entities may be better provided where
necessary by explicit subsidy and budgetary
support rather than tax and duty exemption
privileges if only to improve the fiscal
monitoring aspects of government
operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or
special law to the contrary notwithstanding,
all tax and duty incentives granted to
government and private entities are hereby
withdrawn, except:
a) those covered by the non-impairment
clause of the Constitution;
b) those conferred by effective internation
agreement to which the Government of the
Republic of the Philippines is a signatory;
c) those enjoyed by enterprises registered
with:
(i) the Board of Investment
pursuant to Presidential
Decree No. 1789, as
amended;
(ii) the Export Processing
Zone Authority, pursuant
to Presidential Decree No.
66 as amended;
(iii) the Philippine Veterans
Investment Development
Corporation Industrial
Authority pursuant to
Presidential Decree No.
538, was amended.
d) those enjoyed by the copper mining
industry pursuant to the provisions of Letter
of Instructions No. 1416;
e) those conferred under the four basic
codes namely:
(i) the Tariff and Customs
Code, as amended;
(ii) the National Internal
Revenue Code, as
amended;
(iii) the Local Tax Code, as
amended;
(iv) the Real Property Tax
Code, as amended;
f) those approved by the
President upon the
recommendation of the
Fiscal Incentives Review
Board.
Sec. 2. The Fiscal Incentives Review Board
created under Presidential Decree No. 776,
as amended, is hereby authorized to:
a) restore tax and/or duty exemptions
withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax
and/or duty exemption that may be restored;
c) impose conditions for the restoration of tax
and/or duty exemption;
d) prescribe the date of period of effectivity
of the restoration of tax and/or duty
exemption;
e) formulate and submit to the President for
approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu
of or in combination with the restoration of
tax and duty exemptions or preferential
treatment in taxation, indicating the source of
funding therefor, eligible beneficiaries and
the terms and conditions for the grant thereof
taking into consideration the international
commitment of the Philippines and the
necessary precautions such that the grant of
subsidies does not become the basis for
countervailing action.
Sec. 3. In the discharge of its authority
hereunder, the Fiscal Incentives Review
Board shall take into account any or all of the
following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to
the revenue generation effort;
c) nature of the activity the beneficiary is
engaged; and
d) in general, the greater national interest to
be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and
regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or
modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective upon the
48
promulgation of the rules and regulations, to be issued by the
Ministry of Finance. Said rules and regulations were
49
promulgated and published in the Official Gazette
on February 23, 1987. These became effective on the 15th day
after promulgation in the Official Gasetter, which 15th day
50 51
was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic
approach that all would-be lawyers, learn in their TAXATION I
course, which fro convenient reference, is as follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear
the burden:
a. Direct Tax the where the person
supposed to pay the tax really pays
it. WITHOUT transferring the burden to
someone else.
Examples: Individual income tax, corporate
income tax, transfer taxes (estate tax,
donor's tax), residence tax, immigration tax
b. Indirect Tax that where the tax is
imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a
tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes
(specific tax, percentage taxes, (VAT) and
the tariff and customs indirect taxes (import
duties, special import tax and other dues) 52
IV
To simply matter, the issues raised by petitioner in his motion
for reconsideration can be reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being
enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
 V Section one of this Act, the Corporation,
Petitioner contends that P.D. No. 938 repealed the indirect tax
exemption of NPC as the phrase "all forms of taxes etc.," in its
section 10, amending Section 13, R.A. No. 6395, as amended
by P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has
been the lawmaker's intention that the NPC was to be
completely tax exempt from all forms of taxes direct and
indirect.
NPC's tax exemptions at first applied to the bonds it was
authorized to float to finance its operations upon its creation by
virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for
foreign financing, any loans obtained were to be completely tax
exempt.
After the NPC was authorized to borrow from other sources of
funds aside issuance of bonds it was again specifically
exempted from all types of taxes "to facilitate payment of its
indebtedness." Even when the ceilings for domestic and
foreign borrowings were periodically increased, the tax
exemption privileges of the NPC were maintained.
NPC's tax exemption from real estate taxes was, however,
specifically withdrawn by Rep. Act No. 987, as above stated.
The exemption was, however, restored by R.A. No. 6395.
Section 13, R.A. No. 6395, was very comprehensive in its
enumeration of the tax exemptions allowed NPC. Its section
13(d) is the starting point of this bone of contention among the
parties. For easy reference, it is reproduced as follows:
[T]he Corporation is hereby declared
exempt:
xxx xxx xxx
(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.
P.D. No. 380 added phrase "directly or indirectly" to said
Section 13(d), which now reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and
all other charges imposed directly or
indirectly 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.
(Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c)
and (d) into one very simple paragraph as follows:
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
including its subsidiaries, is hereby declared
exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as
costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any
court or administrative proceedings.
(Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential
Decree Nos. 380
and 938 were issued by one man, acting as
such the Executive and Legislative. 53
xxx xxx xxx
[S]ince both presidential decrees were made
by the same person, it would have been very
easy for him to retain the same or similar
language used in P.D. No. 380 P.D. No. 938
if his intention were to preserve the indirect
tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then
President Marcos no matter what his fault were. It should be
noted that section 13, R.A. No. 6395, provided for tax
exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for
its operations and projects;
13(d) : petroleum products used in
generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase
"ALL FORMS OF TAXES, ETC.,", included 13(a) under the "as
well as" clause and added PNOC subsidiaries as qualified for
tax exemptions.
This is the only conclusion one can arrive at if he has read all
the NPC laws in the order of enactment or issuance as
narrated above in part I hereof. President Marcos must have
considered all the NPC statutes from C.A. No. 120 up to its
latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No.
759, AND came up with a very simple Section 13, R.A. No.
55
6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be
enable to pay its indebtedness which, as of P.D. No. 938,
56
was P12 Billion in total domestic indebtedness, at any one
time, and U$4 Billion in total foreign loans at any one time. The
NPC must be and has to be exempt from all forms of taxes if
this goal is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8
Billion. It must be remembered that to pay the government
share in its capital stock P.D. No. 758 was issued mandating
that P200 Million would be appropriated annually to cover the
said unpaid subscription of the Government in NPC's
authorized capital stock. And significantly one of the sources of
this annual appropriation of P200 million is TAX MONEY
accruing to the General Fund of the Government. It does not
stand to reason then that former President Marcos would order
P200 Million to be taken partially or totally from tax money to
be used to pay the Government subscription in the NPC, on
one hand, and then order the NPC to pay all its indirect taxes,
on the other.
The above conclusion that then President Marcos lumped up
Sections 13 (b), 13 (c) and (d) into the phrase "All FORMS OF"
is supported by the fact that he did not do the same for the tax
exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A.
No. 6395, reads as follows:
The loans, credits and indebtedness
contracted under this subsection and the
payment of the principal, interest and other
charges thereon, as well as the importation
of machinery, equipment, materials and
supplies by the Corporation, paid from the
proceeds of any loan, credit or indebtedness
incurred under this Act, shall also be exempt
from all taxes, fees, imposts, other charges
and restrictions, including import restrictions,
by the Republic of the Philippines, or any of
its agencies and political subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness
contracted this subsection and the payment
of the principal, interest and other charges
thereon, as well as the importation of
machinery, equipment, materials, supplies
and services, by the Corporation, paid from
the proceeds of any loan, credit or
indebtedness incurred under this Act, shall
also be exempt from all direct and
indirect taxes, fees, imposts, other charges
and restrictions, including import
restrictions previously and presently
imposed, and to be imposed by the Republic
of the Philippines, or any of its agencies and
political subdivisions. (Emphasis supplied)
58
P.D. No. 938 did not amend the same and so the tax
59
exemption provision in Section 8 (b), R.A. No. 6395, as
amended by P.D. No. 380, still stands. Since the subject
matter of this particular Section 8 (b) had to do only with loans
and machinery imported, paid for from the proceeds of these
foreign loans, THERE WAS NO OTHER SUBJECT MATTER
TO LUMP IT UP WITH, and so, the tax exemption stood as is
with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax
exemption privilege extended to "taxes, fees, imposts, other
charges . . . to be imposed" in the future surely, an
indication that the lawmakers wanted the NPC to be exempt
from ALL FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax
exemption privileges for both direct and indirect taxes under
P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the
Government decided to rationalize government receipts and
expenditures by formulating and implementing a National
Budget. The NPC, being a government owned and controlled
60
corporation had to be shed off its tax exemption status
privileges under P.D. No. 1177. It was, however, allowed to
ask for a subsidy from the General Fund in the exact amount of
taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed
NPC's tax-free importation privileges. It allowed, however, NPC
to appeal said repeal with the Office of the President and to
avail of tax-free importation privileges under its Section 1,
subject to the prior approval of an Inter-Agency Committed
created by virtue of said P.D. No. 882. It is presumed that the
NPC, being the special creation of the State, was allowed to
continue its tax-free importations.
This Court notes that petitioner brought to the attention of this
Court, the matter of the abolition of NPC's tax exemption
privileges by P.D. No. 1177 only in his Common
61
Reply/Comment to private Respondents' "Opposition" and
"Comment" to Motion for Reconsideration, four (4) months
AFTER the motion for Reconsideration had been filed. During
oral arguments heard on July 9, 1992, he proceeded to discuss
this tax exemption withdrawal as explained by then Secretary
of Justice Vicente Abad Santos in opinion No. 133 (S '77). A 62
careful perusal of petitioner's senate Blue Ribbon Committee
Report No. 474, the basis of the petition at bar, fails to yield
any mention of said P.D. No. 1177's effect on NPC's tax
exemption privileges. Applying by analogy Pulido vs.
63
Pablo, the court declares that the matter of P.D. No. 1177
64
abolishing NPC's tax exemption privileges was not seasonably
invoked by the petitioner.
65
Be that as it may, the Court still has to discuss the effect of
P.D. No. 1177 on the NPC tax exemption privileges as this
statute has been reiterated twice in P.D. No. 1931. The
express repeal of tax privileges of any government-owned or
controlled corporation (GOCC). NPC included, was reiterated
in the fourth whereas clause of P.D. No. 1931's preamble. The
subsidy provided for in Section 23, P.D. No. 1177, being
inconsistent with Section 2, P.D. No. 1931, was deemed
repealed as the Fiscal Incentives Revenue Board was tasked
with recommending the partial or total restoration of tax
exemptions withdrawn by Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC
asked for the subsidy contemplated in Section 23, P.D. No.
1177. Considering, however, that under Section 16 of P.D. No.
1177, NPC had to submit to the Office of the President its
request for the P200 million mandated by P.D. No. 758 to be
appropriated annually by the Government to cover its unpaid
subscription to the NPC authorized capital stock and that under
Section 22, of the same P.D. No. NPC had to likewise submit
to the Office of the President its internal operating budget for
review due to capital inputs of the government (P.D. No. 758)
and to the national government's guarantee of the domestic
and foreign indebtedness of the NPC, it is clear that NPC was
covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted
to exempt GOCC's that suddenly found themselves having to
pay taxes. It will be noted that Section 23, P.D. No. 1177,
mandated that the Secretary of Finance and the Commissioner
of the Budget had to establish the necessary procedure to
accomplish the tax payment/tax subsidy scheme of the
Government. In effect, NPC, did not put any cash to pay any
tax as it got from the General Fund the amounts necessary to
pay different revenue collectors for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177
on July 30, 1977, the NPC lost all its duty
and tax exemptions, whether direct or
indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No.
1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D.
No. 1931, which reads:
"Section 1. The provisions
of special or general law to
the contrary
notwithstanding, all
exemptions from the
payment of duties, taxes,
fees, imports and other
charges heretofore
granted in favor of
government-owned or
controlled corporations
including their subsidiaries
are hereby withdrawn."
Sec. 2. The President of
the Philippines and/or the
Minister of Finance, upon
the recommendation of the
Fiscal Incentives Review
Board created under P.D.
No. 776, is hereby
empowered to restore
partially or totally, the
exemptions withdrawn by
section 1 above. . . .
 Hence, P.D. No. 1931 did not have any
effect or did it change NPC's status. Since it
had already lost all its tax exemptions
privilege with the issuance of P.D. No. 1177
seven (7) years earlier or on July 30, 1977,
there were no tax exemptions to be
withdrawn by section 1 which could later be
restored by the Minister of Finance upon the
recommendation of the FIRB under Section
2 of P.D. No. 1931. Consequently, FIRB
resolutions No. 10-85, and 1-86, were all
illegally and validly issued since FIRB acted
beyond their statutory authority by creating
and not merely restoring the tax exempt
status of NPC. The same is true for FIRB
Res. No. 17-87 which restored NPC's tax
exemption under E.O. No. 93 which likewise
abolished all duties and tax exemptions but
allowed the President upon recommendation
of the FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-
enacts in the same or substantially the same
terms the provisions of the act or acts so
revised and consolidated, the revision and
consolidation shall be taken to be a
continuation of the former act or acts,
although the former act or acts may be
expressly repealed by the revised and
consolidated act; and all rights
and liabilities under the former act or acts
are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in
its Section 1 the first half of Section 23, P.D. No. 1177, on
withdrawal of tax exemption privileges of all GOCC's said
Section 1, P.D. No. 1931 was deemed to be a continuation of
the first half of Section 23, P.D. No. 1177, although the second
half of Section 23, P.D. No. 177, on the subsidy scheme for
former tax exempt GOCCs had been expressly repealed by
Section 2 with its institution of the FIRB recommendation of
partial/total restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931,
were, therefore, the same NPC tax exemption privileges
withdrawn by Section 23, P.D. No. 1177. NPC could no longer
obtain a subsidy for the taxes it had to pay. It could, however,
under P.D. No. 1931, ask for a total restoration of its tax
exemption privileges, which, it did, and the same were granted
under FIRB Resolutions Nos. 10-85 and 1-86 as approved
67 68
by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB
Resolutions Nos. 10-85 and 1-86 were both legally and validly
issued by the FIRB pursuant to P.D. No. 1931. FIRB did not
created NPC's tax exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931
was illegally issued under the now rather infamous
Amendment No. 6 as there was no showing that President
70
Marcos' encroachment on legislative prerogatives was justified
under the then prevailing condition that he could legislate "only
if the Batasang Pambansa 'failed or was unable to act
inadequately on any matter that in his judgment required
immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then President Marcos
could issue decrees not only when the Interim Batasang
Pambansa failed or was unable to act adequately on any
matter for any reason that in his (Marcos') judgment required
immediate action, but also when there existed a grave
emergency or a threat or thereof. It must be remembered that
said Presidential Decree was issued only around nine (9)
months after the Philippines unilaterally declared a moratorium
on its foreign debt payments as a result of the economic
72
crisis triggered by loss of confidence in the government
brought about by the Aquino assassination. The Philippines
was then trying to reschedule its debt payments. One of the
73
big borrowers was the NPC which had a US$ 2.1 billion white
74
elephant of a Bataan Nuclear Power Plant on its back. From 75
all indications, it must have been this grave emergency of a
debt rescheduling which compelled Marcos to issue P.D. No.
1931, under his Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law
granting a tax exemption shall be passed without the
concurrence of a majority of all the members of the Batasang
Pambansa" does not apply as said P.D. No. 1931 was not
77
passed by the Interim Batasang Pambansa but by then
President Marcos under His Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President
Marcos under his Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were
again clipped by, this time, President Aquino. Its section 2
allowed the NPC to apply for the restoration of its tax
exemption privileges. The same was granted under FIRB
Resolution No. 17-87 dated June 24, 1987 which restored
78
NPC's tax exemption privileges effective, starting March 10,
1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on
October 5, 1987. There is no indication, however, from the
79
records of the case whether or not similar approvals were
given by then President Marcos for FIRB Resolutions Nos. 10-
85 and 1- 86. This has led some quarters to believe that a
"travesty of justice" might have occurred when the Minister of
Finance approved his own recommendation as Chairman of
the Fiscal Incentives Review Board as what happened
in Zambales Chromate vs. Court of Appeals when the
80
Secretary of Agriculture and Natural Resources approved a
decision earlier rendered by him when he was the Director of
Mines, and in Anzaldo vs. Clave where Presidential
81 82
Executive Assistant Clave affirmed, on appeal to Malacaang,
his own decision as Chairman of the Civil Service
Commission. 83
Upon deeper analysis, the question arises as to whether one
can talk about "due process" being violated when FIRB
Resolutions Nos. 10-85 and 1-86 were approved by the
Minister of Finance when the same were recommended by him
in his capacity as Chairman of the Fiscal Incentives Review
Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties
were involved: mining groups and scientist-doctors,
respectively. Thus, there was a need for procedural due
process to be followed.
In the case of the tax exemption restoration of NPC, there is no
other comparable entity not even a single public or private
corporation whose rights would be violated if NPC's tax
exemption privileges were to be restored. While there might
have been a MERALCO before Martial Law, it is of public
knowledge that the MERALCO generating plants were sold to
the NPC in line with the State policy that NPC was to be the
State implementing arm for the electrification of the entire
country. Besides, MERALCO was limited to Manila and its
environs. And as of 1984, there was no more MERALCO as
a producer of electricity which could have objected to the
restoration of NPC's tax exemption privileges.
It should be noted that NPC was not asking to be granted tax
exemption privileges for the first time. It was just asking that its
tax exemption privileges be restored. It is for these reasons
that, at least in NPC's case, the recommendation and approval
of NPC's tax exemption privileges under FIRB Resolution Nos.
10-85 and 1-86, done by the same person acting in his dual
capacities as Chairman of the Fiscal Incentives Review Board
and Minister of Finance, respectively, do not violate procedural
due process.
While as above-mentioned, FIRB Resolution No. 17-87 was
approved by President Aquino on October 5, 1987, the view
has been expressed that President Aquino, at least with regard
to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB,
which was allegedly not a delegate of the legislature, the
power delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was
exercising both Executive and Legislative powers. Thus, there
was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for
purposes of E.O No. 93 (S'86), is a delegate of the legislature.
Clearly, she was not sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in
itself it set forth the policy to be carried out and it fixed the
85
standard to which the delegate had to conform in the
performance of his functions, both qualities having been
86
enunciated by this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax
exemption privileges restored from June 11, 1984 up to the
present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner
by which the Commissaries of the Armed Forces of the
Philippines sell their goods.
By virtue of P.D. No. 83, veterans, members of the Armed of
88
the Philippines, and their defendants but groceries and other
goods free of all taxes and duties if bought from any AFP
Commissaries.
In practice, the AFP Commissary suppliers probably treat the
unchargeable specific, ad valorem and other taxes on the
goods earmarked for AFP Commissaries as an added cost of
operation and distribute it over the total units of goods sold as
it would any other cost. Thus, even the ordinary supermarket
buyer probably pays for the specific, ad valorem and other
taxes which theses suppliers do not charge the AFP
Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private
respondents-oil companies have to absorb the taxes they add
to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14,
1954, the Secretary of Justice renders an opinion, wherein he
90
stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the National
Power Corporation from "all taxes, duties,
fees, imposts, charges, and restrictions of
the Republic of the Philippines and its
provinces, cities, and municipalities." This
exemption is broad enough to include all
taxes, whether direct or indirect, which the
National Power Corporation may be required
to pay, such as the specific tax on petroleum
products. That it is indirect or is of no amount
[should be of no moment], for it is the
corporation that ultimately pays it. The view
which refuses to accord the exemption
because the tax is first paid by the seller
disregards realities and gives more
importance to form than to substance. Equity
and law always exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be
construed strictly but not so grudgingly as
knowledge that many impositions taxpayers
have to pay are in the nature of indirect
taxes. To limit the exemption granted the
National Power Corporation to direct taxes
notwithstanding the general and broad
language of the statue will be to thwrat 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. (Emphasis supplied)
In view of all the foregoing, the Court rules and declares that
the oil companies which supply bunker fuel oil to NPC have to
pay the taxes imposed upon said bunker fuel oil sold to NPC.
By the very nature of indirect taxation, the economic burden of
such taxation is expected to be passed on through the
channels of commerce to the user or consumer of the goods
sold. Because, however, the NPC has been exempted from
both direct and indirect taxation, the NPC must beheld
exempted from absorbing the economic burden of indirect
taxation. This means, on the one hand, that the oil companies
which wish to sell to NPC absorb all or part of the economic
burden of the taxes previously paid to BIR, which could they
shift to NPC if NPC did not enjoy exemption from indirect
taxes. This means also, on the other hand, that the NPC may
refuse to pay the part of the "normal" purchase price of bunker
fuel oil which represents all or part of the taxes previously paid
by the oil companies to BIR. If NPC nonetheless purchases
such oil from the oil companies because to do so may be
more convenient and ultimately less costly for NPC than NPC
itself importing and hauling and storing the oil from overseas
NPC is entitled to be reimbursed by the BIR for that part of the
buying price of NPC which verifiably represents the tax already
paid by the oil company-vendor to the BIR.
It should be noted at this point in time that the whole issue of
who WILL pay these indirect taxes HAS BEEN
RENDERED moot and academic by E.O. No. 195 issued on
June 16, 1987 by virtue of which the ad valorem tax rate on
bunker fuel oil was reduced to ZERO (0%) PER CENTUM.
Said E.O. no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION
128 OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED BY
REVISING THE EXCISE TAX RATES OF
CERTAIN PETROLEUM PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the
National Internal Revenue Code, as
amended, is hereby amended to read as
follows:
Par. (b) For products subject to ad
valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil
and on similar fuel oils having more or less
the same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect
immediately.
Done in the city of Manila, this 17th day of
June, in the year of Our Lord, nineteen
 hundred and eighty-seven. (Emphasis
supplied)
The oil companies can now deliver bunker fuel oil to NPC
without having to worry about who is going to bear the
Petitioner, however, asks Us to restrain the Commissioner
from acting favorably on NPC's claim for P410.580,000.00
which represents specific and ad valorem taxes paid by the oil
companies to the BIR from June 11, 1984 to the early part of
1986. 96

economic burden of the ad valorem taxes. What this Court will

now dispose of are petitioner's complaints that some indirect
tax money has been illegally refunded by the Bureau of
Internal Revenue to the NPC and that more claims for refunds
by the NPC are being processed for payment by the BIR.
A careful examination of petitioner's pleadings and annexes
attached thereto does not reveal when the alleged claim for a
P410,580,000.00 tax refund was filed. It is only stated In
paragraph No. 2 of the Deed of Assignment executed by and
97

between NPC and Caltex (Phils.) Inc., as follows:

A case in point is the Tax Credit Memo issued by the Bureau of
Internal Revenue in favor of the NPC last July 7, 1986 for
P58.020.110.79 which were for "erroneously paid specific
and ad valorem taxes during the period from October 31, 1984
to April 27, 1985. Petitioner asks Us to declare this Tax
91
Credit Memo illegal as the PNC did not have indirect tax
exemptions with the enactment of P.D. No. 938. As We have
already ruled otherwise, the only questions left are whether
NPC Is entitled to a tax refund for the tax component of the
price of the bunker fuel oil purchased from Caltex (Phils.) Inc.
and whether the Bureau of Internal Revenue properly refunded
the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing
the
tax exemptions of all GOCCs NPC included, it was only on
May 8, 1985 when the BIR issues its letter authority to the NPC
authorizing it to withdraw tax-free bunker fuel oil from the oil
companies pursuant to FIRB Resolution No. 10-85. Since the
92
tax exemption restoration was retroactive to June 11, 1984
there was a need. therefore, to recover said amount as Caltex
(PhiIs.) Inc. had already paid the BIR the specific and ad
valorem taxes on the bunker oil it sold NPC during the period
above indicated and had billed NPC correspondingly. It 93
should be noted that the NPC, in its letter-claim dated
September 11, 1985 to the Commissioner of the Bureau of
Internal Revenue DID NOT CATEGORICALLY AND
UNEQUIVOCALLY STATE that itself paid the P58.020,110.79
as part of the bunker fuel oil price it purchased from Caltex
(Phils) Inc.
94
The law governing recovery of erroneously or illegally,
collected taxes is section 230 of the National Internal Revenue
Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or
illegally collected. No suit or proceeding
shall be maintained in any court for the
recovery of any national internal revenue tax
hereafter alleged to have been erroneously
or illegally assessed or collected, or of any
penalty claimed to have been collected
without authority, or of any sum alleged to
have been excessive or in any Manner
wrongfully collected. until a claim for refund
or credit has been duly filed with the
Commissioner; but such suit or proceeding
may be maintained, whether or not such tax,
penalty, or sum has been paid under protest
or duress.
That the ASSIGNOR(NPC) has a pending
tax credit claim with the Bureau of Internal
Revenue amounting to P442,887,716.16.
P58.020,110.79 of which is due to Assignor's
oil purchases from the Assignee (Caltex
[Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican
standoff." We cannot restrain the BIR from refunding said
amount because of Our ruling that NPC has both direct and
indirect tax exemption privileges. Neither can We order the BIR
to refund said amount to NPC as there is no pending petition
for review on certiorari of a suit for its collection before Us. At
any rate, at this point in time, NPC can no longer file any suit to
collect said amount EVEN IF lt has previously filed a claim with
the BIR because it is time-barred under Section 230 of the
National Internal Revenue Code of 1977. as amended, which
states:
In any case, no such suit or proceeding shall
be begun after the expiration of two years
from the date of payment of the tax or
penalty REGARDLESS of any supervening
cause that may arise after payment. . . .
(Emphasis supplied)
The date of the Deed of Assignment is June 6. 1986. Even if
We were to assume that payment by NPC for the amount of
P410,580,000.00 had been made on said date. it is clear that
more than two (2) years had already elapsed from said date. At
the same time, We should note that there is no legal obstacle
to the BIR granting, even without a suit by NPC, the tax credit
or refund claimed by NPC, assuming that NPC's claim had
been made seasonably, and assuming the amounts covered
had actually been paid previously by the oil companies to the
BIR.
WHEREFORE, in view of all the foregoing, the Motion for
Reconsideration of petitioner is hereby DENIED for lack of
merit and the decision of this Court promulgated on May 31,
1991 is hereby AFFIRMED.
SO ORDERED.

In any case, no such suit or proceeding shall

be begun after the expiration of two years
from the date of payment of the tax or
penalty regardless of any supervening cause
that may arise after payment; Provided,
however, That the Commissioner may, even
without a written claim therefor, refund or
credit any tax, where on the face of the
return upon which payment was made, such
payment appears clearly, to have been
erroneously paid.

xxx xxx xxx

Inasmuch as NPC filled its claim for P58.020,110.79 on

September 11, 1985, the Commissioner correctly issued the
95

Tax Credit Memo in view of NPC's indirect tax exemption.

G.R. No. L-24265 December 28, 1979 (Sgd.) TEODORO B. GALACAR Municipal
Mayor 1

PROCTER & GAMBLE PHILIPPINE MANUFACTURING

CORPORATION, plaintiff-appellant, For a period of six years, from 1958 to 1963, plaintiff paid
vs. defendant Municipality, allegedly under protest, storage fees in
THE MUNICIPALITY OF JAGNA, PROVINCE OF the total sum of 1142,265.13, broken down as follows:
BOHOL, defendant-appellee.
Procter & Gamble Trading Co. Procter & Gamble Philippine
Picazo, Agcaoili, Santayana, Reyes & Tayao for appellant. Manufacturing Corp.

Joel P. Tiangco and Jesus N. Borromeo for appellee. 19

58 5, _
072.13

1959 7, _
MELENCIO-HERRERA, J.: 076.00

A direct appeal by plaintiff company from the judgment of the
Court of First Instance of Manila, Branch VI, upholding the
validity of Ordinance No. 4, Series of 1957, enacted by
defendant Municipality, which imposed "storage fees on all
exportable copra deposited in the bodega within the jurisdiction
of the Municipality of Jagna Bohol.
Plaintiff-appellant is a domestic corporation with principal
offices in Manila. lt is a consolidated corporation of Procter &
Gamble Trading Company and Philippine Manufacturing
Company, which later became Procter & Gamble Trading
Company, Philippines. It is engaged in the manufacture of
soap, edible oil, margarine and other similar products, and for
this purpose maintains a "bodega" in defendant Municipality
where it stores copra purchased in the municipality and
therefrom ships the same for its manufacturing and other
operations.
On December 13, 1957, the Municipal Council of Jagna
enacted Municipal Ordinance No. 4, Series of 1957, quoted
hereinbelow:
AN ORDINANCE IMPOSING STORAGE
FEES OF ALL EXPORTABLE COPRA
DEPOSITED IN THE BODEGA WITHIN
THE JURISDlCTI0N OF THE
MUNICIPALITY OF JAGNA BOHOL.
Be it ordained by the Municipal Council of
Jagna Bohol, that:
SECTION 1. Any person, firm or corporation
having a deposit of exportable copra in the
bodega, within the jurisdiction of the
Municipality of Jagna Bohol, shall pay to the
Municipal Treasury a storage fee of TEN
(P0.10) CENTAVOS FOR EVERY
HUNDRED (100) kilos;
SECTION 2. All exportable copra deposited
in the bodega within the Municipality of
Jagna Bohol, is part of the surveillance and
lookout of the Municipal Authorities;
SECTION 3. Any person, firm or corporation
found violating the provision of the preceding
section of this Ordinance shall be punished
by a fine of not less than TWO HUNDRED
(P 200.00) PESOS, nor more than FOUR
HUNDRED (P400.00) PESOS, or an
imprisonment of hot less than ONE MONTH,
nor more than THREE MONTHS, or both
fines and imprisonment at the discretion of
the court.
1960 9, _
950.00
1961 7, _
830.00
1962 3, P
648.00
1963 ______ P
P33, P
576.13
TOTAL
CLAIM
On March 3, 1964, plaintiff filed this suit in the Court of First
Instance of Manila, Branch VI, wherein it prayed that 1)
Ordinance No. 4 be declared inapplicable to it, or in the alter.
native, that it be pronounced ultra-vires and void for being
beyond the power of the Municipality to enact; and 2) that
defendant Municipality be ordered to refund to it the amount of
P42,265.13 which it had paid under protest; and costs.
For its part, defendant Municipality upheld its power to enact
the Ordinance in question; questioned the jurisdiction of the
trial Court to take cognizance of the action under section 44(h)
of the Judiciary Act in that it seeks to enjoin the enforcement of
a Municipal Ordinance; and pleaded prescription and laches
for plaintiff's failure to timely question the validity of the said
Ordinance.
After the parties had agreed to submit the case for judgment
on the pleadings, the trial Court upheld its jurisdiction as well
as defendant Municipality's power to enact the Ordinance in
question under section 2238 of the Revised Administrative
Code, otherwise known as the general welfare clause, and
declared that plaintiff's right of action had prescribed under the
5-year period provided for by Article 1149 of the Civil Code.
In this appeal, plaintiff interposes the following Assignments of
Error:
I
THE TRIAL COURT ERRED IN HOLDING
THAT ORDINANCE NO. 4, SERIES OF
1957, ENACTED BY THE DEFENDANT
MUNICIPALITY OF JAGNA BOHOL, IS A
VALID, LEGAL AND ENFORCEABLE
ORDINANCE AGAINST THE PLAINTIFF.
II

SECTION 4. This Ordinance shall take effect THE TRIAL COURT ERRED IN HOLDING
on January 1, 1958. THAT PAYMENT OF THE TAX UNDER
ORDINANCE NO. 4, SERIES OF 1957 WAS
APPROVED December 13,1957. NOT DONE UNDER PROTEST.

III
 THE TRIAL COURT ERRED IN HOLDING
THAT THE ACTION OF THE PLAINTIFF TO
ANNUL AND TO DECLARE ORDINANCE
NO. 4, SERIES OF 1957 OF THE
DEFENDANT HAS ALREADY
PRESCRIBED.
IV
AND, FINALLY, THE TRIAL COURT
ERRED IN NOT HOLDING ORDINANCE
NO. 4. SERIES OF 1957 ULTRA-VIRES
AND VOID AND IN NOT ORDERING THE
REFUND OF TAXES PAID THEREUNDER.
It is plaintiff's submission that the subject Ordinance is
inapplicable to it as it is not engaged in the business or trade of
storing copra for others for compensation or profit and that the
only copra it stores is for its exclusive use in connection with its
business as manufacturer of soap, edible oil, margarine and
other similar products; that the levy is intended as an "export
tax" as it is collected on "exportable copra' , and, therefore,
beyond the power of the Municipality to enact; and that the fee
of P0.10 for every 100 kilos of copra stored in the bodega is
excessive, unreasonable and oppressive and is imposed more
for revenue than as a regulatory fee.
The main question to determine is whether defendant
Municipality was authorized to impose and collect the storage
fee provided for in the challenged Ordinance under the laws
then prevailing.
The validity of the Ordinance must be upheld pursuant to the
broad authority conferred upon municipalities by
Commonwealth Act No. 472, approved on June 16, 1939,
which was the prevailing law when the Ordinance was enacted
(Procter & Gamble Trading Co. vs. Municipality of Medina, 43
SCRA 130 11972]). Section 1 thereof reads:
Section 1. A municipal council or municipal
district council shall have the authority to
impose municipal license taxes upon
persons engaged in any occupation or
business, or exercising privileges in the
municipality or municipal district, by requiring
them to secure licenses at rates fixed by the
municipal council, or municipal district
council, and to collect fees and charges for
services rendered by the municipality or
municipal district and shall otherwise have
power to levy for public local purposes, and
for school purposes, including teachers'
salaries, just and uniform taxes other than
percentage taxes and taxes on specified
articles.
Under the foregoing provision, a municipality is authorized to
impose three kinds of licenses: (1) a license for regulation of
useful occupation or enterprises; (2) license for restriction or
regulation of non-useful occupations or enterprises; and (3)
license for revenue. It is thus unnecessary, as plaintiff would
4
have us do, to determine whether the subject storage fee is a
tax for revenue purposes or a license fee to reimburse
defendant Municipality for service of supervision because
defendant Municipality is authorized not only to impose a
license fee but also to tax for revenue purposes.
The storage fee imposed under the question Ordinance is
actually a municipal license tax or fee on persons, firms and
corporations, like plaintiff, exercising the privilege of storing
copra in a bodega within the Municipality's territorial
jurisdiction. For the term "license tax" has not acquired a fixed
meaning. It is often used indiseriminately to designate
impositions exacted for the exercise of various privileges. In
many instances, it refers to revenue-raising exactions on
privileges or activities. 5 for trading from that it utilizes for manufacturing.
Not only is the imposition of the storage fee authorized by the
general grant of authority under section 1 of CA No. 472.
Neither is the storage fee in question prohibited nor beyond the
power of the municipal councils and municipal district councils
to impose, as listed in section 3 of said CA No. 472. 6
Moreover, the business of buying and selling and storing copra
is property the subject of regulation within the police power
granted to municipalities under section 2238 of the Revised
Administrative Code or the "general welfare clause", which we
quote hereunder:
Section 2238. General power of council to
enact ordinances and make regulations.
The municipal council shall enact such
ordinances and make such regulations, not
3
repugnant to law, as may be necessary to
carry into effect and discharge the powers
and duties conferred upon it by law and such
as shall seem necessary and proper to
provide for the health and safety, promote
the prosperity, improve the morals, peace,
good order, comfort, and convenience of the
municipality and the inhabitants thereof, and
for the protection of property therein.
For it has been held that a warehouse used for keeping or
storing copra is an establishment likely to endanger the public
safety or likely to give rise to conflagration because the oil
content of the copra when ignited is difficult to put under
control by water and the use of chemicals is necessary to put
out the fire. And as the Ordinance itself states, all exportable
7
copra deposited within the municipality is "part of the
surveillance and lookout of municipal authorities.
Plaintiff's argument that the imposition of P0.10 per 100 kilos of
copra stored in a bodega within defendant's territory is beyond
the cost of regulation and surveillance is not well taken. As
enunciated in the case of Victorias Milling Co. vs. Municipality
of Victorias, supra.
The cost of regulation cannot be taken as a
gauge, if the municipality really intended to
enact a revenue ordinance. For, 'if the
charge exceeds the expense of issuance of
a license and costs of regulation, it is a tax'.
And if it is, and it is validly imposed, 'the rule
that license fees for regulation must bear a
reasonable relation to the expense of the
regulation has no application'.
Municipal corporations are allowed wide discretion in
determining the rates of imposable license fees even in cases
of purely police power measures. In the absence of proof as to
municipal conditions and the nature of the business being
taxed as well as other factors relevant to the issue of
arbitrariness or unreasonableness of the questioned rates,
Courts will go slow in writing off an Ordinance. In the case at
8
bar, appellant has not sufficiently shown that the rate imposed
by the questioned Ordinance is oppressive, excessive and
prohibitive.
Plaintiff's averment that the Ordinance, even if presumed valid,
is inapplicable to it because it is not engaged in the business or
occupation of buying or selling of copra but is only storing
copra in connection with its main business of manufacturing
soap and other similar products, and that to be compelled to
pay the storage fees would amount to double taxation, does
not inspire assent. The question of whether appellant is
engaged in that business or not is irrelevant because the
storage fee, as previously mentioned, is an imposition on the
privilege of storing copra in a bodega within defendant
municipality by persons, firms or corporations. Section 1 of the
Ordinance in question does not state that said persons, firms
or corporations should be engaged in the business or
occupation of buying or selling copra. Moreover, by plaintiff's
own admission that it is a consolidated corporation with its
trading company, it will be hard to segregate the copra it uses
Thus, it can be said that plaintiff's payment of storage fees
imposed by the Ordinance in question does not amount to
double taxation. For double taxation to exist, the same property
must be taxed twice, when it should be taxed but once. Double
taxation has also been defined as taxing the same person
twice by the same jurisdiction for the same thing. Surely, a tax
9

on plaintiff's products is different from a tax on the privilege of

storing copra in a bodega situated within the territorial
boundary of defendant municipality.

Plaintiff's further contention that the storage fee imposed by the

Ordinance is actually intended to be an export tax, which is
expressly prohibited by section 2287 of the Revised
Administrative Code, is without merit. Said provision reads as
follows:

Section 2287 ...

It shall not be in the power of the municipal

council to impose a tax in any form whatever
upon goods and merchandise carried into
the municipality, or out of the same, and any
attempt to impose an import or export tax
upon such goods in the guise of an
unreasonable charge for wharfage use of
bridges or otherwise, shall be void.

xxx xxx xxx

We have held that only where there is a clear showing that

what is being taxed is an export to any foreign country would
the prohibition come into play. When the Ordinance itself
10

speaks of "exportable" copra, the meaning conveyed is not

exclusively export to a foreign country but shipment out of the
municipality. The storage fee impugned is not a tax on export
because it is imposed not only upon copra to be exported but
also upon copra sold and to be used for domestic purposes if
stored in any warehouse in the Municipality and the weight
thereof is 100 kilos or more. 11

Thus finding the Ordinance in question to be valid, legal and

enforceable, we find it unnecessary to discuss the ascribed
error that the Court a quo erred in declaring that appellant had
not paid the taxes under protest.

However, we find merit in plaintiff's contention that the lower

Court erred in ruling that its action has prescribed under Article
1149 of the Civil Code, which provides for a period of five
years for all actions whose periods are not fixed in that Code.
The case of Municipality of Opon vs. Caltex Phil., is authority
12

for the view that the period for prescription of actions to recover
municipal license taxes is six years under Article 1145(2) of the
Civil Code. Thus, plaintiff's action brought within six years from
the time the right of action first accrued in 1958 has not yet
prescribed.

WHEREFORE, affirming the judgment appealed, from, we

sustain the validity of Ordinance No. 4, Series of 1957, of
defendant Municipality of Jagna Bohol, under the laws then
prevailing.

Costs against plaintiff-appellant.

SO ORDERED.
G.R. No. 115349 April 18, 1997 WHEREFORE, in view of
the foregoing,
COMMISSIONER OF INTERNAL REVENUE, petitioner, respondent's decision is
vs. SET ASIDE. The
THE COURT OF APPEALS, THE COURT OF TAX APPEALS deficiency contractor's tax
and ATENEO DE MANILA UNIVERSITY, respondents. assessment in the amount
of P46,516.41 exclusive of
surcharge and interest for
the fiscal year ended
March 31, 1978 is hereby
PANGANIBAN, J.: CANCELED. No
pronouncement as to cost.
In conducting researches and studies of social organizations
and cultural values thru its Institute of Philippine Culture, is the SO ORDERED.
Ateneo de Manila University performing the work of an
independent contractor and thus taxable within the purview of Not in accord with said decision, petitioner has come
then Section 205 of the National Internal Revenue Code to this Court via the present petition for review raising
levying a three percent contractor's tax? This question is the following issues:
answer by the Court in the negative as it resolves this petition
assailing the Decision of the Respondent Court of Appeals in
1 2

1) WHETHER OR NOT
CA-G.R. SP No. 31790 promulgated on April 27, 1994
PRIVATE RESPONDENT
affirming that of the Court of Tax Appeals. 3

FALLS UNDER THE

PURVIEW OF
The Antecedent Facts INDEPENDENT
CONTRACTOR
The antecedents as found by the Court of Appeals are PURSUANT TO SECTION
reproduced hereinbelow, the same being largely undisputed by 205 OF THE TAX CODE;
the parties. and

Private respondent is a non-stock, non-profit 2) WHETHER OR NOT

educational institution with auxiliary units and PRIVATE RESPONDENT
branches all over the Philippines. One such IS SUBJECT TO 3%
auxiliary unit is the Institute of Philippine CONTRACTOR'S TAX
Culture (IPC), which has no legal personality UNDER SECTION 205 OF
separate and distinct from that of private THE TAX CODE.
respondent. The IPC is a Philippine unit
engaged in social science studies of The pertinent portions of Section 205 of the National Internal
Philippine society and culture. Occasionally, Revenue Code, as amended, provide:
it accepts sponsorships for its research
activities from international organizations,
Sec. 205. Contractor, proprietors or
private foundations and government
operators of dockyards, and others. A
agencies.
contractor's tax of threeper centum of the
gross receipts is hereby imposed on the
On July 8, 1983, private respondent received following:
from petitioner Commissioner of Internal
Revenue a demand letter dated June 3,
xxx xxx xxx
1983, assessing private respondent the sum
of P174,043.97 for alleged deficiency
contractor's tax, and an assessment dated (16) Business agents and
June 27, 1983 in the sum of P1,141,837 for other independent
alleged deficiency income tax, both for the contractors except
fiscal year ended March 31, 1978. Denying persons, associations and
said tax liabilities, private respondent sent corporations under
petitioner a letter-protest and subsequently contract for embroidery
filed with the latter a memorandum and apparel for export, as
contesting the validity of the assessments. well as their agents and
contractors and except
gross receipts of or from a
On March 17, 1988, petitioner rendered a
pioneer industry registered
letter-decision canceling the assessment for
with the Board of
deficiency income tax but modifying the
Investments under
assessment for deficiency contractor's tax by
Republic Act No. 5186:
increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for
a reconsideration or reinvestigation of the xxx xxx xxx
modified assessment. At the same time, it
filed in the respondent court a petition for The term "independent
review of the said letter-decision of the contractors" include
petitioner. While the petition was pending persons (juridical or
before the respondent court, petitioner natural) not enumerated
issued a final decision dated August 3, 1988 above (but not including
reducing the assessment for deficiency individuals subject to the
contractor's tax from P193,475.55 to occupation tax under
P46,516.41, exclusive of surcharge and Section 12 of the Local
interest. Tax Code) whose activity
consists essentially of the
On July 12, 1993, the respondent court sale of all kinds of services
rendered the questioned decision which for a fee regardless of
dispositively reads: whether or not the
performance of the service
calls for the exercise or
 use of the physical or
mental faculties of such
contractors or their
employees.
xxx xxx xxx
Petitioner contends that the respondent court
erred in holding that private respondent is
not an "independent contractor" within the
purview of Section 205 of the Tax Code. To
petitioner, the term "independent contractor",
as defined by the Code, encompasses all
kinds of services rendered for a fee and that
the only exceptions are the following:
a. Persons, association and corporations
under contract for embroidery and apparel
for export and gross receipts of or from
pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section
12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established
in the Philippines by multinational
corporations, including their alien executives,
and which headquarters do not earn or
derive income from the Philippines and
which act as supervisory, communication
and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific
Region (Section 205 of the Tax Code).
Petitioner thus submits that since private
respondent falls under the definition of an
"independent contractor" and is not among
the aforementioned exceptions, private
respondent is therefore subject to the 3%
contractor's tax imposed under the same
Code. 4
The Court of Appeals disagreed with the Petitioner
Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now
asks us to reverse the CA through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls
under the purview of independent contractor
pursuant to Section 205 of the Tax Code.
2) Whether or not private respondent is
subject to 3% contractor's tax under Section
205 of the Tax Code. 5 tax." According to petitioner, Ateneo has the burden of proof
In fine, these may be reduced to a single issue: Is Ateneo de
Manila University, through its auxiliary unit or branch the
Institute of Philippine Culture performing the work of an
independent contractor and, thus, subject to the three percent
contractor's tax levied by then Section 205 of the National
Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue
Code germane to the case before us read:
Sec. 205. Contractors, proprietors or
operators of dockyards, and others. A
contractor's tax of threeper centum of the
gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent
contractors, except persons, associations
and corporations under contract for
embroidery and apparel for export, as well
as their agents and contractors, and except
gross receipts of or from a pioneer industry
registered with the Board of Investments
under the provisions of Republic Act No.
5186;
xxx xxx xxx
The term "independent contractors" include
persons (juridical or natural) not enumerated
above (but not including individuals subject
to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists
essentially of the sale of all kinds of services
for a fee regardless of whether or not the
performance of the service calls for the
exercise or use of the physical or mental
faculties of such contractors or their
employees.
The term "independent contractor" shall not
include regional or area headquarters
established in the Philippines by
multinational corporations, including their
alien executives, and which headquarters do
not earn or derive income from the
Philippines and which act as supervisory,
communications and coordinating centers for
their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
The term "gross receipts" means all amounts
received by the prime or principal contractor
as the total contract price, undiminished by
amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of
the subcontractor.
Petitioner Commissioner of Internal Revenue contends that
Private Respondent Ateneo de Manila University "falls within
the definition" of an independent contractor and "is not one of
those mentioned as excepted"; hence, it is properly a subject
of the three percent contractor's tax levied by the foregoing
provision of law. Petitioner states that the "term 'independent
6
contractor' is not specifically defined so as to delimit the scope
thereof, so much so that any person who . . . renders physical
and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's
7
to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue
erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical
to determine who are exempted without first determining who
are covered by the aforesaid provision. The Commissioner
should have determined first if private respondent was covered
by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before
asking Ateneo to prove its exemption therefrom. The Court
takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that "(a) statute will not be construed
as imposing a tax unless it does so clearly, expressly, and
unambiguously . . . (A) tax cannot be imposed without clear
and express words for that purpose. Accordingly, the general
rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax lawsand the provisions of
a taxing act are not to be extended by
implication." Parenthetically, in answering the question of who
8
is subject to tax statutes, it is basic that "in case of doubt, such
statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be
engaged in the business of selling its services. Hence, to
impose the three percent contractor's tax on Ateneo's Institute
of Philippine Culture, it should be sufficiently proven that the
private respondent is indeed selling its services for a fee in
pursuit of an independent business. And it is only after private
respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown does
the rule of construction that tax exemptions are to be strictly
construed against the taxpayer come into play, contrary to
petitioner's position. This is the main line of reasoning of the
Court of Tax Appeals in its decision, which was affirmed by
10
the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine
Culture
After reviewing the records of this case, we find no evidence
that Ateneo's Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a
business apart from and independently of the academic
purposes of the university.
Stressing that "it is not the Ateneo de Manila University per
se which is being taxed," Petitioner Commissioner of Internal
Revenue contends that "the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross
receipts made in favor of IPC pursuant to the contracts the
latter entered to conduct researches for the benefit primarily of
its clients. The tax is imposed on the exercise of a taxable
activity. . . . [T]he sale of services of private respondent is
made under a contract and the various contracts entered into
between private respondent and its clients are almost of the
same terms, showing, among others, the compensation and
terms of payment." (Emphasis supplied.)
11
In theory, the Commissioner of Internal Revenue may be
correct. However, the records do not show that Ateneo's IPC in
fact contracted to sell its research services for a fee. Clearly
then, as found by the Court of Appeals and the Court of Tax
Appeals, petitioner's theory is inapplicable to the established
factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to
prove its bare contention that, indeed, contracts for sale of
services were ever entered into by the private respondent. As
appropriately pointed out by the latter:
An examination of the Commissioner's
Written Formal Offer of Evidence in the
Court of Tax Appeals shows that only the
following documentary evidence was
presented:
Exhibit 1 BIR letter of authority no. 331844
2 work. On the contrary, the evidence shows
Examine
r's Field
Audit
Report
3 bespeaks of the fact that education and not
Adjustm
ents to
Sales/R
eceipts
4 Letter-
decision
of BIR
Commis
sioner
Bienveni
do A.
Tan Jr.
None of the foregoing evidence even comes
close to purport to be contracts between
private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly
declared that the " funds received by the Ateneo de Manila
University are technically not a fee. They may however fall as
gifts or donations which are tax-exempt" as shown by private
respondent's compliance with the requirement of Section 123
of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution.
13
Respondent Court of Appeals elucidated on the ruling of the
Court of Tax Appeals:
To our mind, private respondent hardly fits
into the definition of an "independent
contractor".
For one, the established facts show that IPC,
as a unit of the private respondent, is not
engaged in business. Undisputedly, private
respondent is mandated by law to undertake
research activities to maintain its university
status. In fact, the research activities being
carried out by the IPC is focused not on
business or profit but on social sciences
studies of Philippine society and
culture. Since it can only finance a limited
number of IPC's research projects, private
respondent occasionally accepts
sponsorship for unfunded IPC research
projects from international organizations,
private foundations and governmental
agencies. However, such sponsorships are
subject to private respondent's terms and
conditions, among which are, that the
research is confined to topics consistent with
the private respondent's academic
agenda; that no proprietary or commercial
purpose research is done; and that private
respondent retains not only the absolute
right to publish but also the ownership of the
results of the research conducted by the
IPC. Quite clearly, the aforementioned terms
and conditions belie the allegation that
private respondent is a contractor or is
engaged in business.
For another, it bears stressing that private
respondent is a non-stock, non-profit
educational corporation. The fact that it
accepted sponsorship for IPC's unfunded
projects is merely incidental. For, the main
function of the IPC is to undertake research
projects under the academic agenda of the
private respondent. Moreover the records do
not show that in accepting sponsorship of
research work, IPC realized profits from such
that for about 30 years, IPC had
continuously operated at a loss, which
means that sponsored funds are less than
actual expenses for its research projects.
That IPC has been operating at a loss loudly
profit is the motive for undertaking the
research projects.
Then, too, granting arguendo that IPC made
profits from the sponsored research projects,
the fact still remains that there is no proof
 that part of such earnings or profits was ever
distributed as dividends to any stockholder,
as in fact none was so distributed because
they accrued to the benefit of the private
respondent which is a non-profit educational
institution. 14
Therefore, it is clear that the funds received by Ateneo's
Institute of Philippine Culture are not given in the concept of a
fee or price in exchange for the performance of a service or
delivery of an object. Rather, the amounts are in the nature of
an endowment or donation given by IPC's benefactors solely
for the purpose of sponsoring or funding the research with no
strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No
proprietary or commercial research is done, and IPC retains
the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the
results of the research are owned by
Ateneo and, consequently, no portion thereof may be
reproduced without its permission. The amounts given to
15
IPC, therefore, may not be deemed, it bears stressing as fees
or gross receipts that can be subjected to the three percent
contractor's tax.
It is also well to stress that the questioned transactions of
Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work. "By
the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain
in money or its equivalent." By its very nature, a contract of
16
sale requires a transfer of ownership. Thus, Article 1458 of the
Civil Code "expressly makes the obligation to transfer
ownership as an essential element of the contract of sale,
following modern codes, such as the German and the Swiss.
Even in the absence of this express requirement, however,
most writers, including Sanchez Roman, Gayoso, Valverde,
Ruggiero, Colin and Capitant, have considered such transfer of
ownership as the primary purpose of sale. Perez and Alguer
follow the same view, stating that the delivery of the thing does
not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an agreement to
transfer it for a price paid or promised to be paid is the essence
of sale." In the case of a contract for a piece of work, "the
17
contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. .
. . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing, . .
." Ineludably, whether the contract be one of sale or one for a
18
piece of work, a transfer of ownership is involved and a party
necessarily walks away with an object. In the case at bench,
19
it is clear from the evidence on record that there was no sale
either of objects or services because, as adverted to earlier,
there was no transfer of ownership over the research data
obtained or the results of research projects undertaken by the
Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute
of Philippine Culture is done in pursuance of maintaining
Ateneo's university status and not in the course of an
independent business of selling such research with profit in
mind. This is clear from a reading of the regulations governing
universities:
31. In addition to the legal requisites an
institution must meet, among others, the
following requirements before an application
for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research
and operate with a competent qualified staff
at least three graduate departments in
accordance with the rules and standards for
graduate education. One of the departments
shall be science and technology. The
competence of the staff shall be judged by
their effective teaching, scholarly
publications and research activities
published in its school journal as well as their
leadership activities in the profession.
(f) The institution must show evidence of
adequate and stable financial resources and
support, a reasonable portion of which
should be devoted to institutional
development and research. (emphasis
supplied)
xxx xxx xxx
32. University status may be withdrawn, after
due notice and hearing, for failure to
maintain satisfactorily the standards and
requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine
Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical
entity that is separate and distinct form the latter.
Factual Findings and Conclusions of the Court of Tax
Appeals Affirmed by the Court of Appeals Generally
Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a
highly specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably
competent to determine the issue of whether" Ateneo de
21
Manila University may be deemed a subject of the three
percent contractor's tax "through the evidence presented
before it." Consequently, "as a matter of principle, this Court
will not set aside the conclusion reached by . . . the Court of
Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident
exercise of authority . . ." This point becomes more evident in
22
the case before us where the findings and conclusions of both
the Court of Tax Appeals and the Court of Appeals appear
untainted by any abuse of authority, much less grave abuse of
discretion. Thus, we find the decision of the latter affirming that
of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture
conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and
disbursements for the period 1972 to 1985. In fact, it was
23
Ateneo de Manila University itself that had funded the research
projects of the institute, and it was only when Ateneo could no
longer produce the needed funds that the institute sought
funding from outside. The testimony of Ateneo's Director for
Accounting Services, Ms. Leonor Wijangco, provides
significant insight on the academic and nonprofit nature of the
institute's research activities done in furtherance of the
university's purposes, as follows:
Q Now it was testified to earlier by Miss
Thelma Padero (Office Manager of the
Institute of Philippine Culture) that as far as
grants from sponsored research it is possible
that the grant sometimes is less than the
actual cost. Will you please tell us in this
case when the actual cost is a lot less than
the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development
program as a university, because a
university has to have its own research
institute. 24
So, why is it that Ateneo continues to operate and conduct
researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process?
The plain and simple answer is that private respondent is not a
contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its
commitments to education and, ultimately, to public service.
For the institute to have tenaciously continued operating for so
long despite its accumulation of significant losses, we can only
agree with both the Court of Tax Appeals and the Court of
Appeals that "education and not profit is [IPC's] motive for
undertaking the research
projects."25

WHEREFORE, premises considered, the petition is DENIED

and the assailed Decision of the Court of Appeals is hereby
AFFIRMED in full.

SO ORDERED.
G.R. No. 145559 July 14, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BENGUET CORPORATION, respondent.
DECISION
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court,
petitioner Commissioner of Internal Revenue seeks the
reversal and setting aside of the following Resolutions of the
Court of Appeals (CA) in CA-G.R. SP No. 38413, to wit:
1. Resolution dated May 10, 20001 insofar as it
ordered petitioner to issue a tax credit to respondent
Benguet Corporation in the amount
of P49,749,223.31 representing input VAT/tax
attributable to its sales of gold to the Central Bank
(now Bangko Sentral ng Pilipinas or BSP) covering
the period from January 1, 1988 to July 31, 1989; and
2. Resolution dated October 16, 20002 denying
petitioner's motion for reconsideration.
The facts, as narrated by the CA in its basic Resolution of May
10, 2000, are:
[Respondent] is a domestic corporation engaged in
mining business, specifically the exploration,
development and operation of mining properties for
purposes of commercial production and the marketing
of mine products. It is a VAT-registered enterprise,
with VAT Registration No. 31-0-000027 issued on
January 1, 1988. Sometime in January 1988,
[respondent] filed an application for zero-rating of its
sales of mine products, which application was duly
approved by the [petitioner] Commissioner of Internal
Revenue.
On August 28, 1988, then Deputy Commissioner of
Internal Revenue Eufracio D. Santos issued VAT
Ruling No. 378-88 which declared that the sale of
gold to the Central Bank is considered an export sale
and therefore subject to VAT at 0% rate. On
December 14, 1988, then Deputy Commissioner
Santos also issued Revenue Memorandum Circular
(RMC) No. 59-88, again declaring that the sale of gold
by a VAT-registered taxpayer to the Central Bank is
subject to the zero-rate VAT. No less than five
Rulings were subsequently issued by [petitioner] from
1988 to 1990 reiterating and confirming its position
that the sale of gold by a VAT-registered taxpayer to
the Central Bank is subject to the zero-rate VAT.
As a corollary, and in reliance, of the foregoing
issuances, [respondent], during the six (6) taxable
quarters in question covering the period January 1,
1988 to July 31, 1989, sold gold to the Central Bank
and treated these sales as zero-rated that is,
subject to the 0% VAT. During the same period,
[respondent] thus incurred input taxes attributable to
said sales to the Central Bank. Consequently,
[respondent] filed with the Commissioner of Internal
Revenue applications for the issuance of Tax Credit
Certificates for input VAT Credits attributable to its
export sales - that is, inclusive of direct export sales
and sale of gold to the Central Bank corresponding to
the same taxable periods, to wit:
AMOUNT OF TAX CREDIT TAXABLE PERIOD January 1, 1988 to July 31, 1989 is merely speculative and not
APPLIED FOR
P34,449,817.71 01Jan88 to 30beApr88
P30,382,666.86 01May88 to 31Jul88
P13,467,663.41 01 Nov88 to 31Jan89
P7,030,261.29 01 Feb89 to 3
P18,263,960.28 01May89 to 3
(CTA Decision dated March 23, 1995; Pages 83-86,
rollo)
Meanwhile, on January 23, 1992, then Commissioner
Jose U. Ong issued VAT Ruling No. 008-92 declaring
and holding that the sales of gold to the Central Bank
are considered domestic sales subject to 10% VAT
instead of 0% VAT as previously held in BIR
Issuances from 1998 to 1990. Subsequently, VAT
Ruling No. 59-92, dated April 28, 1992, x x x were
issued by [petitioner] reiterating the treatment of sales
of gold to the Central Bank as domestic sales, and
expressly countenancing the Retroactive application
of VAT Ruling No. 008-92 to all such sales made
starting January 1, 1988, ratiocinating, inter alia, that
the mining companies will not be unduly prejudiced by
a retroactive application of VAT Ruling 008-92
because their claim for refund of input taxes are not
lost because the same are allowable on its output
taxes on the sales of gold to Central Bank; on its
output taxes on other sales; and as deduction to
income tax under Section 29 of the Tax Code.
On the basis of the aforequoted BIR Issuances,
[petitioner] thus treated [respondent's] sales of gold to
the Central Bank as domestic sales subject to 10%
VAT but allowed [respondent] a total tax credit of
only P81,991,810.91 which corresponded to VAT
input taxes attributable to its direct export sales (CTA
Decision dated March 23, 1995; Page 87).
Notwithstanding this finding of the [petitioner],
[respondent] was not refunded the said amounts of
tax credit claimed. Thus, to suspend the running of
the two-year prescriptive period (Sec. 106, NIRC) for
claiming refunds or tax credits, [respondent] instituted
x x x consolidated Petitions for Review with the Court
of Tax Appeals, praying for the issuance of "Tax
Credit Certificates" for the following input VAT credits
attributable to export sales transacted during the
taxable quarters or periods in question, to wit:
CTA Case Amount of Tax Credit Ta
Applied for
Number
4429 P64,832,374.67 01JAN 88 to
4495 P43,614,437.88 01AUG 88to
4575 P23,294,221.77 01FEB 89 t
P131,741,034.22 = TOTAL
Significantly, the total amount of P131,741,034.22, as
hereinabove computed, corresponds to the total input
VAT credits attributable to export sales made by
[respondent] during the taxable periods set forth and
therefore, represents a combination of input tax
attributable to both (1) direct export sales and (2)
sales of gold to the Central Bank. (Words in brackets
added).3
In a decision dated March 23, 1995,4 the Court of Tax Appeals
(CTA) dismissed respondent's aforementioned consolidated
Petitions for Review and denied the whole amount of its claim
for tax credit of P131,741,034.22. The tax court held that the
alleged prejudice to respondent as a result of the retroactive
application of VAT Ruling No. 008-92 issued on January 23,
1992 to the latter's gold sales to the Central Bank (CB) from
actual and imminent so as to proscribe said Ruling's
retroactivity. The CTA further held that respondent would not
unduly prejudiced considering that VAT Ruling No. 59-92
which mandates the retroactivity of VAT Ruling No. 008-92
likewise provides for alternative remedies for the recovery of
the input VAT.
Its motion for reconsideration having been denied by the tax
court, respondent appealed to the CA whereat its recourse was
docketed as CA-G.R. SP No. 38413.
At first, the CA, in a decision dated May 30, 1996,5 affirmed in
toto that of the tax court.
However, upon respondent's motion for reconsideration, the
CA, in the herein assailed basic Resolution dated May 10,
2000, reversed itself by setting aside its earlier decision of May
30, 1996 and ordering herein petitioner to issue in respondent's
favor a tax credit in the amount of P131,741,034.22, to wit:
IN THE LIGHT OF ALL THE FOREGOING,
[respondent's] Motion for Reconsideration, x x x as
supplemented, is GRANTED. The Decision of this
Court, dated May 30, 1996, affirming the Decision of
the Court of Tax Appeals x x x is SET ASIDE. The
[petitioner Commissioner of Internal Revenue] is
hereby ordered to issue [respondent] a TAX
CREDIT in the amount of P131,741,034.22.
SO ORDERED.
In its reversal action, the CA ruled that the tax credit in the total
amount of P131,741,034.22 consists of (1) P81,991,810.91,
representing input VAT credits attributable to direct export
sales subject to 0% VAT, and (2) P49,749,223.31,
representing input VAT attributable to sales of gold to the CB
which were subject to 0% when said sales were made in 1988
and 1989. In effect, the CA rejected the retroactive application
of VAT Ruling No. 008-92 to the subject gold sales of
respondent because of the resulting prejudice to the latter
despite the existence of alternative modes for the recovery of
the input VAT.
This time, it was petitioner who moved for a reconsideration
but his motion was denied by the CA in its
subsequent Resolution of October 16, 2000.
Hence, petitioner's present recourse assailing only that portion
of the CA Resolution of May 10, 2000 allowing respondent the
amount of P49,749,223.31 as tax credit corresponding to the
input VAT attributable to its sales of gold to the CB for the
period January 1, 1988 to July 31, 1989. It is petitioner's sole
contention that the CA erred in rejecting the retroactive
application of VAT Ruling No. 008-92, dated January 23, 1992,
subjecting sales of gold to the CB to 10% VAT to respondent's
sales of gold during the period from January 1, 1988 to July 31,
1989. Petitioner posits that, contrary to the ruling of the
appellate court, the retroactive application of VAT Ruling No.
008-92 to respondent would not prejudice the latter.
Initially, the Court, in its Resolution of January 24,
2001, 6 denied the Petition for lack of verification and
certification against forum shopping. However, upon
petitioner's manifestation and motion for reconsideration, the
Court reinstated the Petition in its subsequent Resolution of
March 5, 2001.7
The petition must have to fall.
We start with the well-entrenched rule that rulings and
circulars, rules and regulations, promulgated by the
Commissioner of Internal Revenue, would have no retroactive
application if to so apply them would be prejudicial to the
taxpayers.8
And this is as it should be, for the Tax Code, specifically
Section 246 thereof, is explicit that:
x x x Any revocation, modification, or reversal of any
rules and regulations promulgated in accordance with
the preceding section or any of the rulings or circulars
promulgated by the Commissioner of Internal
Revenue shall not be given retroactive application if
the revocation, modification, or reversal will be
prejudicial to the taxpayers except in the following
cases: a) where the taxpayer deliberately misstates or
omits material facts from his return or in any
document required of him by the Bureau of Internal
Revenue; b) where the facts subsequently gathered
by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based;
or c) where the taxpayer acted in bad faith.
There is no question, therefore, as to the prohibition against
the retroactive application of the revocation, modification or
reversal, as the case maybe, of previously established Bureau
on Internal Revenue (BIR) Rulings when the taxpayer's interest
would be prejudiced thereby. But even if prejudicial to a
taxpayer, retroactive application is still allowed where: (a) a
taxpayer deliberately misstates or omits material facts from his
return or any document required by the BIR; (b) where
subsequent facts gathered by the BIR are materially different
from which the ruling is based; and (c) where the taxpayer
acted in bad faith.
As admittedly, respondent's case does not fall under any of the
above exceptions, what is crucial to determine then is whether
the retroactive application of VAT Ruling No. 008-92 would be
prejudicial to respondent Benguet Corporation.
The Court resolves the question in the affirmative.
Input VAT or input tax represents the actual payments, costs
and expenses incurred by a VAT-registered taxpayer in
connection with his purchase of goods and services. Thus,
"input tax" means the value-added tax paid by a VAT-
registered person/entity in the course of his/its trade or
business on the importation of goods or local purchases of
goods or services from a VAT-registered person.9
On the other hand, when that person or entity sells his/its
products or services, the VAT-registered taxpayer generally
becomes liable for 10% of the selling price as output VAT or
output tax.10 Hence, "output tax" is the value-added tax on the
sale of taxable goods or services by any person registered or
required to register under Section 107 of the (old) Tax Code. 11
The VAT system of taxation allows a VAT-registered taxpayer
to recover its input VAT either by (1) passing on the 10%
output VAT on the gross selling price or gross receipts, as the
case may be, to its buyers, or (2) if the input tax is attributable
to the purchase of capital goods or to zero-rated sales, by filing
a claim for a refund or tax credit with the BIR.12
Simply stated, a taxpayer subject to 10% output VAT on its
sales of goods and services may recover its input VAT costs
by passing on said costs as output VAT to its buyers of goods
and services but it cannot claim the same as a refund or tax
credit, while a taxpayer subject to 0% on its sales of goods and
services may only recover its input VAT costs by filing a refund
or tax credit with the BIR.
Here, the claimed tax credit of input tax amounting
to P49,749,223.31 represents the costs or expenses incurred
by respondent in connection with its gold production. Relying
on BIR Rulings, specifically VAT Ruling No. 378-88, dated
August 28, 1988, and VAT Ruling No. 59-88, dated December
14, 1988, both of which declared that sales of gold to the CB
are considered export sales subject to 0%, respondent sold
gold to the CB from January 1, 1988 to July 31, 1989 without
passing on to the latter its input VAT costs, obviously intending
to obtain a refund or credit thereof from the BIR at the end of
the taxable period. However, by the time respondent applied
for refund/credit of its input VAT costs, VAT Ruling No. 008-92
dated January 23, 1992, treating sales of gold to the CB as
domestic sales subject to 10% VAT, and VAT Ruling No. 059-
92 dated April 28, 1992, retroactively applying said VAT Ruling
No. 008-92 to such sales made from January 1, 1988 onwards,
were issued. As a result, respondent's application for
refund/credit was denied and, as likewise found by the CA, it
was even subsequently assessed deficiency output VAT on
October 19, 1992 in the total amounts of P252,283,241.95 for
the year 1988, and P244,318,148.56 for the year 1989.13
Clearly, from the foregoing, the prejudice to respondent by the
retroactive application of VAT Ruling No. 008-92 to its sales of
gold to the CB from January 1, 1988 to July 31, 1989 is
patently evident.
Verily, by reason of the denial of its claim for refund/credit,
respondent has been precluded from recovering its input VAT
costs attributable to its sales of gold to the CB during the
period mentioned, for the following reasons:
First, because respondent could not pass on to the CB the
10% output VAT which would be retroactively imposed on said
transactions, not having passed the same at the time the sales
were made on the assumption that said sales are subject to
0%, and, hence, maybe refunded or credited later. And
second, because respondent could not claim the input VAT
costs as a refund/credit as it has been prevented such option,
the sales in question having been retroactively subjected to
10% VAT, ergo limiting recovery of said costs to the application
of the same against the output tax which will result therefrom.
Indeed, respondent stands to suffer substantial economic
prejudice by the retroactive application of the VAT Ruling in
question.
But petitioner maintains otherwise, arguing that respondent will
not be unduly prejudiced since there are still other available
remedies for it to recover its input VAT costs. Said remedies,
so petitioner points out, are for respondent to either (1) use
said input taxes in paying its output taxes in connection with its
other sales transactions which are subject to the 10% VAT or
(2) if there are no other sales transactions subject to 10% VAT,
treat the input VAT as cost and deduct the same from income
for income tax purposes.
We are not persuaded.
The first remedy cannot be applied in this case. As correctly
found by the CA, respondent has clearly shown that it has no
"other transactions" subject to 10% VAT, and petitioner has
failed to prove the existence of such "other transactions"
against which to set off respondent's input VAT.14
Anent the second remedy, prejudice will still, indubitably, result
because treating the input VAT as an income tax deductible
expense will yield only a partial and not full financial benefit of
having the input VAT refunded or used as a tax credit. We
quote with approval the CA's observations in this respect, thus:
x x x even assuming that input VAT is still available
for deduction, [respondent] still suffers prejudice. As a
zero-rated taxpayer (pursuant to the 1988 to 1990
BIR issuances), [respondent] could have claimed a
cash refund or tax credit of the input VAT in the
amount of P49,749,223.31. If it had been allowed a
cash refund or tax credit, it could have used the full
amount thereof to pay its other tax obligations (or, in
the case of a cash refund, to fund its operations). With
VAT Ruling No. 059-92, [respondent] is precluded
from claiming the cash refund or tax credit and is
limited to the so-called remedy of deducting the input
VAT from gross income. But a cash refund or tax
credit is not the same as a tax deduction. A tax
deduction has less benefits than a tax credit.
Consider the following differences;
2.42.1 A tax credit may be used to pay any national
internal revenue tax liability. Section 104(b) of the Tax
Code states;
"(b) Excess output or input tax. xxx Any input tax
attributable to xxx zero-rated sales by a VAT-
registered person may at his option be refunded or
credited against other internal revenue taxes, subject
to the provisions of Section 106."
On the other hand, a tax deduction may be used only
against gross income for purposes of income tax. A
tax deduction is not allowed against other internal
revenue taxes such as excise taxes, documentary
stamp taxes, and output VAT.
2.42.2 In terms of income tax, a tax deduction is only
an expense item in computing income tax liabilities
(Sections 27 to 29, Tax Code) while a tax credit is a
direct credit against final income tax due (Section
106[b], Tax Code). This is illustrated in the example
below:
Assume that in 1988, respondent had a gross income
of P1,000,000,000 and deductible expenses in
general (such as salaries, utilities, transportation, fuel
and costs of sale) of P500,000,000. Assume also that
[respondent] had input VAT of P131,741,034.22, the
amount being claimed in the instant case.
[Respondent's] income tax liability, depending on
whether it utilized the input tax as tax credit or tax
deduction, would be as follows:
a. Tax credit
Gross Income (Section 28, Tax Code)
Deductions (Section 29, Tax Code)
Taxable Income (Section 27, Tax Code)
Tax rate (Section 24[a], Tax Code)
Tax Payable
Tax Credit
Tax due
b. Tax deduction
Gross income (Section 28, Tax Code)
Deductions
General (Section 29, Tax Code) P500,000,00
Input VAT (VAT Ruling No. 059-92) P131,741,03
Taxable income (Section 27, Tax Code)
Tax rate (Section 24[a], Tax Code)
Tax payable
Tax Credit
Tax due
Thus, if the input VAT of P131,741,034.22 were to be
credited against the income tax due, the income tax
payable is only P43,258,965.78. On the other hand, if
the input VAT were to be deducted from gross income
before arriving at the net income, the income tax
payable is P128,890,638.02. This is almost three (3)
times the income tax payable if the input VAT were to
be deducted from the income tax payable.
As can be seen from above, there is a substantial
difference between a tax credit and a tax deduction. A
tax credit reduces tax liability while a tax deduction
only reduces taxable income (emphasis supplied).
A tax credit of input VAT fully utilizes the entire
amount of P131,741,034.22, since tax liability is
reduced by the said amount. A tax deduction is not
fully utilized because the savings is only 35%
or P46,109,361.98. In the above case, therefore, the
use of input VAT as a tax deduction results in a loss
of 65% of the input VAT, or P85,631,672.24, which
[respondent] could have otherwise fully utilized as a
tax credit.
xxx xxx xxx
x x x the deduction of an expense under Section 29 of
the Tax Code is not tantamount to a recovery of the
expense. The deduction of a bad debt, for instance,
does not result in the recovery of the debt. On the
other hand, a tax credit, because it can be fully
 utilized to reduce tax liability, is as good as cash and
is thus effectively a full recovery of the input VAT
cost.15 (Emphasis in the original; Words in brackets
supplied).

We may add that the prejudice which befell respondent is all

the more highlighted by the fact that it has been issued
assessments for deficiency output VAT on the basis of the
same sales of gold to the CB.

On a final note, the Court is fully cognizant of the well-

entrenched principle that the Government is not estopped from
collecting taxes because of mistakes or errors on the part of its
agents.16 But, like other principles of law, this also admits of
exceptions in the interest of justice and fair play, as where
injustice will result to the taxpayer.17

As this Court has said in ABS-CBN Broadcasting Corporation

v. Court of Tax Appeals and the Commissioner of Internal
Revenue:18

The insertion of Sec. 338-A [now Sec. 246] into the

National Internal Revenue Code x x x is indicative of
legislative intention to support the principle of good
faith. In fact, in the United States x x x it has been
held that the Commissioner or Collector is precluded
from adopting a position inconsistent with one
previously taken where injustice would result
therefrom, or where there has been a
misrepresentation to the taxpayer. [Word in brackets
supplied].

Here, when respondent sold gold to the CB, it relied on the

formal assurances of the BIR, i.e., VAT Ruling No. 378-88
dated August 28, 1988 and VAT Ruling RMC No. 59-88 dated
December 14, 1988, that such sales are zero-rated. To retroact
a later ruling VAT Ruling No. 008-92 - revoking the grant of
zero-rating status to the sales of gold to the CB and applying a
new and contrary position that such sales are now subject to
10%, is clearly inconsistent with justice and the elementary
requirements of fair play.

Accordingly, we find that the CA did not commit a reversible

error in holding that VAT Ruling No. 008-92 cannot be
retroactively applied to respondent's sales of gold to the CB
during the period January 1, 1988 to July 31, 1989, hence, it is
entitled to tax credit in the amount of P49,749,223.31
attributable to such sales.

IN VIEW WHEREOF, the instant petition is DENIED and the

assailed CA Resolutions are AFFIRMED.

No costs.

SO ORDERED.
[G.R. No. 80276 : December 21, 1990.] 1 unit Toyo Reinforcing Bar 12,000.92

192 SCRA 604 3 units Toyo TYCD 10 CY Cralwer 265,421.35

HYDRO RESOURCES CONTRACTORS CORPORATION, 2 units Scheele K-60 Pump 624,772.80

Petitioner, vs. THE COURT OF TAX APPEALS and THE
HON. DEPUTY MINISTER OF FINANCE, ALFREDO PIO DE 2 units New Reed Gun Mdl. IAS 67,349.90
RODA, Respondents.
1 unit Prota Tunnel Profile 43,340.26

2 units Wild Theodolite Surveying

DECISION
Equipment 28,545.93

1 unit Toyo Mud Sub Pump 201,108.01

PARAS, J.:
2 units Aichi Skymaster Truck

mounted Boom 93,622.78

This is a special civil action of Certiorari instituted by petitioner
Hydro Resources Contractors Corporation against respondents
Court of Tax Appeals and Deputy Minister of Finance which 2 units Grindex Sub Type Pump 140,518.35
seeks to set aside the decisions of both public respondents
holding petitioner liable for a 3% ad valorem duty in the amount 6 units K/Worth C500 Truck Mixer 1,690,054.60
of P281,591.00.
1 unit Putamesitor 201,863.77
It appears that the National Irrigation Administration (referred
to hereinafter as NIA for brevity) a government owned and 6 units Sullair Air Comp. 588,940.53
controlled corporation, entered into an agreement, sometime in
August 1978, with petitioner Hydro Resources Contractors
Corporation (Hydro for short), for the construction of the Magat 2 units Well Air Driven Grout 20,582.40
River Multipurpose Project in Isabela.
10 units Stancom VHF Radio Tran. 32,537.70
Under the aforesaid contract, designated as Contract No. MPI-
C-1, petitioner was allowed to procure new construction 4 units Cummins 1,055,209.20
equipment, spare parts and tools from abroad, the payment for
which was advanced by NIA under a financing plan embodied
By the terms of the contract (quoted earlier) NIA undertakes
in the contract, as follows:
payment of all the import duties and taxes incident to the
importations deductible from the proceeds of the contract price.
a) Procurement Petitioner is required to submit to NIA for HYDRO shall repay NIA in full the value of the construction
approval a list of new construction equipment, spare parts and equipment out of the same proceeds before eventual transfer
tools which it intends to acquire from abroad. Petitioner shall or taking ownership of subject construction equipment upon
procure these items as an agent of NIA as all invoices shall be termination of the contract.
in the name of said government agency. NIA undertakes to pay
all import taxes, duties and all fees, imposts and other charges
NIA reneged and failed in the compliance of its tax obligations.
that may be due on said importations.: nad
In the meantime, HYDRO had fully repaid the value of the
construction equipment in the amount of P14,537,783.63
b) Ownership and delivery The equipment and spare parts (US$1,991,477.21) so much so that on December 6, 1982 and
imported from abroad shall be owned by NIA and delivered to March 24, 1983, NIA executed deeds of sale covering the
its construction site in Isabela. same and transferring the ownership thereof in favor of
petitioner.
c) Repayment Petitioner shall repay NIA the costs of the
above procurement and the manner of repayment shall be Upon the transfer of the ownership of the said equipment
through deductions from each monthly or periodic progress HYDRO was assessed by the Bureau of Customs the
payment due to petitioner. corresponding customs duty and compensating tax,
respectively, as follows:
d) Transfer of Ownership Ownership shall be transferred to
petitioner only upon complete payment of the costs above Customs Duty P1,214,010.00
mentioned.
Compensating Tax 1,089,368.63
The equipment imported by NIA in 1978 and 1979 for Hydro's
use are

DESCRIPTION OF EQUIPMENT NET BOOK VALUE

P2,303,378.63

1 Tamrock Hyd. Jumbo Drill

=========

Ser. #18153 P1,566,116.55

This amount was paid by HYDRO to the Bureau of Customs.

3 units Cat Drill Toyo TYPR 120 278,264.25

In addition, HYDRO was assessed additional 3% ad valorem
duty in the amount of P281,591.00 prescribed in Executive
1 unit Tamrock Hyd. Drill Order 860. HYDRO also paid this amount but this time under
protest.:-cralaw
16 units Air Leg Drills Toyo 1,493,834.29
The Collector of Customs acted favorably on petitioner's
protest and ordered the refund of the amount paid for the ad
valorem duty in the form of tax credit, ruling that
"The foregoing scheme entered into between NIA and HYDRO
had generated a contract and it will be unfair to involve new
proposal as in the imposition of 3% additional duty ad valorem
which was not obtaining at the time of the agreement nor at the
time of arrival and release of the shipment from the piers. For
one thing, the scheme may be viewed in the same light as
sales of commodities to be delivered at some future date,
whose price or prices at the time of delivery may be way above
or below the sale price or prices. For another thing, HYDRO
may not be deprived of rights vested before the promulgation
of Executive Order 860 prescribing 3% additional duty ad
valorem." (p. 22, Rollo)
The Acting Commissioner of Customs affirmed the ruling of the
Collector of Customs. In his 2nd Indorsement dated June 25,
1984, (p. 25, Rollo) Acting Commissioner Ramon Farolan
stated
"This Office shares the view of the Collector of Customs to the
effect that the various equipment and parts in question which
the National Irrigation Administration imported in 1978 and
1979 and subsequently sold to Hydro Resources Construction
Corporation by virtue of a previous agreement, are subject to
duties and taxes but not the additional 3% ad valorem duty
under Executive Order No. 860 which took effect only on
December 21, 1982. Moreover, the Deputy Minister of Finance,
in his 1st Indorsement to the Central Bank dated March 26,
1983, which was then reproduced by the Central Bank
Governor in a circular letter to all authorized agent banks,
clarified to all authorized agent banks, clarified that
Letters of Credit opened prior to the effectivity of P.D. 1853
and E.O. 860 are not subject to the provisions thereof even if
they are amended after the effectivity thereof.
(p. 15, Rollo).
These findings of the Collector of Customs as well as the
Acting Customs Commissioner were reversed by the Deputy
Minister of Finance.
Petitioner appealed to the Court of Tax Appeals but in its
Decision dated May 22, 1987, the said court (with a dissenting
opinion) affirmed the ruling of the Deputy Minister of Finance
denying petitioner's claim for refund.
Hence, the present recourse, after petitioner's motion for
reconsideration was denied.
In this petition, Hydro presents the following issues
I on December 6, 1982 and March 24, 1983 are not relevant and
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT
OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION IN REFUSING TO CONSIDER THE
FACT THAT THE SALE OF THE NIA-FINANCED
EQUIPMENT TOOK PLACE IN 1978.
II
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT
OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION IN APPLYING EXECUTIVE ORDER
NO. 860 RETROACTIVELY.
III
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT
OF IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION IN FAILING TO CONSIDER THAT
THE IMPOSITION OF THE 3% AD VALOREM TAX ON
IMPORTATIONS MADE PRIOR TO ITS ISSUANCE IS
VIOLATIVE OF THE CONSTITUTION.
IV
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT
OF IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION IN IMPOSING THE AD VALOREM
TAX SANS STATUTORY AND LEGAL BASIS.
The petition is meritorious.
Executive Order No. 860 which was the basis for the
imposition of the 3% ad valorem duty upon the said
importations, took effect on December 21, 1982. The
importations were effected in 1978 and 1979 by NIA.
Nonetheless, respondent Court of Tax Appeals denied
petitioner's claim for refund because
"When NIA transferred the equipment in question supposedly
'after its (HYDRO's) use for a number of years', it cannot be
doubted that these equipment were sold and transferred
presumably 'several years' after the equipment's importation in
1978 and 1979. It is obvious therefore that the sale or transfer
of the ownership of the equipment to petitioner HYDRO were
unquestionably made after the effectivity of PD 882 on January
20, 1976, undisputably said sale or transfer thereof was (sic)
governed by Section 4 of PD 882 and was correctly applied by
respondent. We take particular note of the fact that we cannot
pinpoint with definiteness or exactitude from the evidence,
when or what years after the years 1978 and 1979
importations were the equipment sold or transferred by NIA to
petitioner HYDRO so that we can determine outright whether
the sale or transfers are covered by the mandatory provision of
Executive Order 860 effective on December 21, 1982 imposing
3% additional ad valorem duty on such importations. Such that
if the sale or transfer of the ownership of the equipment were
effected to petitioner HYDRO after December 21, 1982, the
effective date of Executive Order No. 860, the 3% ad valorem
duty is imposable as said Executive Order 860 was applied
prospectively and rightly. If the sale or transfer of the
ownership of the equipment to HYDRO were (sic) prior to the
effectivity of Executive Order No. 860, then said Executive
Order 860 is inapplicable, and petitioner is not liable to pay the
3% ad valorem duty of P281,591.00 and is entitled to the
refund thereof.
As a rule and principle, it was incumbent upon petitioner-
taxpayer HYDRO to have shown that the sale or transfer of
said equipment to it were made before December 21, 1982,
when the Executive Order No. 860 was effective in order that it
shall not be subject to the imposition of 3% additional ad
valorem duty. Failing thus, its claim for refund in the amount of
P281,591.00 unquestionably fails." (pp. 37-38; Rollo).:- nad
The foregoing conclusion is erroneous. The subsequent
executions of the Deeds of Sale of the equipment in question
material in the consideration of the application of Executive
Order No. 860 because said Deeds of Sale were mere
formalities in the implementation of Contract No. MPI-C-1
executed on August 1978, which should be reckoned and
construed as the actual date of sale. This must be so because
the contract of purchase and sale of the NIA-financed/owned
equipment to Hydro took place in 1978 when Contract No.
MPI-C-1 was signed by NIA and HYDRO wherein the
contracting parties provided for their financing, procurement,
delivery, repayment, transfer of possession and ownership.
The said scheme contemplated a Contract of Sale within the
purview of Art. 1458 of the Civil Code which provides
"Art. 1458. By the contract of sale, one of the contracting
parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay thereafter a
price certain in money or its equivalent.
"A contract of sale may be absolute or conditional." (p. 11,
Rollo)
This view is shared by the Collector of Customs in his decision
when he declared that there being a meeting of the minds
between NIA and HYDRO upon the object of the contract of
sale and upon the price, the contract of sale of the equipment
between them was perfected in 1978. It is a perfected contract
of sale subject to a suspensive condition, the full payment by
HYDRO of the consideration for the subject of the contract is
the operative act to compel NIA to effect the transfer of
absolute ownership thereof to HYDRO. And under Art. 1187 of
the Civil Code, the effectivity of said contract reverts back to
the constitution of the contract, in this case August 1978.

"ART. 1187. The effects of a conditional obligation to give,

once the condition has been fulfilled, shall retroact to the day of
the constitution of the obligation." (p. 12, Rollo)

It is a cardinal rule that laws shall have no retroactive effect,

unless the contrary is provided. (Art. 4, Civil Code) Except for a
statement providing for its immediate execution, Executive
Order No. 860 does not provide for its retroactivity. Moreover,
the Deputy Minister of Finance in his 1st Indorsement to the
Central Bank dated March 26, 1983 which was reproduced by
the Central Bank Governor in a circular letter to all authorized
agent banks, clarified that letters of credit opened prior to the
effectivity of E.O. 860 are not subject to the provisions thereof.
Consequently, the importations in question which arrived in
1977 and 1978 are not subject to the 3% additional ad valorem
duty, the same being imposed only on those whose letter of
credit were opened after the promulgation of Executive Order
860. In this regard Judge Alex Reyes in his dissenting opinion
correctly observed

"Let it suffice that the procurement of the equipment, as earlier

stated, was not on a tax exempt basis as the import liabilities
thereon have been secured to be paid under the terms of the
financial scheme in the contract. The formality of vesting of title
over the equipment was not an unwarranted expectation but a
matter of an implementation of a pre-existing agreement,
hence, the imported articles can only be subject to the rates of
import duties/taxes prevailing at the time of entry or withdrawal
from customs' custody (Sec. 205, TCC) in 1978 and 1979, thus
foreclosing any retroactive application of the 1982 Executive
Order.:-cralaw

"Taken in the above light, it would be unfair and incongruous to

hold petitioner to an additional levy sans any statutory basis.
The majority could have fumbled into a precipitate action in
taking an adverse position on petitioner's right to a refund."
(pp. 44-45, Rollo)

IN VIEW OF THE FOREGOING CONSIDERATIONS, the

petition is GRANTED; the assailed Decisions of respondents
Court of Tax Appeals and Deputy Minister of Finance are SET
ASIDE and another one rendered ordering the refund of the
amount of P281,591.00 representing 3% additional ad valorem
duty to petitioner Hydro Resources Contractors Corporation in
the form of tax credit.

SO ORDERED.
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16 April 2002
Decision2 of the Court of Appeals in CA-G.R. SP No. 66341
affirming the 8 August 2001 Decision3 of the Court of Tax
Appeals (CTA). The CTA ordered the Commissioner of Internal
Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain
Scandinavian Contractor Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals
adopted, as follows:
[Respondent] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal address located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of
Burmeister and Wain Scandinavian Contractor A/S (BWSC-
Denmark), Mitsui Engineering and Shipbuilding, Ltd., and
Mitsui and Co., Ltd. entered into a contract with the National
Power Corporation (NAPOCOR) for the operation and
maintenance of [NAPOCORs] two power barges. The
Consortium appointed BWSC-Denmark as its coordination
manager.
BWSC-Denmark established [respondent] which subcontracted
the actual operation and maintenance of NAPOCORs two
power barges as well as the performance of other duties and
acts which necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in
a mixture of currencies (Mark, Yen, and Peso). The freely
convertible non-Peso component is deposited directly to the
Consortiums bank accounts in Denmark and Japan, while the
Peso-denominated component is deposited in a separate and
special designated bank account in the Philippines. On the
other hand, the Consortium pays [respondent] in foreign
currency inwardly remitted to the Philippines through the
banking system.
In order to ascertain the tax implications of the above
transactions, [respondent] sought a ruling from the BIR which
responded with BIR Ruling No. 023-95 dated February 14,
1995, declaring therein that if [respondent] chooses to register
as a VAT person and the consideration for its services is paid
for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas, the aforesaid services shall be subject to
VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26,
1995, the Certificate of Registration bearing RDO Control No.
95-113-007556 was issued in favor of [respondent] by the
Revenue District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly
Value-Added Tax Returns reflecting, among others, a total
zero-rated sales of P147,317,189.62 with VAT input taxes
of P3,361,174.14, detailed as follows:
Qtr Exh Date Zero-Rated VAT Input
. . Filed Sales Tax
04-
1st E P 33,019,651.07 P608,953.48
18-96
2n 07-
F 37,108,863.33 756,802.66
d 16-96
10-
3rd G 34,196,372.35 930,279.14
14-96
01-
4th H 42,992,302.87 1,065,138.86
20-97
Total P147,317,189.6 P3,361,174.1
s 2 4
On December 29, 1997, [respondent] availed of the Voluntary
Assessment Program (VAP) of the BIR. It allegedly
misinterpreted Revenue Regulations No. 5-96 dated February
20, 1996 to be applicable to its case. Revenue Regulations No.
5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue
Regulations No. 7-95 are hereby amended to read as follows:
Section 4.102-2(b)(2) "Services other than processing,
manufacturing or repacking for other persons doing business
outside the Philippines for goods which are subsequently
exported, as well as services by a resident to a non-resident
foreign client such as project studies, information services,
engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the
rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations,
[respondent] subjected its sale of services to the Consortium to
the 10% VAT in the total amount of P103,558,338.11
representing April to December 1996 sales since said Revenue
Regulations No. 5-96 became effective only on April 1996. The
sum of P43,893,951.07, representing January to March 1996
sales was subjected to zero rate. Consequently, [respondent]
filed its 1996 amended VAT return consolidating therein the
VAT output and input taxes for the four calendar quarters of
1996. It paid the amount of P6,994,659.67 through BIRs
collecting agent, PCIBank, as its output tax liability for the year
1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT
Ruling No. 003-99 from the VAT Review Committee which
reconfirmed BIR Ruling No. 023-95 "insofar as it held that the
services being rendered by BWSCMI is subject to VAT at zero
percent (0%)."
On the strength of the aforementioned rulings, [respondent] on
April 22,1999, filed a claim for the issuance of a tax credit
certificate with Revenue District No. 113 of the BIR.
[Respondent] believed that it erroneously paid the output VAT
for 1996 due to its availment of the Voluntary Assessment
Program (VAP) of the BIR.4
On 27 December 1999, respondent filed a petition for review
with the CTA in order to toll the running of the two-year
prescriptive period under the Tax Code.
 The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to
issue a tax credit certificate for P6,994,659.67 in favor of
respondent. The CTAs ruling stated:
[Respondents] sale of services to the Consortium [was] paid
for in acceptable foreign currency inwardly remitted to the
Philippines and accounted for in accordance with the rules and
regulations of Bangko Sentral ng Pilipinas. These were
established by various BPI Credit Memos showing remittances
in Danish Kroner (DKK) and US dollars (US$) as payments for
the specific invoices billed by [respondent] to the consortium.
These remittances were further certified by the Branch
Manager x x x of BPI-Davao Lanang Branch to represent
payments for sub-contract fees that came from Den Danske
Aktieselskab Bank-Denmark for the account of [respondent].
Clearly, [respondents] sale of services to the Consortium is
subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax
Code.
xxxx
The zero-rating of [respondents] sale of services to the
Consortium was even confirmed by the [petitioner] in BIR
Ruling No. 023-95 dated February 15, 1995, and later by VAT
Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services
rendered by [respondent] were indeed subject to VAT at zero
percent, it follows that it mistakenly availed of the Voluntary
Assessment Program by paying output tax for its sale of
services. x x x
x x x Considering the principle of solutio indebiti which requires
the return of what has been delivered by mistake, the
[petitioner] is obligated to issue the tax credit certificate prayed
for by [respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals,
which dismissed the petition for lack of merit and affirmed the
CTA decision.6
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners
view that since respondents services are not destined for
consumption abroad, they are not of the same nature as
project studies, information services, engineering and
architectural designs, and other similar services mentioned in
Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as
subject to 0% VAT. Thus, according to petitioner, respondents
services cannot legally qualify for 0% VAT but are subject to
the regular 10% VAT.8
The Court of Appeals found untenable petitioners contention
that under VAT Ruling No. 040-98, respondents services
should be destined for consumption abroad to enjoy zero-
rating. Contrary to petitioners interpretation, there are two
kinds of transactions or services subject to zero percent VAT
under VAT Ruling No. 040-98. These are (a) services other
than repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported; and
(b) services by a resident to a non-resident foreign client, such
as project studies, information services, engineering and
architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is
required by the provision to be consumed abroad in order to be
taxed at zero rate. In x x x the absence of such express or
implied stipulation in the statute, the second classification need
not be consumed abroad."10
The Court of Appeals further held that assuming petitioners
interpretation of Section 4.102-2(b)(2) of Revenue Regulations
No. 5-96 is correct, such administrative provision is void being
an amendment to the Tax Code. Petitioner went beyond
merely providing the implementing details by adding another
requirement to zero-rating. "This is indicated by the additional
phrase as well as services by a resident to a non-resident
foreign client, such as project studies, information services and
engineering and architectural designs and other similar
services. In effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a resident to a
non-resident; and (b) these must be in the nature of project
studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of
the Tax Code,12 for services which were performed in the
Philippines to enjoy zero-rating, these must comply only with
two requisites, to wit: (1) payment in acceptable foreign
currency and (2) accounted for in accordance with the rules of
the BSP. Section 108(b)(2) of the Tax Code does not provide
that services must be "destined for consumption abroad" in
order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioners argument that
our VAT law generally follows the destination principle (i.e.,
exports exempt, imports taxable).14 The Court of Appeals
stated that "if indeed the destination principle underlies and is
the basis of the VAT laws, then petitioners proper remedy
would be to recommend an amendment of Section 108(b)(2) to
Congress. Without such amendment, however, petitioner
should apply the terms of the basic law. Petitioner could not
resort to administrative legislation, as what [he] had done in
this case."15
The Issue
The lone issue for resolution is whether respondent is entitled
to the refund of P6,994,659.67 as erroneously paid output VAT
for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant
petition is not on the ground that respondents services are
subject to 0% VAT. Rather, it is based on the non-retroactivity
of the prejudicial revocation of BIR Ruling No. 023-9517 and
VAT Ruling No. 003-99,18 which held that respondents
services are subject to 0% VAT and which respondent invoked
in applying for refund of the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in
1996 when respondent rendered the services and paid the
VAT in question, enumerates which services are zero-rated,
thus:
(b) Transactions subject to zero-rate. The following services
performed in the Philippines by VAT-registered persons shall
be subject to 0%:
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the
Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign
currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng
Pilipinas(BSP);
(2) Services other than those mentioned in the
preceding sub-paragraph, the consideration for
which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
 effectively subjects the supply of such services to
zero rate;
(4) Services rendered to vessels engaged exclusively
in international shipping; and
(5) Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose export
sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent
claims that it complied with the requirements of the Tax Code
for zero rating under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its service fees
was in acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the Philippines, and (3)
accounting of such remittance was in accordance with BSP
rules. Moreover, respondent contends that its services which
"constitute the actual operation and management of two (2)
power barges in Mindanao" are not "even remotely similar to
project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue
Regulations No. 5-96." As such, respondents services need
not be "destined to be consumed abroad in order to be VAT
zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than
"processing, manufacturing or repacking of goods" and that
payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential
condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing
business outside the Philippines. While this requirement is not
expressly stated in the second paragraph of Section 102(b),
this is clearly provided in the first paragraph of Section 102(b)
where the listed services must be "for other persons doing
business outside the Philippines." The phrase "for other
persons doing business outside the Philippines" not only refers
to the services enumerated in the first paragraph of Section
102(b), but also pertains to the general term "services"
appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of
goods must likewise be performed for persons doing business
outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2).
If the provider and recipient of the "other services" are both
doing business in the Philippines, the payment of foreign
currency is irrelevant. Otherwise, those subject to the regular
VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the
recipient of services. To interpret Section 102(b)(2) to apply to
a payer-recipient of services doing business in the Philippines
is to make the payment of the regular VAT under Section
102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or
avoid it by stipulating payment in foreign currency inwardly
remitted by the payer-recipient. Such interpretation removes
Section 102(a) as a tax measure in the Tax Code, an
interpretation this Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable
foreign currency" under BSP rules, the law clearly envisions
the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines
can be required under BSP rules20 to pay in acceptable foreign
currency for their purchase of goods or services from the
Philippines. In a domestic transaction, where the provider and
recipient of services are both doing business in the Philippines,
the BSP cannot require any party to make payment in foreign
currency.
Services covered by Section 102(b) (1) and (2) are in the
nature of export sales since the payer-recipient of services is
doing business outside the Philippines. Under BSP rules, 21 the
proceeds of export sales must be reported to the Bangko
Sentral ng Pilipinas. Thus, there is reason to require the
provider of services under Section 102(b) (1) and (2) to
account for the foreign currency proceeds to the BSP. The
same rationale does not apply if the provider and recipient of
the services are both doing business in the Philippines since
their transaction is not in the nature of an export sale even if
payment is denominated in foreign currency.
Further, when the provider and recipient of services are both
doing business in the Philippines, their transaction falls
squarely under Section 102(a) governing domestic sale or
exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of
course the transaction falls under the other provisions of
Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other
than those mentioned in the preceding subparagraph," the
legislative intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating,
including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under
both subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section
102(b)] of the present Tax Code clarifies this legislative intent.
Expressly included among the transactions subject to 0% VAT
are "[s]ervices other than those mentioned in the [first]
paragraph [of Section 108(b)] rendered to a person engaged in
business conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the Philippines
when the services are performed, the consideration for which
is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP."
In this case, the payer-recipient of respondents services is the
Consortium which is a joint-venture doing business in the
Philippines. While the Consortiums principal members are
non-resident foreign corporations, the Consortium itself is
doing business in the Philippines. This is shown clearly in BIR
Ruling No. 023-95 which states that the contract between the
Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for
a clarification of the tax implications of a contract between a
consortium composed of Burmeister & Wain Scandinavian
Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding,
Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power
Corporation ("NAPOCOR") for the operation and
maintenance of two 100-Megawatt power barges ("Power
Barges") acquired by NAPOCOR for a 15-year
term.23 (Emphasis supplied)
Considering this length of time, the Consortiums operation and
maintenance of NAPOCORs power barges cannot be
classified as a single or isolated transaction. The Consortium
does not fall under Section 102(b)(2) which requires that the
recipient of the services must be a person doing business
outside the Philippines. Therefore, respondents services to the
Consortium, not being supplied to a person doing business
outside the Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and
maintains NAPOCORs power barges in the Philippines.
NAPOCOR pays the Consortium, through its non-resident
partners, partly in foreign currency outwardly remitted. In turn,
the Consortium pays respondent also in foreign currency
inwardly remitted and accounted for in accordance with BSP
rules. This payment scheme does not entitle respondent to 0%
VAT. As the Court held in Commissioner of Internal Revenue
v. American Express International, Inc. (Philippine
Branch),24 the place of payment is immaterial, much less is the
place where the output of the service is ultimately used. An
essential condition for entitlement to 0% VAT under Section
102(b)(1) and (2) is that the recipient of the services is a
person doing business outside the Philippines. In this case, the
recipient of the services is the Consortium, which is doing
business not outside, but within the Philippines because it has
a 15-year contract to operate and maintain NAPOCORs two
100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally
follows the "destination principle" (exports are zero-rated
whereas imports are taxed). However, as the Court stated in
American Express, there is an exception to this rule. 25 This
exception refers to the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. For services
covered by Section 102(b)(1) and (2), the recipient of the
services must be a person doing business outside the
Philippines. Thus, to be exempt from the destination principle
under Section 102(b)(1) and (2), the services must be (a)
performed in the Philippines; (b) for a person doing business
outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.

Respondents reliance on the ruling in American Express 26 is

misplaced. That case involved a recipient of services,
specifically American Express International, Inc. (Hongkong
Branch), doing business outside the Philippines. There, the
Court stated:

Respondent [American Express International, Inc. (Philippine

Branch)] is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-
resident foreign client [American Express International, Inc.
(Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x x
x27 (Emphasis supplied)

In contrast, this case involves a recipient of services the

Consortium which is doing business in the Philippines.
Hence, American Express services were subject to 0% VAT,
while respondents services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax,

respondent relied on VAT Ruling No. 003-99,28 which
reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the
services being rendered by BWSCMI is subject to VAT at zero
percent (0%)." Respondents reliance on these BIR rulings
binds petitioner.

Petitioners filing of his Answer before the CTA challenging

respondents claim for refund effectively serves as a revocation
of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
However, such revocation cannot be given retroactive effect
since it will prejudice respondent. Changing respondents
status will deprive respondent of a refund of a substantial
amount representing excess output tax.30 Section 246 of the
Tax Code provides that any revocation of a ruling by the
Commissioner of Internal Revenue shall not be given
retroactive application if the revocation will prejudice the
taxpayer. Further, there is no showing of the existence of any
of the exceptions enumerated in Section 246 of the Tax Code
for the retroactive application of such revocation.

However, upon the filing of petitioners Answer dated 2 March

2000 before the CTA contesting respondents claim for refund,
respondents services shall be subject to the regular 10%
VAT.31 Such filing is deemed a revocation of VAT Ruling No.
003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES,
INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL
MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal
Bonifacio R Matol and Assistant Solicitor General Conrado T.
Limcaoco & Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First
Instance of Leyte in its Civil Case No. 3294, which was
certified to Us by the Court of Appeals on October 6, 1969, as
involving only pure questions of law, challenging the power of
taxation delegated to municipalities under the Local Autonomy
Act (Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola
Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First
Instance of Leyte for that court to declare Section 2 of Republic
Act No. 2264. otherwise known as the Local Autonomy Act,
1
unconstitutional as an undue delegation of taxing authority as
well as to declare Ordinances Nos. 23 and 27, series of 1962,
of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of
Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein
are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per
his letter addressed to the Manager of the Pepsi-Cola Bottling
Plant in said municipality, sought to enforce compliance by the
latter of the provisions of said Ordinance No. 27, series of
1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was
approved on September 25, 1962, levies and collects "from
soft drinks producers and manufacturers a tai of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked." For
2
the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to
the Municipal Treasurer a monthly report, of the total number
of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was
approved on October 28, 1962, levies and collects "on soft
drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01)
on each gallon (128 fluid ounces, U.S.) of volume
capacity." For the purpose of computing the taxes due, the
4
person, fun company, partnership, corporation or plant
producing soft drinks shall submit to the Municipal Treasurer a
monthly report of the total number of gallons produced or
manufactured during the month. 5 are used in assessing and collecting taxes. But, a tax does not
The tax imposed in both Ordinances Nos. 23 and 27 is
denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte
rendered judgment "dismissing the complaint and upholding
the constitutionality of [Section 2, Republic Act No. 2264]
declaring Ordinance Nos. 23 and 27 legal and constitutional;
ordering the plaintiff to pay the taxes due under the oft the said
Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company
appealed to the Court of Appeals, which, in turn, elevated the
case to Us pursuant to Section 31 of the Judiciary Act of 1948,
as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an
undue delegation of power, confiscatory and
oppressive?
2. Do Ordinances Nos. 23 and 27
constitute double taxation and impose
percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust
and unfair?
1. The power of taxation is an essential and inherent attribute
of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by
the people. It is a power that is purely legislative and which
6
the central legislative body cannot delegate either to the
executive or judicial department of the government without
infringing upon the theory of separation of powers. The
exception, however, lies in the case of municipal corporations,
to which, said theory does not apply. Legislative powers may
be delegated to local governments in respect of matters of
local concern. This is sanctioned by immemorial practice. By
7 8
necessary implication, the legislative power to create political
corporations for purposes of local self-government carries with
it the power to confer on such local governmental agencies the
power to tax. Under the New Constitution, local governments
9
are granted the autonomous authority to create their own
sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to
create its sources of revenue and to levy taxes, subject to such
limitations as may be provided by law." Withal, it cannot be
said that Section 2 of Republic Act No. 2264 emanated from
beyond the sphere of the legislative power to enact and vest in
local governments the power of local taxation.
The plenary nature of the taxing power thus delegated,
contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said
that the taxing power may be delegated to municipalities and
the like, it is meant that there may be delegated such measure
of power to impose and collect taxes as the legislature may
deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not
deemed wise to tax for more general purposes. This is not to
10
say though that the constitutional injunction against deprivation
of property without due process of law may be passed over
under the guise of the taxing power, except when the taking of
the property is in the lawful exercise of the taxing power, as
when (1) the tax is for a public purpose; (2) the rule on
uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government
levying the tax; and (4) in the assessment and collection of
certain kinds of taxes notice and opportunity for hearing are
provided. Due process is usually violated where the tax
11
imposed is for a private as distinguished from a public purpose;
a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods
violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury
rather than a benefit to such taxpayer. Due process does not
require that the property subject to the tax or the amount of tax
to be raised should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax and the manner
in which it shall be apportioned are generally not necessary to
due process of law. 12
There is no validity to the assertion that the delegated authority
can be declared unconstitutional on the theory of double
taxation. It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which
local taxation may not be exercised. The reason is that the
13
State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law, since We have not adopted other habit-forming drugs. Soft drink is not one of those
22

as part thereof the injunction against double taxation found in specified.

the Constitution of the United States and some states of the
Union. Double taxation becomes obnoxious only where the
14
3. The tax of one (P0.01) on each gallon (128 fluid ounces,
taxpayer is taxed twice for the benefit of the same U.S.) of volume capacity on all softdrinks, produced or
governmental entity or by the same jurisdiction for the same
15
manufactured, or an equivalent of 1- centavos per
purpose, but not in a case where one tax is imposed by the
16
case, cannot be considered unjust and unfair. 24 an increase
23

State and the other by the city or municipality.17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances
cover the same subject matter and impose practically the same
tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As
earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a
centavo for .every bottle corked, irrespective of the volume
contents of the bottle used. When it was discovered that the
producer or manufacturer could increase the volume contents
of the bottle and still pay the same tax rate, the Municipality of
Tanauan enacted Ordinance No. 27, approved on October 28,
1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the
soft drinks produced: in Ordinance No. 23, it was 1/16 of a
centavo for every bottle corked; in Ordinance No. 27, it is one
in the tax alone would not support the claim that the tax is
oppressive, unjust and confiscatory. Municipal corporations are
allowed much discretion in determining the reates of imposable
taxes. 25 This is in line with the constutional policy of
according the widest possible autonomy to local governments
in matters of local taxation, an aspect that is given expression
in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless
the amount is so excessive as to be prohibitive, courts will go
slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance
such as Ordinance No. 27 if the purpose of the law to further
strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking
machine with five but not more than ten crowners or P2,000.00
with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks
and/or mineral waters under Ordinance No. 54, series of 1964,
as amended by Ordinance No. 41, series of 1968, of defendant
Municipality, appears not to affect the resolution of the
29

centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The intention of the Municipal Council of
Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23,
and operates as a repeal of the latter, even without words to
that effect. Plaintiff-appellant in its brief admitted that
18
defendants-appellees are only seeking to enforce Ordinance
No. 27, series of 1962. Even the stipulation of facts confirms
the fact that the Acting Municipal Treasurer of Tanauan, Leyte
sought t6 compel compliance by the plaintiff-appellant of the
provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27,
series of 1962 is being enforced by defendants-appellees.
Even the Provincial Fiscal, counsel for defendants-appellees
admits in his brief "that Section 7 of Ordinance No. 27, series
of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."
validity of Ordinance No. 27. Municipalities are empowered to
impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for
public purposes, just and uniform taxes. The ordinance in
question (Ordinance No. 27) comes within the second power of
a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic
Act No. 2264, otherwise known as the Local Autonomy Act, as
amended, is hereby upheld and Municipal Ordinance No. 27 of
the Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby declared
of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.

That brings Us to the question of whether the remaining

Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those
which are mentioned therein." As long as the text levied under
the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within
the ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non
excepti The limitation applies, particularly, to the prohibition
19

against municipalities and municipal districts to impose "any

percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except
gasoline, under the provisions of the National Internal Revenue
Code." For purposes of this particular limitation, a municipal
ordinance which prescribes a set ratio between the amount of
the tax and the volume of sale of the taxpayer imposes a sales
tax and is null and void for being outside the power of the
municipality to enact. But, the imposition of "a tax of one
20

centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of

volume capacity" on all soft drinks produced or manufactured
under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based
thereon. The tax is levied on the produce (whether sold or not)
and not on the sales. The volume capacity of the taxpayer's
production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is not set
ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific

taxes are those imposed on specified articles, such as distilled
spirits, wines, fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers, manufactured
oils and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court seeking to set aside the decision of the Court of
Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case
No. 5136.
The antecedent facts as found by the Court of Tax Appeals are
not disputed, to wit:
[Respondent], a domestic corporation organized and operating
under the Philippine laws, entered into a license agreement
with SC Johnson and Son, United States of America (USA), a
non-resident foreign corporation based in the U.S.A. pursuant
to which the [respondent] was granted the right to use the
trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the
products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and
Son, U. S. A.
The said License Agreement was duly registered with the
Technology Transfer Board of the Bureau of Patents, Trade
Marks and Technology Transfer under Certificate of
Registration No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent] was
obliged to pay SC Johnson and Son, USA royalties based on a
percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid
for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International
Tax Affairs Division (ITAD) of the BIR a claim for refund of
overpaid withholding tax on royalties arguing that, "the
antecedent facts attending [respondent's] case fall squarely
within the same circumstances under which said MacGeorge
and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential
tax rate of 10% should apply to the [respondent]. We therefore
submit that royalties paid by the [respondent] to SC Johnson
and Son, USA is only subject to 10% withholding tax pursuant
to the most-favored nation clause of the RP-US Tax Treaty
[Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West
Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review
[filed with the Court of Appeals], par. 12). [Respondent's] claim
for there fund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
of the "most favored nation" clause is in the nature of a claim
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
P6,421,770 P1,605,443 P642,177 P963,2661
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private
respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed
a petition for review before the Court of Tax Appeals (CTA)
where the case was docketed as CTA Case No. 5136, to claim
a refund of the overpaid withholding tax on royalty payments
from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its
decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid
withholding tax on royalty payments, beginning July, 1992 to
May, 1993.2
The Commissioner of Internal Revenue thus filed a petition for
review with the Court of Appeals which rendered the decision
subject of this appeal on November 7, 1996 finding no merit in
the petition and affirming in toto the CTA ruling.3
This petition for review was filed by the Commissioner of
Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC
JOHNSON AND SON, USA IS ENTITLED TO THE "MOST
FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO
THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-
US Tax Treaty, which is known as the "most favored nation"
clause, the lowest rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of the United States
from sources within the Philippines only if the circumstances of
the resident of the United States are similar to those of the
resident of West Germany. Since the RP-US Tax Treaty
contains no "matching credit" provision as that provided under
Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany
Tax Treaty. Even assuming that the phrase "paid under similar
circumstances" refers to the payment of royalties, and not
taxes, as held by the Court of Appeals, still, the "most favored
nation" clause cannot be invoked for the reason that when a
tax treaty contemplates circumstances attendant to the
payment of a tax, or royalty remittances for that matter, these
must necessarily refer to circumstances that are tax-related.
Finally, petitioner argues that since S.C. Johnson's invocation
for exemption from the application of the regular tax rate of
25% for royalties, the provisions of the treaty must be
construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that
the instant petition should be denied (1) because it contains a
defective certification against forum shopping as required
under SC Circular No. 28-91, that is, the certification was not
executed by the petitioner herself but by her counsel; and (2)
that the "most favored nation" clause under the RP-US Tax
Treaty refers to royalties paid under similar circumstances as
those royalties subject to tax in other treaties; that the phrase
"paid under similar circumstances" does not refer to payment
of the tax but to the subject matter of the tax, that is, royalties,
because the "most favored nation" clause is intended to allow
the taxpayer in one state to avail of more liberal provisions
contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to
the basic condition that the subject matter of taxation in that
other tax treaty is the same as that in the original tax treaty
under which the taxpayer is liable; thus, the RP-US Tax Treaty
speaks of "royalties of the same kind paid under similar
circumstances". S.C. Johnson also contends that the
Commissioner is estopped from insisting on her interpretation
that the phrase "paid under similar circumstances" refers to the
manner in which the tax is paid, for the reason that said
interpretation is embodied in Revenue Memorandum Circular
("RMC") 39-92 which was already abandoned by the
Commissioner's predecessor in 1993; and was expressly
revoked in BIR Ruling No. 052-95 which stated that royalties
paid to an American licensor are subject only to 10%
withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty. Said
ruling should be given retroactive effect except if such is
prejudicial to the taxpayer pursuant to Section 246 of the
National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification
against forum shopping was signed by petitioner's counsel is
not a fatal defect as to warrant the dismissal of this petition
since Circular No. 28-91 applies only to original actions and not
to appeals, as in the instant case. Moreover, the requirement
that the certification should be signed by petitioner and not by
counsel does not apply to petitioner who has only the Office of
the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax
Treaty refers to the payment of royalties and not taxes, still the
presence or absence of a "matching credit" provision in the
said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of
the said clause's application.1wphi1.nt
We address first the objection raised by private respondent
that the certification against forum shopping was not executed
by the petitioner herself but by her counsel, the Office of the
Solicitor General (O.S.G.) through one of its Solicitors, Atty.
Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS
FILED WITH THE SUPREME COURT AND THE COURT OF
APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE
FILING OF PETITIONS AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of
multiple petitions and complaints involving the same issues in
the Supreme Court, the Court of Appeals or other tribunals or
agencies, with the result that said courts, tribunals or agencies
have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the
Supreme Court or the Court of Appeals, the petitioner aside
from complying with pertinent provisions of the Rules of Court
and existing circulars, must certify under oath to all of the
following facts or undertakings: (a) he has not theretofore
commenced any other action or proceeding involving the same
issues in the Supreme Court, the Court of Appeals, or any
tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following
sanctions: (a) it shall be a cause for the summary dismissal of
the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum
shopping should be attached to petitions filed before this Court
and the Court of Appeals. Petitioner's allegation that Circular
No. 28-91 applies only to original actions and not to appeals as
in the instant case is not supported by the text nor by the
obvious intent of the Circular which is to prevent multiple
petitions that will result in the same issue being resolved by
different courts.
Anent the requirement that the party, not counsel, must certify
under oath that he has not commenced any other action
involving the same issues in this Court or the Court of Appeals
or any other tribunal or agency, we are inclined to accept
petitioner's submission that since the OSG is the only lawyer
for the petitioner, which is a government agency mandated
under Section 35, Chapter 12, title III, Book IV of the 1987
Administrative Code4 to be represented only by the Solicitor
General, the certification executed by the OSG in this case
constitutes substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of
contention in this appeal is the interpretation of Article 13 (2)
(b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-
resident foreign corporation. The provision states insofar as
pertinent
that
1) Royalties derived by a resident of one of the Contracting
States from sources within the other Contracting State may be
taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall
not exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the
royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred
areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to
a resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the
basis of the quoted provision, it is entitled to the concessional
tax rate of 10 percent on royalties based on Article 12 (2) (b) of
the RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the
Contracting State in which they arise, and according to the law
of that State, but the tax so charged shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the
use of, or the right to use, any patent, trademark, design or
model, plan, secret formula or process, or from the use of or
the right to use, industrial, commercial, or scientific equipment,
or for information concerning industrial, commercial or scientific
experience.
For as long as the transfer of technology, under Philippine law,
is subject to approval, the limitation of the tax rate mentioned
under b) shall, in the case of royalties arising in the Republic of
the Philippines, only apply if the contract giving rise to such
royalties has been approved by the Philippine competent
authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty
allows a tax credit of 20 percent of the gross amount of such
royalties against German income and corporation tax for the
taxes payable in the Philippines on such royalties where the
tax rate is reduced to 10 or 15 percent under such treaty.
Article 24 of the RP-Germany Tax Treaty states
1) Tax shall be determined in the case of a resident of the
Federal Republic of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit
for foreign tax, there shall be allowed as a credit against
German income and corporation tax payable in respect of the
following items of income arising in the Republic of the
Philippines, the tax paid under the laws of the Philippines in
accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b)
the Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is reduced to 10 or
15 per cent according to paragraph 2 of Article 12, 20 percent
of the gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-
US Tax Treaty are not paid under circumstances similar to
those in the RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in the former
convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored
nation clause in the RP-US Tax Treaty. Petitioner's position is
explained thus:
Under the foregoing provision of the RP-West Germany Tax
Treaty, the Philippine tax paid on income from sources within
the Philippines is allowed as a credit against German income
and corporation tax on the same income. In the case of
royalties for which the tax is reduced to 10 or 15 percent
according to paragraph 2 of Article 12 of the RP-West
Germany Tax Treaty, the credit shall be 20% of the gross
amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising
from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at
10% of the gross amount of said royalty under certain
conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is allowed
in favor of the German resident. That means the rate of 10% is
granted to the German taxpayer if he is similarly granted a
credit against the income and corporation tax of West
Germany. The clear intent of the "matching credit" is to soften
the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as
that provided under the RP-West Germany Tax Treaty. Hence,
the tax on royalties under the RP-US Tax Treaty is not paid
under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Therefore, the "most favored nation"
clause in the RP-West Germany Tax Treaty cannot be availed
of in interpreting the provisions of the RP-US Tax Treaty.5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax
Appeals, which was upheld by the Court of Appeals, that the
phrase "paid under similar circumstances in Article 13 (2) (b),
(iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state". The
respondent court held that "Words are to be understood in the
context in which they are used", and since what is paid to a
resident of a third state is not a tax but a royalty "logic
instructs" that the treaty provision in question should refer to
royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or
sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are
not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the
circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on
nationality in the circumstances of such payment.6On the other
hand, a cursory reading of the various tax treaties will show
that there is no similarity in the provisions on relief from or
avoidance of double taxation7 as this is a matter of negotiation
between the contracting parties.8 As will be shown later, this
dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines
and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral
treaties which the Philippines has entered into for the
avoidance of double taxation.9 The purpose of these
international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different
jurisdictions. 10 More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical
periods. 11 The apparent rationale for doing away with double
taxation is of encourage the free flow of goods and services
and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies. 12 Foreign investments will only thrive in a
fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in
creating such a climate. 13
Double taxation usually takes place when a person is resident
of a contracting state and derives income from, or owns capital
in, the other contracting state and both states impose tax on
that income or capital. In order to eliminate double taxation, a
tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of
income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of
source is limited. 14
The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited
right to tax together with the state of residence. In this case,
the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation. There are two
methods of relief the exemption method and the credit
method. In the exemption method, the income or capital which
is taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be taken
into account in determining the rate of tax applicable to the
taxpayer's remaining income or capital. On the other hand, in
the credit method, although the income or capital which is
taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax
levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the
income or capital itself, whereas the credit method focuses
upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing
the tax rate is that the Philippines will give up a part of the tax
in the expectation that the tax given up for this particular
investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase
"royalties paid under similar circumstances" in the most
favored nation clause of the US-RP Tax Treaty necessarily
contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines
because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located within
the Philippines. 17 The United States is the state of residence
since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and
the state of source are both permitted to tax the royalties, with
a restraint on the tax that may be collected by the state of
source. 18 Furthermore, the method employed to give relief
from double taxation is the allowance of a tax credit to citizens
or residents of the United States (in an appropriate amount
based upon the taxes paid or accrued to the Philippines)
against the United States tax, but such amount shall not
exceed the limitations provided by United States law for the
taxable year. 19 Under Article 13 thereof, the Philippines may
impose one of three rates 25 percent of the gross amount of
the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments
and engaged in preferred areas of activities; or the lowest rate
of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third
state.
Given the purpose underlying tax treaties and the rationale for
the most favored nation clause, the concessional tax rate of 10
percent provided for in the RP-Germany Tax Treaty should
apply only if the taxes imposed upon royalties in the RP-US
Tax Treaty and in the RP-Germany Tax Treaty are paid under
similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of the United States in respect of
the taxes imposable upon royalties earned from sources within
the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not
contain similar provisions on tax crediting. Article 24 of the RP-
Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross
amount of royalties paid under the law of the Philippines. On
the other hand, Article 23 of the RP-US Tax Treaty, which is
the counterpart provision with respect to relief for double
taxation, does not provide for similar crediting of 20% of the
gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following
manner:
1) In accordance with the provisions and subject to the
limitations of the law of the United States (as it may be
amended from time to time without changing the general
principle thereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United
States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation
owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid
or accrued to the Philippines by the Philippine corporation
paying such dividends with respect to the profits out of which
such dividends are paid. Such appropriate amount shall be
based upon the amount of tax paid or accrued to the
Philippines, but the credit shall not exceed the limitations (for
the purpose of limiting the credit to the United States tax on
income from sources within the Philippines or on income from
sources outside the United States) provided by United States
law for the taxable year. . . .
The reason for construing the phrase "paid under similar
circumstances" as used in Article 13 (2) (b) (iii) of the RP-US
Tax Treaty as referring to taxes is anchored upon a logical
reading of the text in the light of the fundamental purpose of
such treaty which is to grant an incentive to the foreign investor
by lowering the tax and at the same time crediting against the
domestic tax abroad a figure higher than what was collected in
the Philippines.
In one case, the Supreme Court pointed out that laws are not
just mere compositions, but have ends to be achieved and that
the general purpose is a more important aid to the meaning of
a law than any rule which grammar may lay down. 20 It is the
duty of the courts to look to the object to be accomplished, the
evils to be remedied, or the purpose to be subserved, and
should give the law a reasonable or liberal construction which
will best effectuate its purpose. 21 The Vienna Convention on
the Law of Treaties states that a treaty shall be interpreted in
good faith in accordance with the ordinary meaning to be given
to the terms of the treaty in their context and in the light of its
object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double
taxation is to encourage foreign investors to invest in the
Philippines a crucial economic goal for developing
countries. 23 The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures
to minimize, if not completely eliminate, the tax burden laid
upon the income or capital of the investor. Thus, if the rates of
tax are lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on the
part of the state of residence to grant some form of tax relief,
whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been
collected by the Philippine government will simply be collected
by another state, defeating the object of the tax treaty since the
tax burden imposed upon the investor would remain
unrelieved. If the state of residence does not grant some form
of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a
favorable tax regime, should it impose a lower tax rate on the
royalty earnings of the investor, and it would be better to
impose the regular rate rather than lose much-needed
revenues to another country.
At the same time, the intention behind the adoption of the
provision on "relief from double taxation" in the two tax treaties
in question should be considered in light of the purpose behind
the most favored nation clause.
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which
has been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of
the most favored nation. 26 The essence of the principle is to
allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the
subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and Article 12
(2) (b) of the RP-West Germany Tax Treaty, above-quoted,
speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms
despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most grant equality
of international treatment since the tax burden laid upon the
income of the investor is not the same in the two countries.
The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment
precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax
Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on
royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax

exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption. 27 The
burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest
grant of organic or statute law. 28 Private respondent is
claiming for a refund of the alleged overpayment of tax on
royalties; however, there is nothing on record to support a
claim that the tax on royalties under the RP-US Tax Treaty is
paid under similar circumstances as the tax on royalties under
the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is

GRANTED. The decision dated May 7, 1996 of the Court of
Tax Appeals and the decision dated November 7, 1996 of the
Court of Appeals are hereby SET ASIDE.

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. 147188 September 14, 2004
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 Decision2 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 79,099,999.22 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 90 million.4
On 30 August 1989, Toda purportedly sold the property for
100 million to Rafael A. Altonaga, who, in turn, sold the same
property on the same day to Royal Match Inc. (RMI) for 200
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 10 million.6
On 16 April 1990, CIC filed its corporate annual income tax
return7 for the year 1989, declaring, among other things, its
gain from the sale of real property in the amount of
75,728.021. After crediting withholding taxes of 254,497.00,
it paid 26,341,2078 for its net taxable income of 75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC
to Le Hun T. Choa for 12.5 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 notice10 and demand letter to the CIC for
deficiency income tax for the year 1989 in the amount of
79,099,999.22.
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 1987-1989.11
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 Assessment12 dated
9 January 1995 from the Commissioner of Internal Revenue for
deficiency income tax for the year 1989 in the amount of
79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return
Add: Additional gain on sale of real property taxable under ordin
corporate income but were substituted with individual capital
gains(200M 100M)
Total Net Taxable Income per investigation
Tax Due thereof at 35% 61,595,703.
Less: Payment already made
1. Per return 26,595,704.0
2. Thru Capital Gains Tax made
by R.A. Altonaga 10,000,000.00
Add: 50% Surcharge 12,499,999.88
25% Surcharge
Total
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE
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 100
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
review15 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 Answer16 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 100 million (the
difference between the second simulated sale for 200 million
and the first simulated sale for 100 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 decision18 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 79,099,999.22 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 denied20 the
motion for reconsideration, prompting the Commissioner to file
a petition for review21 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 40
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 40
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 40 million from RMI,25and not from Altonaga.
That 40 million was debited by RMI and reflected in its trial
balance26 as "other inv. Cibeles Bldg." Also, as of 31 July
1989, another 40 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.lavvphi1.net
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.lavvphi1.net
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 198635 (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 79,099,999.22 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-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal
Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of
the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate
Estate of the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for
petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the
Judge of the Court of First Instance of Leyte, Ron. Lorenzo C.
Garlitos, presiding, seeking to annul certain orders of the court
and for an order in this Court directing the respondent court
below to execute the judgment in favor of the Government
against the estate of Walter Scott Price for internal revenue
taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C.
Moscoso, G.R. No. L-14674, January 30, 1960, this Court
declared as final and executory the order for the payment by
the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of
First Instance of Leyte in, special proceedings No. 14 entitled
"In the matter of the Intestate Estate of the Late Walter Scott
Price." In order to enforce the claims against the estate the
fiscal presented a petition dated June 21, 1961, to the court
below for the execution of the judgment. The petition was,
however, denied by the court which held that the execution is
not justifiable as the Government is indebted to the estate
under administration in the amount of P262,200. The orders of
the court below dated August 20, 1960 and September 28,
1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract
between Mrs. Simeona K. Price, Administratrix of the
estate of her late husband Walter Scott Price and
Director Zoilo Castrillo of the Bureau of Lands dated
September 19, 1956 and acknowledged before
Notary Public Salvador V. Esguerra, legal adviser in
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
may issue execution if circumstances require" (Rule
89, section 6; see also Rule 74, Section 4; Emphasis
supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the
testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are
under the jurisdiction of the court and such jurisdiction
continues until said properties have been distributed among
the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court
judgment, to seize the properties but to ask the court for an
order to require the administrator to pay the amount due from
the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal
is the fact that the court having jurisdiction of the estate had
found that the claim of the estate against the Government has
been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act
No. 2700). Under the above circumstances, both the claim of
the Government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue
and demandable is well as fully liquidated. Compensation,
therefore, takes place by operation of law, in accordance with
the provisions of Articles 1279 and 1290 of the Civil Code, and
both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in
article 1279 are present, compensation takes effect
by operation of law, and extinguished both debts to
the concurrent amount, eventhough the creditors and
debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to
execute the judgment for taxes against the estate of the
deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the
petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
G.R. No. 128315 June 29, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A.
DIO and VIRGINIA S. DIO, respondents.
PANGANIBAN, J.:
An assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period. It also signals the time
when penalties and protests begin to accrue against the taxpayer. To
enable the taxpayer to determine his remedies thereon, due process
requires that it must be served on and received by the taxpayer.
Accordingly, an affidavit, which was executed by revenue officers stating
the tax liabilities of a taxpayer and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that can be questioned before
the Court of Tax Appeals.
Statement of the Case
Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court praying for the nullification of the October 30, 1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which
effectively affirmed the January 25, 1996 Resolution 3 of the Court of Tax
Appeals 4 CTA Case No. 5271. The CTA disposed as follows:
WHEREFORE, finding [the herein petitioner's]
"Motion to Dismiss" as UNMERITORIOUS, the same
is hereby DENIED. [The CIR] is hereby given a period
of thirty (30) days from receipt hereof to file her
answer.
Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the
Court of Appeals denying reconsideration.
The Facts
As found by the Court of Appeals, the undisputed facts of the case are as
follows:
It appears that by virtue of Letter of Authority No.
001198, then BIR Commissioner Jose U. Ong
authorized Revenue Officers Thomas T. Que, Sonia
T. Estorco and Emmanuel M. Savellano to examine
the books of accounts and other accounting records
of Pascor Realty and Development Corporation.
(PRDC) for the years ending 1986, 1987 and 1988.
The said examination resulted in a recommendation
for the issuance of an assessment in the amounts of
P7,498,434.65 and P3,015,236.35 for the years 1986
and 1987, respectively.
On March 1, 1995, the Commissioner of Internal
Revenue filed a criminal complaint before the
Department of Justice against the PRDC, its
President Rogelio A. Dio, and its Treasurer Virginia S.
Dio, alleging evasion of taxes in the total amount of
P10,513,671 .00. Private respondents PRDC, et. al.
filed an Urgent Request for
Reconsideration/Reinvestigation disputing the tax
assessment and tax liability.
On March 23, 1995, private respondents received a
subpoena from the DOJ in connection with the
criminal complaint filed by the Commissioner of
Internal Revenue (BIR) against them.1wphi1.nt
In a letter dated May 17, 1995, the CIR denied the
urgent request for reconsideration/reinvestigation of
the private respondents on the ground that no formal
assessment of the has as yet been issued by the
Commissioner.
Private respondents then elevated the Decision of the
CIR dated May 17, 1995 to the Court of Tax Appeals
on a petition for review docketed as CTA Case No.
5271 on July 21, 1995. On September 6, 1995, the
CIR filed a Motion to Dismiss the petition on the
ground that the CTA has no jurisdiction over the
subject matter of the petition, as there was no formal
assessment issued against the petitioners. The CTA
denied the said motion to dismiss in a Resolution
dated January 25, 1996 and ordered the CIR to file an
answer within thirty (30) days from receipt of said
resolution. The CIR received the resolution on
As earlier observed, the Court of Appeals sustained the CTA and dismissed
January 31, 1996 but did not file an answer nor did
the petition.
she move to reconsider the resolution.
Instead, the CIR filed this petition on June 7, 1996,
alleging as grounds that:
Respondent Court of Tax
Appeals acted with grave abuse
of discretion and without
jurisdiction in considering the
affidavit/report of the revenue
officer and the indorsement of
said report to the secretary of
justice as assessment which
may be appealed to the Court of
Tax Appeals;
Respondent Court Tax Appeals
acted with grave abuse of
discretion in considering the
denial by petitioner of private
respondents' Motion for
Reconsideration as [a] final
decision which may be
appealed to the Court of Tax
Appeals.
In denying the motion to dismiss filed by the CIR, the
Court of Tax Appeals stated:
We agree with petitioners'
contentions, that the criminal
complaint for tax evasion is the
assessment issued, and that the
letter denial of May 17, 1995 is
the decision properly appealable
to [u]s. Respondent's ground of
denial, therefore, that there was
no formal assessment issued, is
untenable.
It is the Court's honest belief, that the criminal case
for tax evasion is already anassessment. The
complaint, more particularly, the Joint Affidavit of
Revenue Examiners Lagmay and Savellano attached
thereto, contains the details of the assessment like
the kind and amount of tax due, and the period
covered:
Petitioners are right, in claiming that the provisions of
Republic Act No. 1125, relating to exclusive appellate
jurisdiction of this Court, do not, make any mention of
"formal assessment." The law merely states, that this
Court has exclusive appellate jurisdiction over
decisions of the Commissioner of Internal Revenue
on disputed assessments, and other matters arising
under the National Internal Revenue Code, other law
or part administered by the Bureau of Internal
Revenue Code.
As far as this Court is concerned, the amount and
kind of tax due, and the period covered, are sufficient
details needed for an "assessment." These details are
more than complete, compared to the following
definitions of the term as quoted hereunder. Thus:
Assessment is laying a tax. Johnson City v.
Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn.
332. (Words and Phrases, Permanent Edition, Vol. 4,
p. 446).
The word assessment when used in connection with
taxation, may have more than one meaning. The
ultimate purpose of an assessment to such a
connection is to ascertain the amount that each
taxpayer is to pay. More commonly, the word
"assessment" means the official valuation of a
taxpayer's property for purpose of taxation. State v.
New York, N.H. and H.R. Co. 22 A. 765, 768, 60
Conn. 326, 325. (Ibid. p. 445)
From the above, it can be gleaned that an
assessment simply states how much tax is due from a
taxpayer. Thus, based on these definitions, the details
of the tax as given in the Joint Affidavit of
respondent's examiners, which was attached to the
tax evasion complaint, more than suffice to qualify as
an assessment. Therefore, this assessment having
been disputed by petitioners, and there being a denial
of their letter disputing such assessment, this Court
unquestionably acquired jurisdiction over the instant
petition for review. 6
Hence, this recourse to this Court. 7
Ruling of the Court of Appeals
The Court of Appeals held that the tax court committed no grave abuse of
discretion in ruling that the Criminal Complaint for tax evasion filed by the
Commissioner of Internal Revenue with the Department of Justice
constituted an "assessment" of the tax due, and that the said assessment
could be the subject of a protest. By definition, an assessment is simply the
statement of the details and the amount of tax due from a taxpayer. Based
on this definition, the details of the tax contained in the BIR examiners' Joint
Affidavit, 8 which was attached to the criminal Complaint, constituted an
assessment. Since the assailed Order of the CTA was merely interlocutory
and devoid of grave abuse of discretion, a petition for certiorari did not lie.
Issues
Petitioners submit for the consideration of this Court following issues:
(1) Whether or not the criminal
complaint for tax evasion can be
construed as an assessment.
(2) Whether or not an
assessment is necessary before
criminal charges for tax evasion
may be instituted.
(3) Whether or not the CTA can
take cognizance of the case in
the absence of an
assessment. 9
In the main, the Court will resolve whether the revenue officers' Affidavit-
Report, which was attached to criminal revenue Complaint filed the
Department of Justice, constituted an assessment that could be questioned
before the Court of Tax Appeals.
The Court's Ruling
The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the
Department of Justice cannot in any way be construed as a formal
assessment of private respondents' tax liabilities. This position is based on
Section 205 of the National Internal Revenue Code 10 (NIRC), which
provides that remedies for the collection of deficient taxes may be by either
civil or criminal action. Likewise, petitioner cites Section 223(a) of the same
Code, which states that in case of failure to file a return, the tax may be
assessed or a proceeding in court may be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an
action or proceeding for the collection of taxes, but merely a notice that the
amount stated therein is due as tax and that the taxpayer is required to pay
the same. Thus, qualifying as an assessment was the BIR examiners' Joint
Affidavit, which contained the details of the supposed taxes due from
respondent for taxable years ending 1987 and 1988, and which was
attached to the tax evasion Complaint filed with the DOJ. Consequently, the
denial by the BIR of private respondents' request for reinvestigation of the
disputed assessment is properly appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the regulations governing
the protest of assessments 11 provide a specific definition or form of an
assessment. However, the NIRC defines the specific functions and effects
of an assessment. To consider the affidavit attached to the Complaint as a
proper assessment is to subvert the nature of an assessment and to set a
bad precedent that will prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the
taxpayer that he or she has tax liabilities. But not all documents coming
from the BIR containing a computation of the tax liability can be deemed
assessments.
To start with, an assessment must be sent to and received by a taxpayer,
and must demand payment of the taxes described therein within a specific
period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax
due, in case the taxpayer fails to pay deficiency tax within the time
prescribed for its payment in the notice of assessment. Likewise, an interest
of 20 percent per annum, or such higher rates as may be prescribed by
rules and regulations, is to be collected form the date prescribed for its
payment until the full payment. 12
The issuance of an assessment is vital in determining, the period of
limitation regarding its proper issuance and the period within which to
protest it. Section 203 13 of the NIRC provides that internal revenue taxes
must be assessed within three years from the last day within which to file
the return. Section 222, 14 on the other hand, specifies a period of ten
years in case a fraudulent return with intent to evade was submitted or in
case of failure to file a return. Also, Section 228 15 of the same law states
that said assessment may be protested only within thirty days from receipt
thereof. Necessarily, the taxpayer must be certain that a specific document
constitutes an assessment. Otherwise, confusion would arise regarding the
period within which to make an assessment or to protest the same, or
whether interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector
of internal revenue releases, mails or sends such notice to the taxpayer. 16
In the present case, the revenue officers' Affidavit merely contained a
computation of respondents' tax liability. It did not state a demand or a
period for payment. Worse, it was addressed to the justice secretary, not to
the taxpayers.
Respondents maintain that an assessment, in relation to taxation, is simply
understood' to mean:
A notice to the effect that the amount therein stated is
due as tax and a demand for payment thereof. 17
Fixes the liability of the taxpayer and ascertains the
facts and furnishes the data for the proper
presentation of tax rolls. 18
Even these definitions fail to advance private respondents' case. That the
BIR examiners' Joint Affidavit attached to the Criminal Complaint contained
some details of the tax liabilities of private respondents does not ipso
facto make it an assessment. The purpose of the Joint Affidavit was merely
to support and substantiate the Criminal Complaint for tax evasion. Clearly,
it was not meant to be a notice of the tax due and a demand to the private
respondents for payment thereof.
The fact that the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that the intent
of the commissioner was to file a criminal complaint for tax evasion, not to
issue an assessment. Although the revenue officers recommended the
issuance of an assessment, the commissioner opted instead to file a
criminal case for tax evasion. What private respondents received was a
notice from the DOJ that a criminal case for tax evasion had been filed
against them, not a notice that the Bureau of Internal Revenue had made
an assessment.
In addition, what private respondents sent to the commissioner was a
motion for a reconsideration of the tax evasion charges filed, not of an
assessment, as shown thus:
This is to request for reconsideration of the tax evasion charges against my
client, PASCOR Realty and Development Corporation and for the same to
be referred to the Appellate Division in order to give my client the
opportunity of a fair and objective hearing. 19
Additional Issues:
Assessment Not
Necessary Before Filing of
Criminal Complaint
Private respondents maintain that the filing of a criminal complaint must be
preceded by an assessment. This is incorrect, because Section 222 of the
NIRC specifically states that in cases where a false or fraudulent return is
submitted or in cases of failure to file a return such as this case,
proceedings in court may be commenced without an assessment.
Furthermore, Section 205 of the same Code clearly mandates that the civil
and criminal aspects of the case may be pursued simultaneously. In Ungab
v. Cusi,20 petitioner therein sought the dismissal of the criminal Complaints
for being premature, since his protest to the CTA had not yet been
resolved. The Court held that such protests could not stop or suspend the
criminal action which was independent of the resolution of the protest in the
CTA. This was because the commissioner of internal revenue had, in such
tax evasion cases, discretion on whether to issue an assessment or to file a
criminal case against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to
Section 255 of the NLRC, 21 which penalizes failure to file a return. They
add that a tax assessment should precede a criminal indictment. We
disagree. To reiterate, said Section 222 states that an assessment is not
necessary before a criminal charge can be filed. This is the general rule.
Private respondents failed to show that they are entitled to an exception.
Moreover, the criminal charge need only be supported by a prima
facie showing of failure to file a required return. This fact need not be
proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a
complaint. Before an assessment is issued, there is, by practice, a pre-
assessment notice sent to the taxpayer. The taxpayer is then given a
chance to submit position papers and documents to prove that the
assessment is unwarranted. If the commissioner is unsatisfied, an
assessment signed by him or her is then sent to the taxpayer informing the
latter specifically and clearly that an assessment has been made against
him or her. In contrast, the criminal charge need not go through all these.
The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is
notified that a criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be stressed that a
criminal complaint is instituted not to demand payment, but to penalize the
taxpayer for violation of the Tax Code.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision is

REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED.
No costs.

SO ORDERED.
G.R. No. 120880 June 5, 1997 the petitioner and the estate of the deceased President Marcos
have already become final and unappealable, and may thus be
FERDINAND R. MARCOS II, petitioner, enforced by the summary remedy of levying upon the
vs. properties of the late President, as was done by the
COURT OF APPEALS, THE COMMISSIONER OF THE respondent Commissioner of Internal Revenue.
BUREAU OF INTERNAL REVENUE and HERMINIA D. DE
GUZMAN, respondents. WHEREFORE, premises considered
judgment is hereby rendered DISMISSING
the petition for Certiorari with prayer for
Restraining Order and Injunction.

TORRES, JR., J.:

No pronouncements as to cost.

In this Petition for Review on Certiorari, Government action is

SO ORDERED.
once again assailed as precipitate and unfair, suffering the
basic and oftly implored requisites of due process of law.
Specifically, the petition assails the Decision of the Court of
1 Unperturbed, petitioner is now before us assailing the validity
Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, of the appellate court's decision, assigning the following as
where the said court held: errors:

In view of all the foregoing, we rule that the A. RESPONDENT COURT MANIFESTLY
deficiency income tax assessments and ERRED IN RULING THAT THE SUMMARY
estate tax assessment, are already final and TAX REMEDIES RESORTED TO BY THE
(u)nappealable-and-the subsequent levy of GOVERNMENT ARE NOT AFFECTED AND
real properties is a tax remedy resorted to by PRECLUDED BY THE PENDENCY OF THE
the government, sanctioned by Section 213 SPECIAL PROCEEDING FOR THE
and 218 of the National Internal Revenue ALLOWANCE OF THE LATE PRESIDENT'S
Code. This summary tax remedy is distinct ALLEGED WILL. TO THE CONTRARY,
and separate from the other tax remedies THIS PROBATE PROCEEDING
(such as Judicial Civil actions and Criminal PRECISELY PLACED ALL PROPERTIES
actions), and is not affected or precluded by WHICH FORM PART OF THE LATE
the pendency of any other tax remedies PRESIDENT'S ESTATE IN CUSTODIA
instituted by the government. LEGIS OF THE PROBATE COURT TO THE
EXCLUSION OF ALL OTHER COURTS
AND ADMINISTRATIVE AGENCIES.
WHEREFORE, premises considered,
judgment is hereby rendered DISMISSING
the petition for certiorari with prayer for B. RESPONDENT COURT ARBITRARILY
Restraining Order and Injunction. ERRED IN SWEEPINGLY DECIDING THAT
SINCE THE TAX ASSESSMENTS OF
PETITIONER AND HIS PARENTS HAD
No pronouncements as to costs.
ALREADY BECOME FINAL AND
UNAPPEALABLE, THERE WAS NO NEED
SO ORDERED. TO GO INTO THE MERITS OF THE
GROUNDS CITED IN THE PETITION.
More than seven years since the demise of the late Ferdinand INDEPENDENT OF WHETHER THE TAX
E. Marcos, the former President of the Republic of the ASSESSMENTS HAD ALREADY BECOME
Philippines, the matter of the settlement of his estate, and its FINAL, HOWEVER, PETITIONER HAS THE
dues to the government in estate taxes, are still unresolved, RIGHT TO QUESTION THE UNLAWFUL
the latter issue being now before this Court for resolution. MANNER AND METHOD IN WHICH TAX
Specifically, petitioner Ferdinand R. Marcos II, the eldest son COLLECTION IS SOUGHT TO BE
of the decedent, questions the actuations of the respondent ENFORCED BY RESPONDENTS
Commissioner of Internal Revenue in assessing, and collecting COMMISSIONER AND DE GUZMAN.
through the summary remedy of Levy on Real Properties, THUS, RESPONDENT COURT SHOULD
estate and income tax delinquencies upon the estate and HAVE FAVORABLY CONSIDERED THE
properties of his father, despite the pendency of the MERITS OF THE FOLLOWING GROUNDS
proceedings on probate of the will of the late president, which IN THE PETITION:
is docketed as Sp. Proc. No. 10279 in the Regional Trial Court
of Pasig, Branch 156. (1) The Notices of Levy on
Real Property were issued
Petitioner had filed with the respondent Court of Appeals a beyond the period
Petition for Certiorari and Prohibition with an application for writ provided in the Revenue
of preliminary injunction and/or temporary restraining order on Memorandum Circular No.
June 28, 1993, seeking to 38-68.

I. Annul and set aside the Notices of Levy on (2) [a] The numerous
real property dated February 22, 1993 and pending court cases
May 20, 1993, issued by respondent questioning the late
Commissioner of Internal Revenue; President's ownership or
interests in several
properties (both personal
II. Annul and set aside the Notices of Sale
and real) make the total
dated May 26, 1993;
value of his estate, and the
consequent estate tax
III. Enjoin the Head Revenue Executive due, incapable of exact
Assistant Director II (Collection Service), pecuniary determination at
from proceeding with the Auction of the real this time. Thus,
properties covered by Notices of Sale. respondents' assessment
of the estate tax and their
After the parties had pleaded their case, the Court of Appeals issuance of the Notices of
rendered its Decision on November 29, 1994, ruling that the
2 Levy and Sale are
deficiency assessments for estate and income tax made upon
 premature, confiscatory
and oppressive.
[b] Petitioner, as one of the
late President's
compulsory heirs, was
never notified, much less
served with copies of the
Notices of Levy, contrary
to the mandate of Section
213 of the NIRC. As such,
petitioner was never given
an opportunity to contest
the Notices in violation of
his right to due process of
law.
C. ON ACCOUNT OF THE CLEAR MERIT
OF THE PETITION, RESPONDENT COURT
MANIFESTLY ERRED IN RULING THAT IT
HAD NO POWER TO GRANT INJUNCTIVE
RELIEF TO PETITIONER. SECTION 219
OF THE NIRC NOTWITHSTANDING,
COURTS POSSESS THE POWER TO
ISSUE A WRIT OF PRELIMINARY
INJUNCTION TO RESTRAIN
RESPONDENTS COMMISSIONER'S AND
DE GUZMAN'S ARBITRARY METHOD OF
COLLECTING THE ALLEGED DEFICIENCY
ESTATE AND INCOME TAXES BY MEANS
OF LEVY.
The facts as found by the appellate court are undisputed, and
are hereby adopted:
On September 29, 1989, former President
Ferdinand Marcos died in Honolulu, Hawaii,
USA.
On June 27, 1990, a Special Tax Audit Team
was created to conduct investigations and
examinations of the tax liabilities and
obligations of the late president, as well as
that of his family, associates and "cronies".
Said audit team concluded its investigation
with a Memorandum dated July 26, 1991.
The investigation disclosed that the
Marcoses failed to file a written notice of the
death of the decedent, an estate tax returns
[sic], as well as several income tax returns
covering the years 1982 to 1986, all in
violation of the National Internal Revenue
Code (NIRC).
Subsequently, criminal charges were filed
against Mrs. Imelda R. Marcos before the
Regional Trial of Quezon City for violations
of Sections 82, 83 and 84 (has penalized
under Sections 253 and 254 in relation to
Section 252 a & b) of the National Internal
Revenue Code (NIRC).
The Commissioner of Internal Revenue
thereby caused the preparation and filing of
the Estate Tax Return for the estate of the
late president, the Income Tax Returns of
the Spouses Marcos for the years 1985 to
1986, and the Income Tax Returns of
petitioner Ferdinand "Bongbong" Marcos II
for the years 1982 to 1985.
On July 26, 1991, the BIR issued the
following: (1) Deficiency estate tax
assessment no. FAC-2-89-91-002464
(against the estate of the late president
Ferdinand Marcos in the amount of
P23,293,607,638.00 Pesos); (2) Deficiency
income tax assessment no. FAC-1-85-91-
002452 and Deficiency income tax
assessment no. FAC-1-86-91-002451
(against the Spouses Ferdinand and Imelda
Marcos in the amounts of P149,551.70 and
P184,009,737.40 representing deficiency
income tax for the years 1985 and 1986); (3)
Deficiency income tax assessment nos.
FAC-1-82-91-002460 to FAC-1-85-91-
002463 (against petitioner Ferdinand
"Bongbong" Marcos II in the amounts of
P258.70 pesos; P9,386.40 Pesos; P4,388.30
Pesos; and P6,376.60 Pesos representing
his deficiency income taxes for the years
1982 to 1985).
The Commissioner of Internal Revenue
avers that copies of the deficiency estate
and income tax assessments were all
personally and constructively served on
August 26, 1991 and September 12, 1991
upon Mrs. Imelda Marcos (through her
caretaker Mr. Martinez) at her last known
address at No. 204 Ortega St., San Juan,
M.M. (Annexes "D" and "E" of the Petition).
Likewise, copies of the deficiency tax
assessments issued against petitioner
Ferdinand "Bongbong" Marcos II were also
personally and constructively served upon
him (through his caretaker) on September
12, 1991, at his last known address at Don
Mariano Marcos St. corner P. Guevarra St.,
San Juan, M.M. (Annexes "J" and "J-1" of
the Petition). Thereafter, Formal Assessment
notices were served on October 20, 1992,
upon Mrs. Marcos c/o petitioner, at his office,
House of Representatives, Batasan
Pambansa, Quezon City. Moreover, a notice
to Taxpayer inviting Mrs. Marcos (or her duly
authorized representative or counsel), to a
conference, was furnished the counsel of
Mrs. Marcos, Dean Antonio Coronel but to
no avail.
The deficiency tax assessments were not
protested administratively, by Mrs. Marcos
and the other heirs of the late president,
within 30 days from service of said
assessments.
On February 22, 1993, the BIR
Commissioner issued twenty-two notices of
levy on real property against certain parcels
of land owned by the Marcoses to satisfy
the alleged estate tax and deficiency income
taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy
on real property were issued for the purpose
of satisfying the deficiency income taxes.
On May 26, 1993, additional four (4) notices
of Levy on real property were again issued.
The foregoing tax remedies were resorted to
pursuant to Sections 205 and 213 of the
National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993
sent by Atty. Loreto Ata (counsel of herein
petitioner) calling the attention of the BIR
and requesting that they be duly notified of
any action taken by the BIR affecting the
interest of their client Ferdinand "Bongbong"
Marcos II, as well as the interest of the late
president copies of the aforesaid notices
were, served on April 7, 1993 and on June
10, 1993, upon Mrs. Imelda Marcos, the
petitioner, and their counsel of record, "De
Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office".
Notices of sale at public auction were posted
on May 26, 1993, at the lobby of the City Hall
of Tacloban City. The public auction for the
 sale of the eleven (11) parcels of land took
place on July 5, 1993. There being no
bidder, the lots were declared forfeited in
favor of the government.
On June 25, 1993, petitioner Ferdinand
"Bongbong" Marcos II filed the instant
petition for certiorari and prohibition under
Rule 65 of the Rules of Court, with prayer for
temporary restraining order and/or writ of
preliminary injunction.
It has been repeatedly observed, and not without merit, that
the enforcement of tax laws and the collection of taxes, is of
paramount importance for the sustenance of government.
Taxes are the lifeblood of the government and should be
collected without unnecessary hindrance. However, such
collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself.
It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common
good, may be achieved. 3
Whether or not the proper avenues of assessment and
collection of the said tax obligations were taken by the
respondent Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and
subsequent sale of properties of the late President Marcos
effected by the BIR are null and void for disregarding the
established procedure for the enforcement of taxes due upon
the estate of the deceased. The case of Domingo
vs. Garlitos is specifically cited to bolster the argument that
4 upon the validity of a waiver of hereditary rights. 10
"the ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased, person, as in
an inheritance (estate) 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 therefor." This remedy is
allegedly, exclusive, and cannot be effected through any other
means.
Petitioner goes further, submitting that the probate court is not
precluded from denying a request by the government for the
immediate payment of taxes, and should order the payment of
the same only within the period fixed by the probate court for
the payment of all the debts of the decedent. In this regard,
petitioner cites the case of Collector of Internal Revenue
vs. The Administratrix of the Estate of Echarri (67 Phil 502),
where it was held that:
The case of Pineda vs. Court of First
Instance of Tayabas and Collector of Internal
Revenue (52 Phil 803), relied upon by the
petitioner-appellant is good authority on the
proposition that the court having control over
the administration proceedings has
jurisdiction to entertain the claim presented
by the government for taxes due and to
order the administrator to pay the tax should
it find that the assessment was proper, and
that the tax was legal, due and collectible.
And the rule laid down in that case must be
understood in relation to the case
of Collector of Customs vs. Haygood, supra.,
as to the procedure to be followed in a given
case by the government to effectuate the
collection of the tax. Categorically stated,
where during the pendency of judicial
administration over the estate of a deceased
person a claim for taxes is presented by the
government, the court has the authority to
order payment by the administrator; but, in
the same way that it has authority to order
payment or satisfaction, it also has the
negative authority to deny the same. While
there are cases where courts are required to
perform certain duties mandatory and
ministerial in character, the function of the
court in a case of the present character is
not one of them; and here, the court cannot
be an organism endowed with latitude of
judgment in one direction, and converted into
a mere mechanical contrivance in another
direction.
On the other hand, it is argued by the BIR, that the state's
authority to collect internal revenue taxes is paramount. Thus,
the pendency of probate proceedings over the estate of the
deceased does not preclude the assessment and collection,
through summary remedies, of estate taxes over the same.
According to the respondent, claims for payment of estate and
income taxes due and assessed after the death of the
decedent need not be presented in the form of a claim against
the estate. These can and should be paid immediately. The
probate court is not the government agency to decide whether
an estate is liable for payment of estate of income taxes. Well-
settled is the rule that the probate court is a court with special
and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting,
albeit with limited jurisdiction, as a probate court over estate of
deceased individual, is not a trifling thing. The court's
jurisdiction, once invoked, and made effective, cannot be
treated with indifference nor should it be ignored with impunity
by the very parties invoking its authority.
In testament to this, it has been held that it is within the
jurisdiction of the probate court to approve the sale of
properties of a deceased person by his prospective heirs
before final adjudication; to determine who are the heirs of the
5
decedent; the recognition of a natural child; the status of a
6 7
woman claiming to be the legal wife of the decedent; the 8
legality of disinheritance of an heir by the testator; and to pass
9
The pivotal question the court is tasked to resolve refers to the
authority of the Bureau of Internal Revenue to collect by the
summary remedy of levying upon, and sale of real properties of
the decedent, estate tax deficiencies, without the cognition and
authority of the court sitting in probate over the supposed will
of the deceased.
The nature of the process of estate tax collection has been
described as follows:
Strictly speaking, the assessment of an
inheritance tax does not directly involve the
administration of a decedent's estate,
although it may be viewed as an incident to
the complete settlement of an estate, and,
under some statutes, it is made the duty of
the probate court to make the amount of the
inheritance tax a part of the final decree of
distribution of the estate. It is not against the
property of decedent, nor is it a claim against
the estate as such, but it is against the
interest or property right which the heir,
legatee, devisee, etc., has in the property
formerly held by decedent. Further, under
some statutes, it has been held that it is not
a suit or controversy between the parties,
nor is it an adversary proceeding between
the state and the person who owes the tax
on the inheritance. However, under other
statutes it has been held that the hearing
and determination of the cash value of the
assets and the determination of the tax are
adversary proceedings. The proceeding has
been held to be necessarily a proceeding in
rem. 11
In the Philippine experience, the enforcement and collection of
estate tax, is executive in character, as the legislature has
seen it fit to ascribe this task to the Bureau of Internal
Revenue. Section 3 of the National Internal Revenue Code
attests to this:
Sec. 3. Powers and duties of the Bureau.
The powers and duties of the Bureau of
Internal Revenue shall comprehend the
 assessment and collection of all national
internal revenue taxes, fees, and charges,
and the enforcement of all forfeitures,
penalties, and fines connected therewith,
including the execution of judgments in all
cases decided in its favor by the Court of
Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and
administer the supervisory and police power
conferred to it by this Code or other laws.
Thus, it was in Vera vs. Fernandez that the court recognized
12
the liberal treatment of claims for taxes charged against the
estate of the decedent. Such taxes, we said, were exempted
from the application of the statute of non-claims, and this is
justified by the necessity of government funding, immortalized
in the maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae taxes are the
sinews of the state.
Taxes assessed against the estate of a
deceased person, after administration is
opened, need not be submitted to the
committee on claims in the ordinary course
of administration. In the exercise of its
control over the administrator, the court may
direct the payment of such taxes upon
motion showing that the taxes have been
assessed against the estate.
Such liberal treatment of internal revenue taxes in the probate
proceedings extends so far, even to allowing the enforcement
of tax obligations against the heirs of the decedent, even after
distribution of the estate's properties.
Claims for taxes, whether assessed before
or after the death of the deceased, can be
collected from the heirs even after the
distribution of the properties of the decedent.
They are exempted from the application of
the statute of non-claims. The heirs shall be
liable therefor, in proportion to their share in
the inheritance. 13
Thus, the Government has two ways of
collecting the taxes in question. One, by
going after all the heirs and collecting from
each one of them the amount of the tax
proportionate to the inheritance received.
Another remedy, pursuant to the lien created
by Section 315 of the Tax Code upon all
property and rights to property belong to the
taxpayer for unpaid income tax, is by
subjecting said property of the estate which
is in the hands of an heir or transferee to the
payment of the tax due the estate.
(Commissioner of Internal Revenue vs.
Pineda, 21 SCRA 105, September 15,
1967.)
From the foregoing, it is discernible that the approval of the
court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of
estate taxes. It cannot therefore be argued that the Tax Bureau
erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it
was required to seek first the probate court's sanction. There is
nothing in the Tax Code, and in the pertinent remedial laws
that implies the necessity of the probate or estate settlement
court's approval of the state's claim for estate taxes, before the
same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate
or settlement court which is bidden not to authorize the
executor or judicial administrator of the decedent's estate to
deliver any distributive share to any party interested in the
estate, unless it is shown a Certification by the Commissioner
of Internal Revenue that the estate taxes have been paid. This
provision disproves the petitioner's contention that it is the
probate court which approves the assessment and collection of
the estate tax.
If there is any issue as to the validity of the BIR's decision to
assess the estate taxes, this should have been pursued
through the proper administrative and judicial avenues
provided for by law.
Section 229 of the NIRC tells us how:
Sec. 229. Protesting of assessment.
When the Commissioner of Internal Revenue
or his duly authorized representative finds
that proper taxes should be assessed, he
shall first notify the taxpayer of his findings.
Within a period to be prescribed by
implementing regulations, the taxpayer shall
be required to respond to said notice. If the
taxpayer fails to respond, the Commissioner
shall issue an assessment based on his
findings.
Such assessment may be protested
administratively by filing a request for
reconsideration or reinvestigation in such
form and manner as may be prescribed by
implementing regulations within (30) days
from receipt of the assessment; otherwise,
the assessment shall become final and
unappealable.
If the protest is denied in whole or in part, the
individual, association or corporation
adversely affected by the decision on the
protest may appeal to the Court of Tax
Appeals within thirty (30) days from receipt
of said decision; otherwise, the decision shall
become final, executory and demandable.
(As inserted by P.D. 1773)
Apart from failing to file the required estate tax return within the
time required for the filing of the same, petitioner, and the other
heirs never questioned the assessments served upon them,
allowing the same to lapse into finality, and prompting the BIR
to collect the said taxes by levying upon the properties left by
President Marcos.
Petitioner submits, however, that "while the assessment of
taxes may have been validly undertaken by the Government,
collection thereof may have been done in violation of the law.
Thus, the manner and method in which the latter is enforced
may be questioned separately, and irrespective of the finality of
the former, because the Government does not have the
unbridled discretion to enforce collection without regard to the
clear provision of law." 14
Petitioner specifically points out that applying Memorandum
Circular No. 38-68, implementing Sections 318 and 324 of the
old tax code (Republic Act 5203), the BIR's Notices of Levy on
the Marcos properties, were issued beyond the allowed period,
and are therefore null and void:
. . . the Notices of Levy on Real Property
(Annexes O to NN of Annex C of this
Petition) in satisfaction of said assessments
were still issued by respondents well beyond
the period mandated in Revenue
Memorandum Circular No. 38-68. These
Notices of Levy were issued only on 22
February 1993 and 20 May 1993 when at
least seventeen (17) months had already
lapsed from the last service of tax
assessment on 12 September 1991. As no
notices of distraint of personal property were
first issued by respondents, the latter should
have complied with Revenue Memorandum
Circular No. 38-68 and issued these Notices
of Levy not earlier than three (3) months nor
later than six (6) months from 12 September
1991. In accordance with the Circular,
respondents only had until 12 March 1992
(the last day of the sixth month) within which
to issue these Notices of Levy. The Notices
 of Levy, having been issued beyond the
period allowed by law, are thus void and of
no effect. 15
We hold otherwise. The Notices of Levy upon real property
were issued within the prescriptive period and in accordance
with the provisions of the present Tax Code. The deficiency tax
assessment, having already become final, executory, and
demandable, the same can now be collected through the
summary remedy of distraint or levy pursuant to Section 205 of
the NIRC.
The applicable provision in regard to the prescriptive period for
the assessment and collection of tax deficiency in this instance
is Article 223 of the NIRC, which pertinently provides:
Sec. 223. Exceptions as to a 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 a failure to file a return, the tax may be
assessed, or a proceeding in court for the
collection of such tax may be begun without
assessment, at any time within ten (10)
years after the discovery of the falsity, fraud,
or omission: Provided, That, in a fraud
assessment which has become final and
executory, the fact of fraud shall be judicially
taken cognizance of in the civil or criminal
action for the collection thereof.
xxx xxx xxx
(c) Any internal revenue tax which has been
assessed within the period of limitation
above prescribed, may be collected by
distraint or levy or by a proceeding in court
within three years following the assessment
of the tax.
xxx xxx xxx
The omission to file an estate tax return, and the subsequent
failure to contest or appeal the assessment made by the BIR is
fatal to the petitioner's cause, as under the above-cited
provision, in case of failure to file a return, the tax may be
assessed at any time within ten years after the omission, and
any tax so assessed may be collected by levy upon real
property within three years following the assessment of the tax.
Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting
the validity of the said assessment, there is now no reason why
the BIR cannot continue with the collection of the said tax. Any
objection against the assessment should have been pursued
following the avenue paved in Section 229 of the NIRC on
protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court
cases questioning the late president's ownership or interests in
several properties (both real and personal) make the total
value of his estate, and the consequent estate tax due,
incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance
of the Notices of Levy and sale are premature and oppressive."
He points out the pendency of Sandiganbayan Civil Case Nos.
0001-0034 and 0141, which were filed by the government to
question the ownership and interests of the late President in
real and personal properties located within and outside the
Philippines. Petitioner, however, omits to allege whether the
properties levied upon by the BIR in the collection of estate
taxes upon the decedent's estate were among those involved
in the said cases pending in the Sandiganbayan. Indeed, the
court is at a loss as to how these cases are relevant to the
matter at issue. The mere fact that the decedent has pending
cases involving ill-gotten wealth does not affect the
enforcement of tax assessments over the properties
indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of
the BIR's total assessment of P23,292,607,638.00, stating that
this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20
September 1991. Allegedly, this is clear evidence of the
uncertainty on the part of the Government as to the total value
of the estate of the late President.
This is, to our mind, the petitioner's last ditch effort to assail the
assessment of estate tax which had already become final and
unappealable.
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, whose16
determinations and assessments are presumed correct and
made in good faith. The taxpayer has the duty of proving
17
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. In this instance, petitioner has not pointed out
18
one single provision in the Memorandum of the Special Audit
Team which gave rise to the questioned assessment, which
bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and
unconscionable amount of the taxes charged. But mere
rhetoric cannot supply the basis for the charge of impropriety of
the assessments made.
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
19
pronounced in view of the absence of sufficient attack against
the actuations of government.
On the matter of sufficiency of service of Notices of
Assessment to the petitioner, we find the respondent appellate
court's pronouncements sound and resilient to petitioner's
attacks.
Anent grounds 3(b) and (B) both
alleging/claiming lack of notice We find,
after considering the facts and
circumstances, as well as evidences, that
there was sufficient, constructive and/or
actual notice of assessments, levy and sale,
sent to herein petitioner Ferdinand
"Bongbong" Marcos as well as to his mother
Mrs. Imelda Marcos.
Even if we are to rule out the notices of
assessments personally given to the
caretaker of Mrs. Marcos at the latter's last
known address, on August 26, 1991 and
September 12, 1991, as well as the notices
of assessment personally given to the
caretaker of petitioner also at his last known
address on September 12, 1991 the
subsequent notices given thereafter could no
longer be ignored as they were sent at a
time when petitioner was already here in the
Philippines, and at a place where said
notices would surely be called to petitioner's
attention, and received by responsible
persons of sufficient age and discretion.
Thus, on October 20, 1992, formal
assessment notices were served upon Mrs.
 Marcos c/o the petitioner, at his office, IN VIEW WHEREOF, the Court RESOLVED to DENY the
House of Representatives, Batasan present petition. The Decision of the Court of Appeals dated
Pambansa, Q.C. (Annexes "A", "A-1", "A-2", November 29, 1994 is hereby AFFIRMED in all respects.
"A-3"; pp. 207-210, Comment/Memorandum
of OSG). Moreover, a notice to taxpayer SO ORDERED.
dated October 8, 1992 inviting Mrs. Marcos
to a conference relative to her tax liabilities,
was furnished the counsel of Mrs. Marcos
Dean Antonio Coronel (Annex "B", p.
211, ibid). Thereafter, copies of Notices were
also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja,
Medialdea, Ata, Bello, Guevarra and Serapio
Law Office", on April 7, 1993 and June 10,
1993. Despite all of these Notices, petitioner
never lifted a finger to protest the
assessments, (upon which the Levy and sale
of properties were based), nor appealed the
same to the Court of Tax Appeals.

There being sufficient service of Notices to

herein petitioner (and his mother) and it
appearing that petitioner continuously
ignored said Notices despite several
opportunities given him to file a protest and
to thereafter appeal to the Court of Tax
Appeals, the tax assessments subject of
this case, upon which the levy and sale of
properties were based, could no longer be
contested (directly or indirectly) via this
instant petition for certiorari.20

Petitioner argues that all the questioned Notices of Levy,

however, must be nullified for having been issued without
validly serving copies thereof to the petitioner. As a mandatory
heir of the decedent, petitioner avers that he has an interest in
the subject estate, and notices of levy upon its properties
should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy

the delinquent estate tax, the delinquent taxpayer is the Estate
of the decedent, and not necessarily, and exclusively, the
petitioner as heir of the deceased. In the same vein, in the
matter of income tax delinquency of the late president and his
spouse, petitioner is not the taxpayer liable. Thus, it follows
that service of notices of levy in satisfaction of these tax
delinquencies upon the petitioner is not required by law, as
under Section 213 of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon

said certificate a description of the property
upon which levy is made. At the same time,
written notice of the levy shall be mailed to or
served upon the Register of Deeds of the
province or city where the property is located
and upon the delinquent taxpayer, or if he be
absent from the Philippines, to his agent or
the manager of the business in respect to
which the liability arose, or if there be none,
to the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices

of warrants of distraint and levy of sale were furnished the
counsel of petitioner on April 7, 1993, and June 10, 1993, and
the petitioner himself on April 12, 1993 at his office at the
Batasang Pambansa. We cannot therefore, countenance
21

petitioner's insistence that he was denied due process. Where

there was an opportunity to raise objections to government
action, and such opportunity was disregarded, for no justifiable
reason, the party claiming oppression then becomes the
oppressor of the orderly functions of government. He who
comes to court must come with clean hands. Otherwise, he not
only taints his name, but ridicules the very structure of
established authority.
G.R. No. L-36181 October 23, 1982
MERALCO SECURITIES CORPORATION (now FIRST
PHILIPPINE HOLDINGS CORPORATION), petitioner,
vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON
VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.
TEEHANKEE, J.:
These are original actions for certiorari to set aside and annul
the writ of mandamus issued by Judge Victorino A. Savellano
of the Court of First Instance of Manila in Civil Case No. 80830
ordering petitioner Meralco Securities Corporation (now First
Philippine Holdings Corporation) to pay, and petitioner
Commissioner of Internal Revenue to collect from the former,
the amount of P51,840,612.00, by way of alleged deficiency
corporate income tax, plus interests and surcharges due
thereon and to pay private respondents 25% of the total
amount collectible as informer's reward.
On May 22, 1967, the late Juan G. Maniago (substituted in
these proceedings by his wife and children) submitted to
petitioner Commissioner of Internal Revenue confidential
denunciation against the Meralco Securities Corporation for tax
evasion for having paid income tax only on 25 % of the
dividends it received from the Manila Electric Co. for the years
1962-1966, thereby allegedly shortchanging the government of
income tax due from 75% of the said dividends.
Petitioner Commissioner of Internal Revenue caused the
investigation of the denunciation after which he found and held
that no deficiency corporate income tax was due from the
Meralco Securities Corporation on the dividends it received
from the Manila Electric Co., since under the law then
prevailing (section 24[a] of the National Internal Revenue
Code) "in the case of dividends received by a domestic or
foreign resident corporation liable to (corporate income) tax
under this Chapter . . . .only twenty-five per centum thereof
shall be returnable for the purposes of the tax imposed under
this section." The Commissioner accordingly rejected
Maniago's contention that the Meralco from whom the
dividends were received is "not a domestic corporation liable to
tax under this Chapter." In a letter dated April 5, 1968, the
Commissioner informed Maniago of his findings and ruling and
therefore denied Maniago's claim for informer's reward on a
non-existent deficiency. This action of the Commissioner was
sustained by the Secretary of Finance in a 4th Indorsement
dated May 11, 1971.
On August 28, 1970, Maniago filed a petition for mandamus,
and subsequently an amended petition for mandamus, in the
Court of First Instance of Manila, docketed therein as Civil
Case No. 80830, against the Commissioner of Internal
Revenue and the Meralco Securities Corporation to compel the
Commissioner to impose the alleged deficiency tax
assessment on the Meralco Securities Corporation and to
award to him the corresponding informer's reward under the
provisions of R.A. 2338.
On October 28, 1978, the Commissioner filed a motion to
dismiss, arguing that since in matters of issuance and non-
issuance of assessments, he is clothed under the National
Internal Revenue Code and existing rules and regulations with
discretionary power in evaluating the facts of a case and since
mandamus win not lie to compel the performance of a
discretionary power, he cannot be compelled to impose the
alleged tax deficiency assessment against the Meralco
Securities Corporation. He further argued that mandamus may
not lie against him for that would be tantamount to a usurpation
of executive powers, since the Office of the Commissioner of
Internal Revenue is undeniably under the control of the
executive department.
On the other hand, the Meralco Securities Corporation filed its
answer, dated January 15, 1971, interposing as special and/or
affirmative defenses that the petition states no cause of action,
that the action is premature, that mandamus win not lie to
compel the Commissioner of Internal Revenue to make an
assessment and/or effect the collection of taxes upon a
taxpayer, that since no taxes have actually been recovered
and/or collected, Maniago has no right to recover the reward
prayed for, that the action of petitioner had already prescribed
and that respondent court has no jurisdiction over the subject
matter as set forth in the petition, the same being cognizable
only by the Court of Tax Appeals.
On January 10, 1973, the respondent judge rendered a
decision granting the writ prayed for and ordering the
Commissioner of Internal Revenue to assess and collect from
the Meralco Securities Corporation the sum of P51,840,612.00
as deficiency corporate income tax for the period 1962 to 1969
plus interests and surcharges due thereon and to pay 25%
thereof to Maniago as informer's reward.
All parties filed motions for reconsideration of the decision but
the same were denied by respondent judge in his order dated
April 6, 1973, with respondent judge denying respondents'
claim for attorneys fees and for execution of the decision
pending appeal.
Hence, the Commissioner filed a separate petition with this
Court, docketed as G.R. No. L-36748 praying that the decision
of respondent judge dated January 10, 1973 and his order
dated April 6, 1973 be reconsidered for respondent judge has
no jurisdiction over the subject matter of the case and that the
issuance or non-issuance of a deficiency assessment is a
prerogative of the Commissioner of Internal Revenue not
reviewable by mandamus.
The Meralco Securities Corporation (now First Philippine
Holdings Corporation) likewise appealed the same decision of
respondent judge in G.R. No. L-36181 and in the Court's
resolution dated June 13, 1973, the two cases were ordered
consolidated.
We grant the petitions.
Respondent judge has no jurisdiction to take cognizance of the
case because the subject matter thereof clearly falls within the
scope of cases now exclusively within the jurisdiction of the
Court of Tax Appeals. Section 7 of Republic Act No. 1125,
enacted June 16, 1954, granted to the Court of Tax
Appeals exclusive appellate jurisdiction to review by appeal,
among others, decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the
National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue. The law
transferred to the Court of Tax Appeals jurisdiction over all
cases involving said assessments previously cognizable by
courts of first instance, and even those already pending in said
courts. 1 The question of whether or not to impose a
deficiency tax assessment on Meralco Securities
Corporation undoubtedly comes within the purview of the
words "disputed assessments" or of "other matters
arising under the National Internal Revenue Code . . . .In
the case of Blaquera vs. Rodriguez, et al, 2 this Court
ruled that "the determination of the correctness or
incorrectness of a tax assessment to which the
taxpayer is not agreeable, falls within the jurisdiction of
the Court of Tax Appeals and not of the Court of First
Instance, for under the provisions of Section 7 of
Republic Act No. 1125, the Court of Tax Appeals
has exclusive appellate jurisdiction to review, on appeal,
any decision of the Collector of Internal Revenue in
cases involving disputed assessments and other matters
arising under the National Internal Revenue Code or
other law or part of law administered by the Bureau of
Internal Revenue."
Thus, even assuming arguendo that the right granted the
taxpayers affected to question and appeal disputed
assessments, under section 7 of Republic Act No. 1125, may
be availed of by strangers or informers like the late Maniago,
the most that he could have done was to appeal to the Court of
Tax Appeals the ruling of petitioner Commissioner of Internal
Revenue within thirty (30) days from receipt thereof pursuant to
section 11 of Republic Act No. 1125. 3 He failed to take such
an appeal to the tax court. The ruling is clearly final and
no longer subject to review by the courts. 4
It is furthermore a well-recognized rule that mandamus only
lies to enforce the performance of a ministerial act or
duty 5 and not to control the performance of a
discretionary power. 6 Purely administrative and
discretionary functions may not be interfered with by the
courts. 7 Discretion, as thus intended, means the power
or right conferred upon the office by law of acting
officially under certain circumstances according to the
dictates of his own judgment and conscience and not
controlled by the judgment or conscience of
others. 8 mandamus may not be resorted to so as to
interfere with the manner in which the discretion shall be
exercised or to influence or coerce a particular
determination. 9
In an analogous case, where a petitioner sought to
compel the Rehabilitation Finance Corporation to accept
payment of the balance of his indebtedness with his
backpay certificates, the Court ruled that "mandamus
does not compel the Rehabilitation Finance Corporation
to accept backpay certificates in payment of outstanding
loans. Although there is no provision expressly
authorizing such acceptance, nor is there one prohibiting
it, yet the duty imposed by the Backpay Law upon said
corporation as to the acceptance or discount of backpay
certificates is neither clear nor ministerial, but
discretionary merely, and such special civil action does
not issue to control the exercise of discretion of a public
officer." 10 Likewise, we have held that courts have no
power to order the Commissioner of Customs to
confiscate goods imported in violation of the Import
Control Law, R.A. 426, as said forfeiture is subject to the
discretion of the said official, 11 nor may courts control the
determination of whether or not an applicant for a visa
has a non-immigrant status or whether his entry into this
country would be contrary to public safety for it is not a
simple ministerial function but an exercise of discretion. 12
only when the discharge of the same requires neither the
exercise of official discretion or judgment." 14
Thus, after the Commissioner who is specifically
charged by law with the task of enforcing and
implementing the tax laws and the collection of taxes
had after a mature and thorough study rendered his
decision or ruling that no tax is due or collectible, and his
decision is sustained by the Secretary, now Minister of
Finance (whose act is that of the President unless
reprobated), such decision or ruling is a valid exercise of
discretion in the performance of official duty and cannot
be controlled much less reversed by mandamus. A
contrary view, whereby any stranger or informer would
be allowed to usurp and control the official functions of
the Commissioner of Internal Revenue would create
disorder and confusion, if not chaos and total disruption
of the operations of the government.
Considering then that respondent judge may not order by
mandamus the Commissioner to issue the assessment against
Meralco Securities Corporation when no such assessment has
been found to be due, no deficiency taxes may therefore be
assessed and collected against the said corporation. Since no
taxes are to be collected, no informer's reward is due to private
respondents as the informer's heirs. Informer's reward is
contingent upon the payment and collection of unpaid or
deficiency taxes. An informer is entitled by way of reward only
to a percentage of the taxes actually assessed and collected.
Since no assessment, much less any collection, has been
made in the instant case, respondent judge's writ for the
Commissioner to pay respondents 25% informer's reward is
gross error and without factual nor legal basis.
WHEREFORE, the petitions are hereby granted and the
questioned decision of respondent judge dated January 10,
1973 and order dated April 6, 1973 are hereby reversed and
set aside. With costs against private respondents.
Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur.

Moreover, since the office of the Commissioner of

Internal Revenue is charged with the administration of
revenue laws, which is the primary responsibility of the
executive branch of the government, mandamus may
not he against the Commissioner to compel him to
impose a tax assessment not found by him to be due or
proper for that would be tantamount to a usurpation of
executive functions. As we held in the case
of Commissioner of Immigration vs. Arca 13 anent this
principle, "the administration of immigration laws is the
primary responsibility of the executive branch of the
government. Extensions of stay of aliens are
discretionary on the part of immigration authorities, and
neither a petition for mandamus nor one for certiorari
can compel the Commissioner of Immigration to extend
the stay of an alien whose period to stay has expired.

Such discretionary power vested in the proper executive

official, in the absence of arbitrariness or grave abuse so as to
go beyond the statutory authority, is not subject to the contrary
judgment or control of others. " "Discretion," when applied to
public functionaries, means a power or right conferred upon
them by law of acting officially, under certain circumstances,
uncontrolled by the judgment or consciences of others. A
purely ministerial act or duty in contradiction to a discretional
act is one which an officer or tribunal performs in a given state
of facts, in a prescribed manner, in obedience to the mandate
of a legal authority, without regard to or the exercise of his own
judgment upon the propriety or impropriety of the act done. If
the law imposes a duty upon a public officer and gives him the
right to decide how or when the duty shall be performed, such
duty is discretionary and not ministerial. The duty is ministerial
G.R. No. 81446 August 18, 1988
BONIFACIA SY PO, petitioner,
vs.
HONORABLE COURT OF TAX APPEALS AND
HONORABLE COMMISSIONER OF INTERNAL
REVENUE, respondents.
Basilio E. Duaban for petitioner.
SARMIENTO, J.:
1 ERRED IN DECIDING THE CASE IN A WAY CONTRARY TO
This is an appeal from the decision of the respondent Court of
Tax Appeals, dated September 30,1987, which affirmed an
earlier decision of the correspondent Commissioner of Internal
Revenue in assessment letters dated August 16, 1972 and
September 26, 1972, which ordered the payment by the
petitioner of deficiency income tax for 1966 to 1970 in the
amount of P7,154,685.16 and deficiency specific tax for
January 2, 1964 to January 19, 1972, in the amount of
P5,595,003.68.
We adopt the respondent court's finding of facts, to wit:
Petitioner is the widow of the late Mr. Po Bien Sing who died
on September 7, 1980. In the taxable years 1964 to 1972, the
deceased Po Bien Sing was the sole proprietor of Silver Cup
Wine Factory (Silver Cup for brevity), Talisay, Cebu. He was
engaged in the business of manufacture and sale of
compounded liquors, using alcohol and other ingredients as
raw materials.
On the basis of a denunciation against Silver Cup allegedly "for
tax evasion amounting to millions of pesos" the then Secretary
of Finance Cesar Virata directed the Finance-BIR--NBI team
constituted under Finance Department Order No. 13-70 dated
February 19, 1971 (Exh- 3, pp. 532-553, Folder II, BIR rec.) to
conduct the corresponding investigation in a memorandum
dated April 2, 1971 (p. 528, Folder II, BIR rec.). Accordingly, a
letter and a subpoena duces tecum dated April 13,1971 and
May 3,1971, respectively, were issued against Silver Cup
requesting production of the accounting records and other
related documents for the examination of the team. (Exh. 11,
pp. 525-526, Folder II, BIR rec.). Mr. Po Bien Sing did not
produce his books of accounts as requested (Affidavit dated
December 24, 1971 of Mr. Generoso. Quinain of the team, p.
525, Folder H, BIR rec.). This prompted the team with the
assistance of the PC Company, Cebu City, to enter the factory
bodega of Silver Cup and seized different brands, consisting of
1,555 cases of alcohol products. (Exh. 22, Memorandum
Report of the Team dated June 5, 1971, pp. 491-492, Folder II,
BIR rec.). The inventory lists of the seized alcohol products are
contained in Volumes I, II, III, IV and V (Exhibits 14, 15, 16, 17,
and 18, respectively, BIR rec.). On the basis of the team's
report of investigation, the respondent Commissioner of
Internal Revenue assessed Mr. Po Bien Sing deficiency
income tax for 1966 to 1970 in the amount of P7,154,685.16
(Exh. 6 pp. 17-19, Folder I, BIR rec.) and for deficiency specific
tax for January 2,1964 to January 19, 1972 in the amount of
P5,595,003.68 (Exh. 8, p. 107, Folder I, BIR rec.).
Petitioner protested the deficiency assessments through letters
dated October 9 and October 30, 1972 (Exhs. 7 and 9, pp. 27-
28; pp. 152-159, respectively, BIR rec.), which protests were
referred for reinvestigation. The corresponding report dated
August 13, 1981 (Exh. 1 0, pp. 355, Folder I, BIR rec.)
recommended the reiteration of the assessments in view of the
taxpayer's persistent failure to present the books of accounts
for examination (Exh. 8, p. 107, Folder I, BIR rec.), compelling
respondent to issue warrants of distraint and levy on
September 10, 1981 (Exh. 11, p. 361, Folder I, BIR rec.).
The warrants were admittedly received by petitioner on
October 14, 1981 (Par. IX, Petition; admitted par. 2, Answer),
which petitioner deemed respondent's decision denying her
protest on the subject assessments. Hence, petitioner's appeal
on October 29,1981. 2
The petitioner assigns the following errors:
I
RESPONDENT INTENTIONALLY ERRED IN HOLDING THAT
PETITIONER HAS NOT PRESENTED ANY EVIDENCE OF
RELEVANCE AND COMPETENCE REQUIRED TO BASH
THE TROUBLING DISCREPANCIES AND SQUARE THE
ISSUE OF ILLEGALITY POSITED ON THE SUBJECT
ASSESSMENTS.
II
RESPONDENT COURT OF TAX APPEALS PALPABLY
THE DOCTRINES ALREADY LAID DOWN BY THIS COURT.
III
RESPONDENT COURT OF TAX APPEALS GRAVELY
ERRED IN FINDING PO BEEN SING TO HAVE INCURRED
THE ALLEGED DEFICIENCY TAXES IN QUESTION. 3
We affirm.
Settled is the rule that the factual findings of the Court of Tax
Appeals are binding upon this Honorable Court and can only
be disturbed on appeal if not supported by substantial
evidence.4
The assignments of errors boils down to a single issue
previously raised before the respondent Court, i.e., whether or
not the assessments have valid and legal bases.
The applicable legal provision is Section 16(b) of the National
Internal Revenue Code of 1977 as amended. It reads:
Sec. 16. Power of the Commissioner of Internal Revenue to
make assessments.
xxx xxx xxx
(b) Failure to submit required returns, statements, reports and
other documents. - When a report required by law as a basis
for the assessment of an national internal revenue tax shall not
be forthcoming within the time fixed by law or regulation or
when there is reason to believe that any such report is false,
incomplete, or erroneous, the Commissioner of Internal
Revenue shall assess the proper tax on the best evidence
obtainable.
In case a person fails to file a required return or other
document at the time prescribed by law, or willfully or
otherwise, files a false or fraudulent return or other documents,
the Commissioner shall make or amend the return from his
own knowledge and from such information as he can obtain
through testimony or otherwise, which shall be prima
facie correct and sufficient for all legal purposes.
The law is specific and clear. The rule on the "best evidence
obtainable" applies when a tax report required by law for the
purpose of assessment is not available or when the tax report
is incomplete or fraudulent.
In the instant case, the persistent failure of the late Po Bien
Sing and the herein petitioner to present their books of
accounts for examination for the taxable years involved left the
Commissioner of Internal Revenue no other legal option except
to resort to the power conferred upon him under Section 16 of
the Tax Code.
The tax figures arrived at by the Commissioner of Internal
Revenue are by no means arbitrary. We reproduce the
respondent court's findings, to wit:
As thus shown, on the basis of the quantity of bottles of wines
seized during the raid and the sworn statements of former
employees Messrs. Nelson S. Po and Alfonso Po taken on
May 26, and 27,1971, respectively, by the investigating team in
Cebu City (Exhs. 4 and 5, pp. 514-517, pp. 511-513, Folder 11,
BIR rec.), it was ascertained that the Silver Cup for the years
1964 to 1970, inclusive, utilized and consumed in the
manufacture of compounded liquours and other products
20,105 drums of alcohol as raw materials 81,288,787 proof
liters of alcohol. As determined, the total specific tax liability of
the taxpayer for 1964 to 1971 amounted to P5,593,003.68
(Exh. E, petition, p. 10, CTA rec.)
Likewise, the team found due from Silver Cup deficiency
income taxes for the years 1966 to 1970 inclusive in the
aggregate sum of P7,154,685.16, as follows:
1966 P207,636.24
1967 645,335.04
1968 1,683,588.48
1969 1,589,622.48
1970 3,028,502.92
Total amount due.
and collectible P7,154,685.16
going to operate for the day. After the storekeeper leaves, the
illegal operation then begins. Untaxed alcohol is brought in
from Cebu Alcohol Plant into the compound of Silver Cup
sometimes at about 6:00 A.M. or at 12:00 noon or in the
evening or even at mid-night when the storekeeper is not
around. When the storekeeper comes, he sees nothing
because untaxed alcohol is brought directly to, and stored at, a
secret tunnel within the bodega itself inside the compound of
Silver Cup.
In the same vein, the factory personnel manager testified that
false entries were entered in the official register book: thus,
A As factory personnel manager and all-around handy man
of Po Bien Sing, owner of Silver Cup, these labels were
entrusted to me to make the false entries in the official register
book of Silver Cup, which I did under the direction of Po Bien
Sing. (Sworn statement, p. 512, Folder II, BIR
rec.) 10 (Emphasis ours)
The existence of fraud as found by the respondents can not be
lightly set aside absent substantial evidence presented by the
petitioner to counteract such finding. The findings of fact of the
respondent Court of Tax Appeals are entitled to the highest
respect.11 We do not find anything in the questioned decision
that should disturb this long-established doctrine.
WHEREFORE, the Petition is DENIED. The Decision of the
respondent Court of Tax Appeals is hereby AFFIRMED. Costs
against the petitioner.

SO ORDERED.

The 50% surcharge has been imposed, pursuant to Section

72 * of the Tax Code and tax 1/2% monthly interest has
likewise been imposed pursuant to the provision of Section
51(d) ** of the Tax Code (Exh. O, petition). 5

The petitioner assails these assessments as wrong.

In the case of Collector of Internal Revenue vs. Reyes, 6 we

ruled:

Where the taxpayer is appealing to the tax court on the ground

that the Collector's assessment is erroneous, it is incumbent
upon him to prove there what is the correct and just liability by
a full and fair disclosure of all pertinent data in his possession.
Otherwise, if the taxpayer confines himself to proving that the
tax assessment is wrong, the tax court proceedings would
settle nothing, and the way would be left open for subsequent
assessments and appeals in interminable succession.

Tax assessments by tax examiners are presumed correct and

made in good faith. The taxpayer has the duty to prove
otherwise. 7 In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau
of Internal Revenue examiner and approved by his superior
officers will not be disturbed. 8 All presumptions are in favor of
the correctness of tax assessments. 9

On the whole, we find that the fraudulent acts detailed in the

decision under review had not been satisfactorily rebutted by
the petitioner. There are indeed clear indications on the part of
the taxpayer to deprive the Government of the taxes due. The
Assistant Factory Superintendent of Silver Cup, Nelson Po
gave the following testimony:

Annexes "A", "A-1 " to "A-17" show that from January to

December 1970, Silver Cup had used in production 189 drums
of untaxed distilled alcohol and 3,722 drums of untaxed
distilled alcohol. Can you tell us how could this be possible with
the presence of a revenue inspector in the premises of Silver
Cup during working hours?

Actually, the revenue inspector or storekeeper comes around

once a week on the average. Sometimes, when the
storekeeper is around in the morning and Po Bein Sing wants
to operate with untaxed alcohol as raw materials, Po Bien Sing
tells the storekeeper to go home because the factory is not
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E.
SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M.
RUIZ, MISAEL P. VERA, in his capacity as Commissioner
of Internal Revenue, ARTURO LOGRONIO, RODOLFO DE
LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR
ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN
DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin, for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor
General Crispin V . Bautista, Solicitor Pedro A. Ramirez
and Special Attorney Jaime M. Maza for Respondents.
DECISION
VILLAMOR, J.:
This is an original action of certiorari, prohibition and
mandamus, with prayer for a writ of preliminary mandatory and
prohibitory injunction. In their petition Bache & Co. (Phil.), Inc.,
a corporation duly organized and existing under the laws of the
Philippines, and its President, Frederick E. Seggerman, pray
this Court to declare null and void Search Warrant No. 2-M-70
issued by respondent Judge on February 25, 1970; to order
respondents to desist from enforcing the same and/or keeping
the documents, papers and effects seized by virtue thereof, as
well as from enforcing the tax assessments on petitioner
corporation alleged by petitioners to have been made on the
basis of the said documents, papers and effects, and to order
the return of the latter to petitioners. We gave due course to
the petition but did not issue the writ of preliminary injunction
prayed for therein.
The pertinent facts of this case, as gathered from record, are
as follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera,
Commissioner of Internal Revenue, wrote a letter addressed to
respondent Judge Vivencio M. Ruiz requesting the issuance of
a search warrant against petitioners for violation of Section
46(a) of the National Internal Revenue Code, in relation to all
other pertinent provisions thereof, particularly Sections 53, 72,
73, 208 and 209, and authorizing Revenue Examiner Rodolfo
de Leon, one of herein respondents, to make and file the
application for search warrant which was attached to the letter.
In the afternoon of the following day, February 25, 1970,
respondent De Leon and his witness, respondent Arturo
Logronio, went to the Court of First Instance of Rizal. They
brought with them the following papers: respondent Veras
aforesaid letter-request; an application for search warrant
already filled up but still unsigned by respondent De Leon; an
affidavit of respondent Logronio subscribed before respondent
De Leon; a deposition in printed form of respondent Logronio
already accomplished and signed by him but not yet
subscribed; and a search warrant already accomplished but
still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so,
by means of a note, he instructed his Deputy Clerk of Court to
take the depositions of respondents De Leon and Logronio.
After the session had adjourned, respondent Judge was
informed that the depositions had already been taken. The
stenographer, upon request of respondent Judge, read to him
her stenographic notes; and thereafter, respondent Judge
asked respondent Logronio to take the oath and warned him
that if his deposition was found to be false and without legal
basis, he could be charged for perjury. Respondent Judge
signed respondent de Leons application for search warrant
and respondent Logronios deposition, Search Warrant No. 2-
M-70 was then sign by respondent Judge and accordingly
issued.
Three days later, or on February 28, 1970, which was a
Saturday, the BIR agents served the search warrant petitioners
at the offices of petitioner corporation on Ayala Avenue,
Makati, Rizal. Petitioners lawyers protested the search on the
ground that no formal complaint or transcript of testimony was
attached to the warrant. The agents nevertheless proceeded
with their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of
First Instance of Rizal praying that the search warrant be
quashed, dissolved or recalled, that preliminary prohibitory and
mandatory writs of injunction be issued, that the search
warrant be declared null and void, and that the respondents be
ordered to pay petitioners, jointly and severally, damages and
attorneys fees. On March 18, 1970, the respondents, thru the
Solicitor General, filed an answer to the petition. After hearing,
the court, presided over by respondent Judge, issued on July
29, 1970, an order dismissing the petition for dissolution of the
search warrant. In the meantime, or on April 16, 1970, the
Bureau of Internal Revenue made tax assessments on
petitioner corporation in the total sum of P2,594,729.97, partly,
if not entirely, based on the documents thus seized. Petitioners
came to this Court.
The petition should be granted for the following
reasons:chanrob1es virtual 1aw library
1. Respondent Judge failed to personally examine the
complainant and his witness.
The pertinent provisions of the Constitution of the Philippines
and of the Revised Rules of Court are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons,
houses, papers and effects against unreasonable searches
and seizures shall not be violated, and no warrants shall issue
but upon probable cause, to be determined by the judge after
examination under oath or affirmation of the complainant and
the witnesses he may produce, and particularly describing the
place to be searched, and the persons or things to be seized."
(Art. III, Sec. 1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. A search
warrant shall not issue but upon probable cause in connection
with one specific offense to be determined by the judge or
justice of the peace after examination under oath or affirmation
of the complainant and the witnesses he may produce, and
particularly describing the place to be searched and the
persons or things to be seized.
"No search warrant shall issue for more than one specific
offense.
"SEC. 4. Examination of the applicant. The judge or justice
of the peace must, before issuing the warrant, personally
examine on oath or affirmation the complainant and any
witnesses he may produce and take their depositions in
writing, and attach them to the record, in addition to any
affidavits presented to him." (Rule 126, Revised Rules of
Court.)
The examination of the complainant and the witnesses he may
produce, required by Art. III, Sec. 1, par. 3, of the Constitution,
and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court,
should be conducted by the judge himself and not by others.
The phrase "which shall be determined by the judge after
examination under oath or affirmation of the complainant and
the witnesses he may produce," appearing in the said
constitutional provision, was introduced by Delegate Francisco
as an amendment to the draft submitted by the Sub-Committee
of Seven. The following discussion in the Constitutional
Convention (Laurel, Proceedings of the Philippine
Constitutional Convention, Vol. III, pp. 755-757) is
enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compaero los piropos y vamos
al grano.
En los casos de una necesidad de actuar inmediatamente para
que no se frusten los fines de la justicia mediante el registro
inmediato y la incautacion del cuerpo del delito, no cree Su
Seoria que causaria cierta demora el procedimiento apuntado
en su enmienda en tal forma que podria frustrar los fines de la
justicia o si Su Seoria encuentra un remedio para esto casos
con el fin de compaginar los fines de la justicia con los
derechos del individuo en su persona, bienes etcetera,
etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso
hipottico que Su Seoria pregunta por la siguiente razon: el
que solicita un mandamiento de registro tiene que hacerlo por
escrito y ese escrito no aparecer en la Mesa del Juez sin que
alguien vaya el juez a presentar ese escrito o peticion de
sucuestro. Esa persona que presenta el registro puede ser el
mismo denunciante o alguna persona que solicita dicho
mandamiento de registro. Ahora toda la enmienda en esos
casos consiste en que haya peticion de registro y el juez no se
atendra solamente a sea peticion sino que el juez examiner a
ese denunciante y si tiene testigos tambin examiner a los
testigos.
"SR. ORENSE. No cree Su Seoria que el tomar le
declaracion de ese denunciante por escrito siempre requeriria
algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por
otro lado minimizamos en todo lo posible las vejaciones
injustas con la expedicion arbitraria de los mandamientos de
registro. Creo que entre dos males debemos escoger. el
menor.
x x x thus limited to listening to the stenographers readings of her
"MR. LAUREL. . . . The reason why we are in favor of this
amendment is because we are incorporating in our constitution
something of a fundamental character. Now, before a judge
could issue a search warrant, he must be under the obligation
to examine personally under oath the complainant and if he
has any witness, the witnesses that he may produce . .
."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4,
Rule 126, is more emphatic and candid, for it requires the
judge, before issuing a search warrant, to "personally examine
on oath or affirmation the complainant and any witnesses he
may produce . . ."cralaw virtua1aw library
Personal examination by the judge of the complainant and his
witnesses is necessary to enable him to determine the
existence or non-existence of a probable cause, pursuant to
Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126
of the Revised Rules of Court, both of which prohibit the
issuance of warrants except "upon probable cause." The
determination of whether or not a probable cause exists calls
for the exercise of judgment after a judicial appraisal of facts
and should not be allowed to be delegated in the absence of
any rule to the contrary.
In the case at bar, no personal examination at all was
conducted by respondent Judge of the complainant
(respondent De Leon) and his witness (respondent Logronio).
While it is true that the complainants application for search
warrant and the witness printed-form deposition were
subscribed and sworn to before respondent Judge, the latter
did not ask either of the two any question the answer to which
could possibly be the basis for determining whether or not
there was probable cause against herein petitioners. Indeed,
the participants seem to have attached so little significance to
the matter that notes of the proceedings before respondent
Judge were not even taken. At this juncture it may be well to
recall the salient facts. The transcript of stenographic notes
(pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at
the hearing of this case in the court below shows that per
instruction of respondent Judge, Mr. Eleodoro V. Gonzales,
Special Deputy Clerk of Court, took the depositions of the
complainant and his witness, and that stenographic notes
thereof were taken by Mrs. Gaspar. At that time respondent
Judge was at the sala hearing a case. After respondent Judge
was through with the hearing, Deputy Clerk Gonzales,
stenographer Gaspar, complainant De Leon and witness
Logronio went to respondent Judges chamber and informed
the Judge that they had finished the depositions. Respondent
Judge then requested the stenographer to read to him her
stenographic notes. Special Deputy Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the
Honorable Judge requested or instructed them, requested Mr.
Logronio to raise his hand and warned him if his deposition will
be found to be false and without legal basis, he can be
charged criminally for perjury. The Honorable Court told Mr.
Logronio whether he affirms the facts contained in his
deposition and the affidavit executed before Mr. Rodolfo de
Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
"A The Honorable Judge.
"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings
which led to the issuance of Search Warrant No. 2-M-70 was
notes, to a few words of warning against the commission of
perjury, and to administering the oath to the complainant and
his witness. This cannot be consider a personal examination. If
there was an examination at all of the complainant and his
witness, it was the one conducted by the Deputy Clerk of
Court. But, as stated, the Constitution and the rules require a
personal examination by the judge. It was precisely on account
of the intention of the delegates to the Constitutional
Convention to make it a duty of the issuing judge to personally
examine the complainant and his witnesses that the question
of how much time would be consumed by the judge in
examining them came up before the Convention, as can be
seen from the record of the proceedings quoted above. The
reading of the stenographic notes to respondent Judge did not
constitute sufficient compliance with the constitutional mandate
and the rule; for by that manner respondent Judge did not have
the opportunity to observe the demeanor of the complainant
and his witness, and to propound initial and follow-up
questions which the judicial mind, on account of its training,
was in the best position to conceive. These were important in
arriving at a sound inference on the all-important question of
whether or not there was probable cause.
2. The search warrant was issued for more than one specific
offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec.
46(a) of the National Internal Revenue Code in relation to all
other pertinent provisions thereof particularly Secs. 53, 72, 73,
208 and 209." The question is: Was the said search warrant
issued "in connection with one specific offense," as required by
Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine
closely the provisions of the Tax Code referred to above. Thus
we find the following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by
corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax
returns and for rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax,
to make a return or to supply the information required under
the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies,
repacks, compounds, or manufactures any article subject to a
specific tax, without having paid the privilege tax therefore, or
who aids or abets in the conduct of illicit distilling, rectifying,
compounding, or illicit manufacture of any article subject to
specific tax . . .," and provides that in the case of a corporation,
partnership, or association, the official and/or employee who
caused the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts,
sales, business, or gross value of output removed, or to pay
the tax due thereon.
The search warrant in question was issued for at least four
distinct offenses under the Tax Code. The first is the violation
of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax
returns), which are interrelated. The second is the violation of
Sec. 53 (withholding of income taxes at source). The third is
the violation of Sec. 208 (unlawful pursuit of business or
occupation); and the fourth is the violation of Sec. 209 (failure
to make a return of receipts, sales, business or gross value of
output actually removed or to pay the tax due thereon). Even in
their classification the six above-mentioned provisions are
embraced in two different titles: Secs. 46(a), 53, 72 and 73 are
under Title II (Income Tax); while Secs. 208 and 209 are under
Title V (Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-
19550, June 19, 1967 (20 SCRA 383), is not applicable,
because there the search warrants were issued for "violation of
Central Bank Laws, Internal Revenue (Code) and Revised
Penal Code;" whereas, here Search Warrant No 2-M-70 was
issued for violation of only one code, i.e., the National Internal
Revenue Code. The distinction more apparent than real,
because it was precisely on account of the Stonehill incident,
which occurred sometime before the present Rules of Court
took effect on January 1, 1964, that this Court amended the
former rule by inserting therein the phrase "in connection with
one specific offense," and adding the sentence "No search
warrant shall issue for more than one specific offense," in what
is now Sec. 3, Rule 126. Thus we said in
Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in
connection with the disputed search warrants, that this Court
deemed it fit to amend Section 3 of Rule 122 of the former
Rules of Court that a search warrant shall not issue but upon
probable cause in connection with one specific offense. Not
satisfied with this qualification, the Court added thereto a
paragraph, directing that no search warrant shall issue for
more than one specific offense."
3. The search warrant does not particularly describe the things
to be seized.
The documents, papers and effects sought to be seized are
described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals,
columnars, receipts and disbursements books, customers
ledgers); receipts for payments received; certificates of stocks
and securities; contracts, promissory notes and deeds of sale;
telex and coded messages; business communications,
accounting and business records; checks and check stubs;
records of bank deposits and withdrawals; and records of
foreign remittances, covering the years 1966 to 1970."cralaw
virtua1aw library
The description does not meet the requirement in Art III, Sec.
1, of the Constitution, and of Sec. 3, Rule 126 of the Revised
Rules of Court, that the warrant should particularly describe the
things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto
Concepcion, said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application
for the contested search warrants was compounded by the
description therein made of the effects to be searched for and
seized, to wit:chanrob1es virtual 1aw library
Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals,
typewriters, and other documents and/or paper showing all
business transactions including disbursement receipts, balance
sheets and related profit and loss statements.
"Thus, the warrants authorized the search for and seizure of
records pertaining to all business transactions of petitioners
herein, regardless of whether the transactions were legal or
illegal. The warrants sanctioned the seizure of all records of
the petitioners and the aforementioned corporations, whatever
their nature, thus openly contravening the explicit command of
our Bill of Rights that the things to be seized be particularly
described as well as tending to defeat its major objective:
the elimination of general warrants."cralaw virtua1aw library
While the term "all business transactions" does not appear in
Search Warrant No. 2-M-70, the said warrant nevertheless
tends to defeat the major objective of the Bill of Rights, i.e., the
elimination of general warrants, for the language used therein
is so all-embracing as to include all conceivable records of
petitioner corporation, which, if seized, could possibly render
its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896,
this Court had occasion to explain the purpose of the
requirement that the warrant should particularly describe the
place to be searched and the things to be seized, to
wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58
(sec. 97) specifically require that a search warrant should
particularly describe the place to be searched and the things to
be seized. The evident purpose and intent of this requirement
is to limit the things to be seized to those, and only those,
particularly described in the search warrant to leave the
officers of the law with no discretion regarding what articles
they shall seize, to the end that unreasonable searches and
seizures may not be made, that abuses may not be
committed. That this is the correct interpretation of this
constitutional provision is borne out by American
authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be
defeated under the search warrant issued in this case.
A search warrant may be said to particularly describe the
things to be seized when the description therein is as specific
as the circumstances will ordinarily allow (People v. Rubio; 57
Phil. 384); or when the description expresses a conclusion of
fact not of law by which the warrant officer may be
guided in making the search and seizure (idem., dissent of
Abad Santos, J.,); or when the things described are limited to
those which bear direct relation to the offense for which the
warrant is being issued (Sec. 2, Rule 126, Revised Rules of
Court). The herein search warrant does not conform to any of
the foregoing tests. If the articles desired to be seized have
any direct relation to an offense committed, the applicant must
necessarily have some evidence, other than those articles, to
prove the said offense; and the articles subject of search and
seizure should come in handy merely to strengthen such
evidence. In this event, the description contained in the herein
disputed warrant should have mentioned, at least, the dates,
amounts, persons, and other pertinent data regarding the
receipts of payments, certificates of stocks and securities,
contracts, promissory notes, deeds of sale, messages and
communications, checks, bank deposits and withdrawals,
records of foreign remittances, among others, enumerated in
the warrant.
Respondents contend that certiorari does not lie because
petitioners failed to file a motion for reconsideration of
respondent Judges order of July 29, 1970. The contention is
without merit. In the first place, when the questions raised
before this Court are the same as those which were squarely
raised in and passed upon by the court below, the filing of a
motion for reconsideration in said court before certiorari can be
instituted in this Court is no longer a prerequisite. (Pajo, etc.,
Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the
rule requiring the filing of a motion for reconsideration before
an application for a writ of certiorari can be entertained was
never intended to be applied without considering the
circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In
the case at bar time is of the essence in view of the tax
assessments sought to be enforced by respondent officers of
the Bureau of Internal Revenue against petitioner corporation, PREMISES CONSIDERED, the petition is granted.
On account of which immediate and more direct action Accordingly, Search Warrant No. 2-M-70 issued by respondent
becomes necessary. (Matute v. Court of Appeals, Et Al., 26 Judge is declared null and void; respondents are permanently
SCRA 768.) Lastly, the rule does not apply where, as in this enjoined from enforcing the said search warrant; the
case, the deprivation of petitioners fundamental right to due documents, papers and effects seized thereunder are ordered
process taints the proceeding against them in the court below to be returned to petitioners; and respondent officials the
not only with irregularity but also with nullity. (Matute v. Court Bureau of Internal Revenue and their representatives are
of Appeals, Et Al., supra.) permanently enjoined from enforcing the assessments
mentioned in Annex "G" of the present petition, as well as
It is next contended by respondents that a corporation is not other assessments based on the documents, papers and
entitled to protection against unreasonable search and effects seized under the search warrant herein nullified, and
seizures. Again, we find no merit in the contention. from using the same against petitioners in any criminal or other
proceeding. No pronouncement as to costs.
"Although, for the reasons above stated, we are of the opinion
that an officer of a corporation which is charged with a violation Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando,
of a statute of the state of its creation, or of an act of Congress Teehankee and Makasiar, JJ., concur.
passed in the exercise of its constitutional powers, cannot
refuse to produce the books and papers of such corporation, Reyes, J.B.L., J., concurs with Mr. Justice Barredo.
we do not wish to be understood as holding that a corporation
is not entitled to immunity, under the 4th Amendment, against Castro, J., concurs in the result.
unreasonable searches and seizures. A corporation is, after all,
but an association of individuals under an assumed name and
with a distinct legal entity. In organizing itself as a collective
body it waives no constitutional immunities appropriate to such
body. Its property cannot be taken without compensation. It
can only be proceeded against by due process of law, and is
protected, under the 14th Amendment, against unlawful
discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed.
652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it
was thought that a different rule applied to a corporation, the
ground that it was not privileged from producing its books and
papers. But the rights of a corporation against unlawful search
and seizure are to be protected even if the same result might
have been achieved in a lawful way." (Silverthorne Lumber
Company, Et. Al. v. United States of America, 251 U.S. 385, 64
L. ed. 319.)

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly

recognized the right of a corporation to object against
unreasonable searches and seizures,
thus:jgc:chanrobles.com.ph

"As regards the first group, we hold that petitioners herein have
no cause of action to assail the legality of the contested
warrants and of the seizures made in pursuance thereof, for
the simple reason that said corporations have their respective
personalities, separate and distinct from the personality of
herein petitioners, regardless of the amount of shares of stock
or the interest of each of them in said corporations, whatever,
the offices they hold therein may be. Indeed, it is well settled
that the legality of a seizure can be contested only by the party
whose rights have been impaired thereby, and that the
objection to an unlawful search and seizure is purely personal
and cannot be availed of by third parties. Consequently,
petitioners herein may not validly object to the use in evidence
against them of the documents, papers and things seized from
the offices and premises of the corporations adverted to above,
since the right to object to the admission of said papers in
evidence belongs exclusively to the corporations, to whom the
seized effects belong, and may not be invoked by the
corporate officers in proceedings against them in their
individual capacity . . ."cralaw virtua1aw library

In the Stonehill case only the officers of the various

corporations in whose offices documents, papers and effects
were searched and seized were the petitioners. In the case at
bar, the corporation to whom the seized documents belong,
and whose rights have thereby been impaired, is itself a
petitioner. On that score, petitioner corporation here stands on
a different footing from the corporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if

not entirely as claimed by petitioners at least partly as
in effect admitted by respondents based on the documents
seized by virtue of Search Warrant No. 2-M-70. Furthermore,
the fact that the assessments were made some one and one-
half months after the search and seizure on February 25, 1970,
is a strong indication that the documents thus seized served as
basis for the assessments. Those assessments should
therefore not be enforced.
 cigarettes packed by machine a tax at the
rates prescribed below based on the
G.R. No. 119761 August 29, 1996 constructive manufacturer's wholesale price
or the actual manufacturer's wholesale price,
whichever is higher:
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
HON. COURT OF APPEALS, HON. COURT OF TAX (1) On locally manufactured cigarettes which
APPEALS and FORTUNE TOBACCO are currently classified and taxed at fifty-five
CORPORATION, respondents. percent (55%) or the exportation of which is
not authorized by contract or otherwise, fifty-
five (55%) provided that the minimum tax
shall not be less than Five Pesos (P5.00) per
pack.
VITUG, J.:p
(2) On other locally manufactured cigarettes,
The Commissioner of Internal Revenue ("CIR") disputes the decision, dated forty-five percent (45%) provided that the
31 March 1995, of respondent Court of Appeals 1 affirming the 10th August minimum tax shall not be less than Three
1994 decision and the 11th October 1994 resolution of the Court of Tax Pesos (P3.00) per pack.
Appeals 2 ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco
Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner
of Internal Revenue." xxx xxx xxx

The facts, by and large, are not in dispute. When the registered manufacturer's
wholesale price or the actual manufacturer's
Fortune Tobacco Corporation ("Fortune Tobacco") is engaged wholesale price whichever is higher of
in the manufacture of different brands of cigarettes. existing brands of cigarettes, including the
amounts intended to cover the taxes, of
cigarettes packed in twenties does not
On various dates, the Philippine Patent Office issued to the
exceed Four Pesos and eighty centavos
corporation separate certificates of trademark registration over
(P4.80) per pack, the rate shall be twenty
"Champion," "Hope," and "More" cigarettes. In a letter, dated
percent (20%). (Emphasis supplied)
7

06 January 1987, of then Commissioner of Internal Revenue

Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the
Presidential Commission on Good Government, "the initial About a month after the enactment and two (2)
position of the Commission was to classify 'Champion,' 'Hope,' days before the effectivity of RA 7654, Revenue
and 'More' as foreign brands since they were listed in the Memorandum Circular No. 37-93 ("RMC 37-93"), was
World Tobacco Directory as belonging to foreign companies. issued by the BIR the full text of which expressed:
However, Fortune Tobacco changed the names of 'Hope' to
'Hope Luxury' and 'More' to 'Premium More,' thereby removing REPUBLIKA NG PILIPINAS
the said brands from the foreign brand category. Proof was KAGAWARAN NG PANANALAPI
also submitted to the Bureau (of Internal Revenue ['BIR']) that KAWANIHAN NG RENTAS INTERNAS
'Champion' was an original Fortune Tobacco Corporation
register and therefore a local brand." Ad Valorem taxes were
3

imposed on these brands, at the following rates:

4

BRAND AD VALOREM TAX RATE

E.O. 22 and E.O. 273 RA 6956
06-23-86 07-25-87 06-18-90
07-01-86 01-01-88 07-05-90

Hope Luxury M. 100's

Sec. 142, (c), (2) 40% 45%
Hope Luxury M. King
Sec. 142, (c), (2) 40% 45%
More Premium M. 100's
Sec. 142, (c), (2) 40% 45% REVENUE MEMORANDUM CIRCULAR
More Premium International NO. 37-93
Sec. 142, (c), (2) 40% 45%
Champion Int'l. M. 100's
SUBJECT: Reclassification of Cigarettes
Sec. 142, (c), (2) 40% 45%
Subject to Excise Tax
Champion M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. King TO: All Internal Revenue Officers and Others
Sec. 142, (c), last par. 15% 20% Concerned.
Champion Lights
Sec. 142, (c), last par. 15% 20% 5
In view of the issues raised on whether
"HOPE," "MORE" and "CHAMPION"
A bill, which later became Republic Act ("RA") No. cigarettes which are locally manufactured
7654, was enacted, on 10 June 1993, by the
6 are appropriately considered as locally
legislature and signed into law, on 14 June 1993, by manufactured cigarettes bearing a foreign
the President of the Philippines. The new law became brand, this Office is compelled to review the
effective on 03 July 1993. It amended Section previous rulings on the matter.
142(c)(1) of the National Internal Revenue Code
("NIRC") to read; as follows: Section 142 (c)(1) National Internal Revenue
Code, as amended by R.A. No. 6956,
Sec. 142. Cigars and Cigarettes. provides:

xxx xxx xxx On locally manufactured

cigarettes bearing a
foreign brand, fifty-five
(c) Cigarettes packed by machine. There
percent (55%) Provided,
shall be levied, assessed and collected on
 That this rate shall apply
regardless of whether or
not the right to use or title
to the foreign brand was
sold or transferred by its
owner to the local
manufacturer. Whenever it
has to be determined
whether or not a cigarette
bears a foreign brand, the
listing of brands
manufactured in foreign
countries appearing in the
current World Tobacco
Directory shall govern.

Under the foregoing, the test for imposition

of the 55% ad valorem tax on cigarettes is
that the locally manufactured cigarettes bear
a foreign brand regardless of whether or not
the right to use or title to the foreign brand
was sold or transferred by its owner to the
local manufacturer. The brand must be
originally owned by a foreign manufacturer
or producer. If ownership of the cigarette
brand is, however, not definitely
determinable, ". . . the listing of brands
manufactured in foreign countries appearing
in the current World Tobacco Directory shall
govern. . . ."

"HOPE" is listed in the World Tobacco

Directory as being manufactured by (a)
Japan Tobacco, Japan and (b) Fortune
Tobacco, Philippines. "MORE" is listed in the
said directory as being manufactured by: (a)
Fills de Julia Reig, Andorra; (b) Rothmans,
Australia; (c) RJR-Macdonald Canada; (d)
Rettig-Strenberg, Finland; (e) Karellas,
Greece; (f) R.J. Reynolds, Malaysia; (g)
Rothmans, New Zealand; (h) Fortune
Tobacco, Philippines; (i) R.J. Reynolds,
Puerto Rico; (j) R.J. Reynolds, Spain; (k)
Tabacalera, Spain; (l) R.J. Reynolds,
Switzerland; and (m) R.J. Reynolds, USA.
"Champion" is registered in the said directory
as being manufactured by (a)
Commonwealth Bangladesh; (b) Sudan,
Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar,
Sudan; and (f) Tabac Reunies, Switzerland.
Since there is no showing who among the
above-listed manufacturers of the cigarettes
bearing the said brands are the real owner/s
On 02 July 1993, at about 17:50 hours, BIR Deputy
Commissioner Victor A. Deoferio, Jr., sent via
telefax a copy of RMC 37-93 to Fortune Tobacco but
it was addressed to no one in particular. On 15 July
1993, Fortune Tobacco received, by ordinary mail, a
certified xerox copy of RMC 37-93.
In a letter, dated 19 July 1993, addressed to the
appellate division of the BIR, Fortune Tobacco
requested for a review, reconsideration and recall of
RMC 37-93. The request was denied on 29 July 1993.
The following day, or on 30 July 1993, the CIR
assessed Fortune Tobacco for ad valorem tax
deficiency amounting to P9,598,334.00.
On 03 August 1993, Fortune Tobacco filed a petition
for review with the CTA.8

thereof, then it follows that the same shall be

considered foreign brand for purposes of
determining the ad valorem tax pursuant to
Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88,
dated August 24, 1988, "in cases where it
cannot be established or there is dearth of
evidence as to whether a brand is foreign or
not, resort to the World Tobacco Directory
should be made."
In view of the foregoing, the aforesaid
brands of cigarettes, viz: "HOPE," "MORE"
and "CHAMPION" being manufactured by
Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes
bearing a foreign brand subject to the
55% ad valorem tax on cigarettes.
Any ruling inconsistent herewith is revoked
or modified accordingly.
On 10 August 1994, the CTA upheld the position of
Fortune Tobacco and adjudged:
WHEREFORE, Revenue Memorandum
Circular No. 37-93 reclassifying the brands
of cigarettes, viz: "HOPE," "MORE" and
"CHAMPION" being manufactured by
Fortune Tobacco Corporation as locally
manufactured cigarettes bearing a foreign
brand subject to the 55% ad valorem tax on
cigarettes is found to be defective, invalid
and unenforceable, such that when R.A. No.
7654 took effect on July 3, 1993, the brands
in question were not CURRENTLY
CLASSIFIED AND TAXED at 55% pursuant
to Section 1142(c)(1) of the Tax Code, as
amended by R.A. No. 7654 and were
therefore still classified as other locally
manufactured cigarettes and taxed at 45% or
20% as the case may be.

Accordingly,
( the deficiency ad valorem tax
assessment
S issued on petitioner Fortune
Tobacco G
Corporation in the amount of
P9,598,334.00,
D exclusive of surcharge and
 interest, is hereby canceled for lack of legal INTO ITS
basis. CORRECTNESS OR
PROPRIETY; RMC 37-93
Respondent Commissioner of Internal IS CORRECT. 10

Revenue is hereby enjoined from collecting

the deficiency tax assessment made and In fine, petitioner opines that RMC 37-93 is merely an
issued on petitioner in relation to the interpretative ruling of the BIR which can thus become
implementation of RMC No. 37-93. effective without any prior need for notice and
hearing, nor publication, and that its issuance is not
SO ORDERED. 9 discriminatory since it would apply under similar
circumstances to all locally manufactured cigarettes.
In its resolution, dated 11 October 1994, the CTA
dismissed for lack of merit the motion for The Court must sustain both the appellate court and
reconsideration. the tax court.

The CIR forthwith filed a petition for review with the Petitioner stresses on the wide and ample authority of
Court of Appeals, questioning the CTA's 10th August the BIR in the issuance of rulings for the effective
1994 decision and 11th October 1994 resolution. On implementation of the provisions of the National
31 March 1993, the appellate court's Special Internal Revenue Code. Let it be made clear that such
Thirteenth Division affirmed in all respects the authority of the Commissioner is not here doubted.
assailed decision and resolution. Like any other government agency, however, the CIR
may not disregard legal requirements or applicable
principles in the exercise of its quasi-legislative
In the instant petition, the Solicitor General argues: powers.
That
Let us first distinguish between two kinds of
I. RMC 37-93 IS A administrative issuances a legislative rule and
RULING OR OPINION OF an interpretative rule.
THE COMMISSIONER OF
INTERNAL REVENUE
INTERPRETING THE In Misamis Oriental Association of Coco Traders,
PROVISIONS OF THE Inc., vs. Department of Finance Secretary, the Court
11

TAX CODE. expressed:

II. BEING AN . . . a legislative rule is in the nature of

INTERPRETATIVE subordinate legislation, designed to
RULING OR OPINION, implement a primary legislation by providing
THE PUBLICATION OF the details thereof . In the same way that
RMC 37-93, FILING OF laws must have the benefit of public hearing,
COPIES THEREOF WITH it is generally required that before a
THE UP LAW CENTER legislative rule is adopted there must be
AND PRIOR HEARING hearing. In this connection, the
ARE NOT NECESSARY Administrative Code of 1987 provides:
TO ITS VALIDITY,
EFFECTIVITY AND Public Participation. If not otherwise
ENFORCEABILITY. required by law, an agency shall, as far as
practicable, publish or circulate notices of
III. PRIVATE proposed rules and afford interested parties
RESPONDENT IS the opportunity to submit their views prior to
DEEMED TO HAVE BEEN the adoption of any rule.
NOTIFIED OR RMC 37-93
ON JULY 2, 1993. (2) In the fixing of rates, no rule or final order
shall be valid unless the proposed rates shall
IV. RMC 37-93 IS NOT have been published in a newspaper of
DISCRIMINATORY general circulation at least two (2) weeks
SINCE IT APPLIES TO before the first hearing thereon.
ALL LOCALLY
MANUFACTURED (3) In case of opposition, the rules on
CIGARETTES SIMILARLY contested cases shall be observed.
SITUATED AS "HOPE,"
"MORE" AND In addition such rule must be published. On
"CHAMPION" the other hand, interpretative rules are
CIGARETTES. designed to provide guidelines to the law
which the administrative agency is in charge
V. PETITIONER WAS of enforcing. 12

NOT LEGALLY
PROSCRIBED FROM It should be understandable that when an
RECLASSIFYING administrative rule is merely interpretative in nature,
"HOPE," "MORE" AND its applicability needs nothing further than its bare
"CHAMPION" issuance for it gives no real consequence more than
CIGARETTES BEFORE what the law itself has already prescribed. When,
THE EFFECTIVITY OF upon the other hand, the administrative rule goes
R.A. NO. 7654. beyond merely providing for the means that can
facilitate or render least cumbersome the
VI. SINCE RMC 37-93 IS implementation of the law but substantially adds to or
AN INTERPRETATIVE increases the burden of those governed, it behooves
RULE, THE INQUIRY IS the agency to accord at least to those directly affected
NOT INTO ITS VALIDITY, a chance to be heard, and thereafter to be duly
EFFECTIVITY OR informed, before that new issuance is given the force
ENFORCEABILITY BUT and effect of law.
A reading of RMC 37-93, particularly considering the due notice thereof may be
circumstances under which it has been issued, fairly presumed.
convinces us that the circular cannot be viewed
simply as a corrective measure (revoking in the Due notice of the said
process the previous holdings of past issuances may be fairly
Commissioners) or merely as construing Section presumed only after the
142(c)(1) of the NIRC, as amended, but has, in fact following procedures have
and most importantly, been made in order to place been taken;
"Hope Luxury," "Premium More" and "Champion"
within the classification of locally manufactured
cigarettes bearing foreign brands and to thereby have xxx xxx xxx
them covered by RA 7654. Specifically, the new law
would have its amendatory provisions applied to (5) Strict compliance with
locally manufactured cigarettes which at the time of its the foregoing procedures
effectivity were not so classified as bearing foreign is
brands. Prior to the issuance of the questioned enjoined. 13

circular, "Hope Luxury," "Premium More," and

"Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand
subject to 45% ad valorem tax. Hence, without RMC
37-93, the enactment of RA 7654, would have had no
new tax rate consequence on private respondent's
products. Evidently, in order to place "Hope Luxury,"
"Premium More," and "Champion" cigarettes within
the scope of the amendatory law and subject them to
an increased tax rate, the now disputed RMC 37-93
had to be issued. In so doing, the BIR not simply
intrepreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the
requirements of notice, of hearing, and of publication
should not have been then ignored.
Nothing on record could tell us that it was either
impossible or impracticable for the BIR to observe
and comply with the above requirements before giving
effect to its questioned circular.
Not insignificantly, RMC 37-93 might have likewise
infringed on uniformity of taxation.
Article VI, Section 28, paragraph 1, of the 1987
Constitution mandates taxation to be uniform and
equitable. Uniformity requires that all subjects or
objects of taxation, similarly situated, are to be treated
alike or put on equal footing both in privileges and
liabilities. Thus, all taxable articles or kinds of
14

Indeed, the BIR itself, in its RMC 10-86, has observed property of the same class must be taxed at the same
and provided: rate and the tax must operate with the same force
15

and effect in every place where the subject may be

RMC NO. 10-86
Effectivity of Internal Revenue Rules and
Regulations
It has been observed that one of the problem
areas bearing on compliance with Internal
Revenue Tax rules and regulations is lack or
insufficiency of due notice to the tax paying
public. Unless there is due notice, due
found.
Apparently, RMC 37-93 would only apply to "Hope
Luxury," "Premium More" and "Champion" cigarettes
and, unless petitioner would be willing to concede to
the submission of private respondent that the circular
should, as in fact my esteemed colleague Mr. Justice
Bellosillo so expresses in his separate opinion, be
considered adjudicatory in nature and thus violative of
due process following the Ang Tibay doctrine, the
16

compliance therewith may not be reasonably
expected. And most importantly, their strict
enforcement could possibly suffer from legal
infirmity in the light of the constitutional
provision on "due process of law" and the
essence of the Civil Code provision
concerning effectivity of laws, whereby due
notice is a basic requirement (Sec. 1, Art. IV,
Constitution; Art. 2, New Civil Code).
measure suffers from lack of uniformity of taxation. In
its decision, the CTA has keenly noted that other
cigarettes bearing foreign brands have not been
similarly included within the scope of the circular,
such as
1. Locally manufactured by ALHAMBRA
INDUSTRIES, INC.

In order that there shall be a just (a) "PALM TREE" is listed

enforcement of rules and regulations, in as manufactured by office
conformity with the basic element of due of Monopoly, Korea
process, the following procedures are hereby (Exhibit "R")
prescribed for the drafting, issuance and
implementation of the said Revenue Tax 2. Locally manufactured by LA SUERTE
Issuances: CIGAR and CIGARETTE COMPANY

(1) This Circular shall (a) "GOLDEN KEY" is

apply only to (a) Revenue listed being manufactured
Regulations; (b) Revenue by United Tobacco,
Audit Memorandum Pakistan (Exhibit "S")
Orders; and (c) Revenue
Memorandum Circulars
(b) "CANNON" is listed as
and Revenue
being manufactured by
Memorandum Orders
Alpha Tobacco,
bearing on internal
Bangladesh (Exhibit "T")
revenue tax rules and
regulations.
3. Locally manufactured by LA PERLA
INDUSTRIES, INC.
(2) Except when the law
otherwise expressly
provides, the aforesaid (a) "WHITE HORSE" is
internal revenue tax listed as being
issuances shall not begin manufactured by
to be operative until after Rothman's, Malaysia
(Exhibit "U")
 (b) "RIGHT" is listed as
being manufactured by
SVENSKA, Tobaks,
Sweden (Exhibit "V-1")
4. Locally manufactured by MIGHTY
CORPORATION
(a) "WHITE HORSE" is
listed as being
manufactured by
Rothman's, Malaysia
(Exhibit "U-1")
5. Locally manufactured by STERLING
TOBACCO CORPORATION
(a) "UNION" is listed as
being manufactured by
Sumatra Tobacco,
Indonesia and Brown and
Williamson, USA (Exhibit
"U-3")
(b) "WINNER" is listed as
being manufactured by
Alpha Tobacco,
Bangladesh; Nangyang,
Hongkong; Joo Lan,
Malaysia; Pakistan
Tobacco Co., Pakistan;
Premier Tobacco,
Pakistan and Haggar,
Sudan (Exhibit "U-4"). 7 1
The court quoted at length from the transcript of the
hearing conducted on 10 August 1993 by the
Committee on Ways and Means of the House of
Representatives; viz:
THE CHAIRMAN. So you have specific
information on Fortune Tobacco alone. You
don't have specific information on other
tobacco manufacturers. Now, there are other
brands which are similarly situated. They are
locally manufactured bearing foreign brands.
And may I enumerate to you all these
brands, which are also listed in the World
Tobacco Directory . . . Why were these
brand not reclassified at 55 if your want to
give a level playing filed to foreign
manufacturers?
MS. CHATO. Mr. Chairman, in fact, we have
already prepared a Revenue Memorandum
Circular that was supposed to come after
RMC No. 37-93 which have really named
specifically the list of locally manufactured
cigarettes bearing a foreign brand for excise
tax purposes and includes all these brands
that you mentioned at 55 percent except that
at that time, when we had to come up with
this, we were forced to study the brands of
Hope, More and Champion because we
were given documents that would indicate
the that these brands were actually being
claimed or patented in other countries
because we went by Revenue Memorandum
Circular 1488 and we wanted to give some
rationality to how it came about but we
couldn't find the rationale there. And we
really found based on our own interpretation
that the only test that is given by that existing
law would be registration in the World
Tobacco Directory. So we came out with this
proposed revenue memorandum circular
which we forwarded to the Secretary of
Finance except that at that point in time, we
went by the Republic Act 7654 in Section 1
which amended Section 142, C-1, it said,
that on locally manufactured cigarettes which
are currently classified and taxed at 55
percent. So we were saying that when this
law took effect in July 3 and if we are going
to come up with this revenue circular
thereafter, then I think our action would really
be subject to question but we feel that . . .
Memorandum Circular Number 37-93 would
really cover even similarly situated
brands. And in fact, it was really because of
the study, the short time that we were given
to study the matter that we could not include
all the rest of the other brands that would
have been really classified as foreign brand
if we went by the law itself. I am sure that by
the reading of the law, you would without
that ruling by Commissioner Tan they would
really have been included in the definition or
in the classification of foregoing brands.
These brands that you referred to or just
read to us and in fact just for your
information, we really came out with a
proposed revenue memorandum circular for
those brands. (Emphasis supplied)
(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-
3).
xxx xxx xxx
MS. CHATO. . . . But I do agree with you
now that it cannot and in fact that is why I felt
that we . . . I wanted to come up with a more
extensive coverage and precisely why I
asked that revenue memorandum circular
that would cover all those similarly situated
would be prepared but because of the lack of
time and I came out with a study of RA 7654,
it would not have been possible to really
come up with the reclassification or the
proper classification of all brands that are
listed there. . . (emphasis supplied) (Exhibit
"FF-2d," page IX-1)
xxx xxx xxx
HON. DIAZ. But did you not consider that
there are similarly situated?
MS. CHATO. That is precisely why, Sir, after
we have come up with this Revenue
Memorandum Circular No. 37-93, the other
brands came about the would have also
clarified RMC 37-93 by I was saying really
because of the fact that I was just recently
appointed and the lack of time, the period
that was allotted to us to come up with the
right actions on the matter, we were really
caught by the July 3 deadline. But in fact,
We have already prepared a revenue
memorandum circular clarifying with the
other . . . does not yet, would have been a
list of locally manufactured cigarettes
bearing a foreign brand for excise tax
purposes which would include all the other
brands that were mentioned by the
Honorable Chairman. (Emphasis supplied)
(Exhibit "FF-2-d," par. IX-4). 18
All taken, the Court is convinced that the hastily promulgated
RMC 37-93 has fallen short of a valid and effective
administrative issuance.
WHEREFORE, the decision of the Court of Appeals, sustaining
that of the Court of Tax Appeals, is AFFIRMED. No costs.
SO ORDERED.
G.R. No. L-66653 June 19, 1986
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BURROUGHS LIMITED AND THE COURT OF TAX
APPEALS, respondents.
Sycip, Salazar, Feliciano & Hernandez Law Office for private
respondent.
PARAS, J.:
Petition for certiorari to review and set aside the Decision
dated June 27, 1983 of respondent Court of Tax Appeals in its
C.T.A. Case No. 3204, entitled "Burroughs Limited vs.
Commissioner of Internal Revenue" which ordered petitioner
Commissioner of Internal Revenue to grant in favor of private
respondent Burroughs Limited, tax credit in the sum of
P172,058.90, representing erroneously overpaid branch profit
remittance tax.
Burroughs Limited is a foreign corporation authorized to
engage in trade or business in the Philippines through a
branch office located at De la Rosa corner Esteban Streets,
Legaspi Village, Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the
Central Bank for authority to remit to its parent company
abroad, branch profit amounting to P7,647,058.00. Thus, on
March 14, 1979, it paid the 15% branch profit remittance tax,
pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office
the amount of P6,499,999.30 computed as follows:
Amount applied for
remittance................................
P7,647,058.00
Deduct: 15% branch profit
remittance tax
..............................................1,147,058.70
Net amount actually
remitted.................................. P6,499,999.30
Claiming that the 15% profit remittance tax should have been
computed on the basis of the amount actually remitted
(P6,499,999.30) and not on the amount before profit
remittance tax (P7,647,058.00), private respondent filed on
December 24, 1980, a written claim for the refund or tax credit
of the amount of P172,058.90 representing alleged overpaid
branch profit remittance tax, computed as follows:
Profits actually remitted
.........................................P6,499,999.30
Remittance tax rate
.......................................................15%
Branch profit remittance tax-
due thereon
......................................................P
974,999.89
Branch profit remittance
tax paid
.............................................................Pl,147
,058.70
Less: Branch profit remittance
tax as above
computed................................................. 974
,999.89
Total amount
refundable...........................................
P172,058.81
On February 24, 1981, private respondent filed with
respondent court, a petition for review, docketed as C.T.A.
Case No. 3204 for the recovery of the above-mentioned
amount of P172,058.81.
On June 27, 1983, respondent court rendered its Decision, the
dispositive portion of which reads
ACCORDINGLY, respondent Commission of Internal Revenue
is hereby ordered to grant a tax credit in favor of petitioner
Burroughs Limited the amount of P 172,058.90. Without
pronouncement as to costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision,
petitioner filed the instant petition before this Court with the
prayers as herein earlier stated upon the sole issue of whether
the tax base upon which the 15% branch profit remittance tax
shall be imposed under the provisions of section 24(b) of the
Tax Code, as amended, is the amount applied for remittance
on the profit actually remitted after deducting the 15% profit
remittance tax. Stated differently is private respondent
Burroughs Limited legally entitled to a refund of the
aforementioned amount of P172,058.90.
We rule in the affirmative. The pertinent provision of the
National Revenue Code is Sec. 24 (b) (2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances.
Any profit remitted abroad by a branch to its
head office shall be subject to a tax of fifteen
per cent (15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980
by then Acting Commissioner of Internal Revenue Hon. Efren I.
Plana the aforequoted provision had been interpreted to mean
that "the tax base upon which the 15% branch profit remittance
tax ... shall be imposed...(is) the profit actually remitted abroad
and not on the total branch profits out of which the remittance
is to be made. " The said ruling is hereinbelow quoted as
follows:
In reply to your letter of November 3, 1978,
relative to your query as to the tax base
upon which the 15% branch profits
remittance tax provided for under Section 24
(b) (2) of the 1977 Tax Code shall be
imposed, please be advised that the 15%
branch profit tax shall be imposed on the
branch profits actually remitted abroad and
not on the total branch profits out of which
the remittance is to be made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private
respondent that it made an overpayment in the amount of
P172,058.90 which is the difference between the remittance
tax actually paid of Pl,147,058.70 and the remittance tax that
should have been paid of P974,999,89, computed as follows
Profits actually
remitted.........................................
P6,499,999.30
 Remittance tax SO ORDERED.
rate.............................................................. 1
5%

Remittance tax
due...................................................
P974,999.89

is well-taken. As correctly held by

respondent Court in its assailed decision-

Respondent concedes at least that in his

ruling dated January 21, 1980 he held that
under Section 24 (b) (2) of the Tax Code the
15% branch profit remittance tax shall be
imposed on the profit actually remitted
abroad and not on the total branch profit out
of which the remittance is to be made. Based
on such ruling petitioner should have paid
only the amount of P974,999.89 in
remittance tax computed by taking the 15%
of the profits of P6,499,999.89 in remittance
tax actually remitted to its head office in the
United States, instead of Pl,147,058.70, on
its net profits of P7,647,058.00.
Undoubtedly, petitioner has overpaid its
branch profit remittance tax in the amount of
P172,058.90.

Petitioner contends that respondent is no longer entitled to a

refund because Memorandum Circular No. 8-82 dated March
17, 1982 had revoked and/or repealed the BIR ruling of
January 21, 1980. The said memorandum circular states

Considering that the 15% branch profit

remittance tax is imposed and collected at
source, necessarily the tax base should be
the amount actually applied for by the branch
with the Central Bank of the Philippines as
profit to be remitted abroad.

Petitioner's aforesaid contention is without merit. What is

applicable in the case at bar is still the Revenue Ruling of
January 21, 1980 because private respondent Burroughs
Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular No. 8-82 dated
March 17, 1982 cannot be given retroactive effect in the light of
Section 327 of the National Internal Revenue Code which
provides-

Sec. 327. Non-retroactivity of rulings. Any

revocation, modification, or reversal of any of
the rules and regulations promulgated in
accordance with the preceding section or
any of the rulings or circulars promulgated by
the Commissioner shag not be given
retroactive application if the revocation,
modification, or reversal will be prejudicial to
the taxpayer except in the following cases
(a) where the taxpayer deliberately misstates
or omits material facts from his return or in
any document required of him by the Bureau
of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of
Internal Revenue are materially different
from the facts on which the ruling is based,
or (c) where the taxpayer acted in bad faith.
(ABS-CBN Broadcasting Corp. v. CTA, 108
SCRA 151-152)

The prejudice that would result to private respondent

Burroughs Limited by a retroactive application of Memorandum
Circular No. 8-82 is beyond question for it would be deprived of
the substantial amount of P172,058.90. And, insofar as the
enumerated exceptions are concerned, admittedly, Burroughs
Limited does not fall under any of them.

WHEREFORE, the assailed decision of respondent Court of

Tax Appeals is hereby AFFIRMED. No pronouncement as to
costs.
G.R. No. L-52306 October 12, 1981
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
COURT OF TAX APPEALS and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the
Court of Tax Appeals in C.T.A. Case No. 2809, dated
November 29, 1979, which affirmed the assessment by the
Commissioner of Internal Revenue, dated April 16, 1971, of a
deficiency withholding income tax against petitioner, ABS-CBN
Broadcasting Corporation, for the years 1965, 1966, 1967 and
1968 in the respective amounts of P75,895.24, P99,239.18,
P128,502.00 and P222, 260.64, or a total of P525,897.06.
During the period pertinent to this case, petitioner corporation
was engaged in the business of telecasting local as well as
foreign films acquired from foreign corporations not engaged in
trade or business within the Philippines. for which petitioner
paid rentals after withholding income tax of 30%of one-half of
the film rentals.
In so far as the income tax on non-resident corporations is
concerned, section 24 (b) of the National Internal Revenue
Code, as amended by Republic Act No. 2343 dated June 20,
1959, used to provide:
(b) Tax on foreign corporations.(1) Non-
resident corporations. There shall be
levied, collected, and paid for each taxable
year, in lieu of the tax imposed by the
preceding paragraph, upon the amount
received by every foreign corporation not
engaged in trade or business within the
Philippines, from an sources within the
Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities,
compensations, remunerations, emoluments,
or other fixed or determinable annual or
periodical gains, profits, and income, a tax
equal to thirty per centum of such amount.
(Emphasis supplied)
On April 12, 1961, in implementation of the aforequoted
provision, the Commissioner of Internal Revenue issued
General Circular No. V-334 reading thus:
In connection with Section 24 (b) of Tax
Code, the amendment introduced by
Republic Act No. 2343, under which an
income tax equal to 30% is levied upon the
amount received by every foreign
corporation not engaged in trade or business
within the Philippines from all sources within
this country as interest, dividends, rents,
salaries, wages, premiums, annuities,
compensations, remunerations, emoluments,
or other fixed or determinable annual or
periodical gains, profits, and income, it has
been determined that the tax is still imposed
on income derived from capital, or labor, or
both combined, in accordance with the basic
principle of income taxation (Sec. 39, Income
Tax Regulations), and that a mere return of
capital or investment is not income (Par.
5,06, 1 Mertens Law of Federal 'Taxation).
Since according to the findings of the Special
Team who inquired into business of the non-
resident foreign film distributors, the
distribution or exhibition right on a film is
invariably acquired for a consideration, either
for a lump sum or a percentage of the film
rentals, whether from a parent company or
an independent outside producer, apart of
the receipts of a non-resident foreign film
distributor derived from said film represents,
therefore, a return of investment.
xxx xxx xxx
4. The local distributor should withhold 30%
of one-half of the film rentals paid to the non-
resident foreign film distributor and pay the
same to this office in accordance with law
unless the non- resident foreign film
distributor makes a prior settlement of its
income tax liability. (Emphasis ours).
Pursuant to the foregoing, petitioner dutifully withheld and
turned over to the Bureau of Internal Revenue the amount of
30% of one-half of the film rentals paid by it to foreign
corporations not engaged in trade or business within the
Philippines. The last year that petitioner withheld taxes
pursuant to the foregoing Circular was in 1968.
On June 27, 1968, Republic Act No. 5431 amended Section 24
(b) of the Tax Code increasing the tax rate from 30 % to 35 %
and revising the tax basis from "such amount" referring to
rents, etc. to "gross income," as follows:
(b) Tax on foreign corporations.(1) Non-
resident corporations.A foreign corporation
not engaged in trade or business in the
Philippines including a foreign life insurance
company not engaged in the life insurance
business in the Philippines shall pay a tax
equal to thirty-five per cent of the gross
income received during each taxable year
from all sources within the Philippines, as
interests, dividends, rents, royalties, salaries,
wages, premiums, annuities, compensations,
remunerations for technical services or
otherwise, emoluments or other fixed or
determinable annual, periodical or casual
gains, profits, and income, and capital
gains, Provided however, That premiums
shah not include reinsurance premiums.
(Emphasis supplied)
On February 8, 1971, the Commissioner of Internal Revenue
issued Revenue Memorandum Circular No. 4-71, revoking
General Circular No. V-334, and holding that the latter was
"erroneous for lack of legal basis," because "the tax therein
prescribed should be based on gross income without deduction
whatever," thus:
After a restudy and analysis of Section 24 (b)
of the National Internal Revenue Code, as
amended by Republic Act No. 5431, and
guided by the interpretation given by tax
authorities to a similar provision in the
Internal Revenue Code of the United States,
on which the aforementioned provision of our
Tax Code was patterned, this Office has
come to the conclusion that the tax therein
prescribed should be based on gross income
without t deduction whatever. Consequently,
the ruling in General Circular No. V-334,
dated April 12, 1961, allowing the deduction
of the proportionate cost of production or
exhibition of motion picture films from the
rental income of non- resident foreign
corporations, is erroneous for lack of legal
basis.
In view thereof, General Circular No. V-334,
dated April 12, 1961, is hereby revoked and
henceforth, local films distributors and
exhibitors shall deduct and withhold 35% of
the entire amount payable by them to non-
resident foreign corporations, as film rental
or royalty, or whatever such payment may be
denominated, without any deduction
whatever, pursuant to Section 24 (b), and
 pay the withheld taxes in accordance with
Balance P198,447.00
Section 54 of the Tax Code, as amended.
Add: 1/2% mo. int. fr. 4-16- 23,813.64
All rulings inconsistent with this Circular is 69 to 4-29-71
likewise revoked. (Emphasis ours)
Total amount due & P222,260.44 1

On the basis of this new Circular, respondent Commissioner of collectible

Internal Revenue issued against petitioner a letter of
assessment and demand dated April 15, 1971, but allegedly
released by it and received by petitioner on April 12, 1971, On May 5, 1971, petitioner requested for a reconsideration and
requiring them to pay deficiency withholding income tax on the withdrawal of the assessment. However, without acting
remitted film rentals for the years 1965 through 1968 and film thereon, respondent, on April 6, 1976, issued a warrant of
royalty as of the end of 1968 in the total amount of distraint and levy over petitioner's personal as well as real
P525,897.06 computed as follows: properties. The petitioner then filed its Petition for Review with
the Court of Tax Appeals whose Decision, dated November 29,
1979, is, in turn, the subject of this review. The Tax Court held:
1965
For the reasons given, the Court finds the
Total amount remitted P 511,059.48 assessment issued by respondent on April
16, 1971 against petitioner in the amounts of
Withholding tax due thereon 153,318.00 P75,895.24, P 99,239.18, P128,502.00 and
P222,260.64 or a total of P525,897.06 as
Less: Amount already 89,000.00 deficiency withholding income tax for the
assessed years 1965, 1966, 1967 and 1968,
respectively, in accordance with law. As
Balance P64,318.00 prayed for, the petition for review filed in this
case is dismissed, and petitioner ABS-CBN
Add: 1/2% mo. int. fr. 4-16-66 11,577.24 Broadcasting Corporation is hereby ordered
to 4-16-69 to pay the sum of P525,897.06 to
respondent Commissioner of Internal
Total amount due & collectible P 75,895.24 Revenue as deficiency withholding income
tax for the taxable years 1965 thru 1968,
plus the surcharge and interest which have
1966 accrued thereon incident to delinquency
pursuant to Section 51 (e) of the National
Internal Revenue Code, as amended.
Total amount remitted P373,492.24
WHEREFORE, the decision appealed from
Withholding tax due thereon 112,048.00 is hereby affirmed at petitioner's cost.
Less: Amount already 27,947.00
assessed SO ORDERED. 2

Balance 84,101.00 The issues raised are two-fold:

Add: 11/2%mo. int. fr. 4-16- 15,138.18 I. Whether or not respondent can apply
67 to 4-116-70 General Circular No. 4-71 retroactively and
issue a deficiency assessment against
Total amount due & P99,239.18 petitioner in the amount of P 525,897.06 as
collectible deficiency withholding income tax for the
years 1965, 1966, 1967 and 1968.
1967
II. Whether or not the right of the
Commissioner of Internal Revenue to assess
Total amount remitted P601,160.65 the deficiency withholding income tax for the
year 196,5 has prescribed. 3

Withholding tax due 180,348.00

thereon Upon the facts and circumstances of the case, review is
warranted.
Less: Amount already 71,448.00
assessed
In point is Sec. 338-A (now Sec. 327) of the Tax Code. As
Balance 108,900.00 inserted by Republic Act No. 6110 on August 9, 1969, it
provides:
Add: 1/2% mo. int. fr. 4- 19,602.00
16-68 to 4-16-71 Sec. 338-A. Non-retroactivity of rulings.
Any revocation, modification, or reversal of
Total amount due & P128,502.00 and of the rules and regulations promulgated
collectible in accordance with the preceding section or
any of the rulings or circulars promulgated by
the Commissioner of Internal Revenue shall
1968 not be given retroactive application if the
relocation, modification, or reversal will be
prejudicial to the taxpayers, except in the
Total amount remitted P881,816.92 following cases: (a) where the taxpayer
deliberately mis-states or omits material
Withholding tax due 291,283.00 facts from his return or any document
thereon required of him by the Bureau of Internal
Revenue: (b) where the facts subsequently
Less: Amount already 92,886.00 gathered by the Bureau of Internal Revenue
assessed are materially different from the facts on
 which the ruling is based; or (c) where the
taxpayer acted in bad faith. (italics for
emphasis)
It is clear from the foregoing that rulings or circulars
promulgated by the Commissioner of Internal Revenue have
no retroactive application where to so apply them would be
prejudicial to taxpayers. The prejudice to petitioner of the
retroactive application of Memorandum Circular No. 4-71 is
beyond question. It was issued only in 1971, or three years
after 1968, the last year that petitioner had withheld taxes
under General Circular No. V-334. The assessment and
demand on petitioner to pay deficiency withholding income tax
was also made three years after 1968 for a period of time
commencing in 1965. Petitioner was no longer in a position to
withhold taxes due from foreign corporations because it had
already remitted all film rentals and no longer had any control
over them when the new Circular was issued. And in so far as
the enumerated exceptions are concerned, admittedly,
petitioner does not fall under any of them.
Respondent claims, however, that the provision on non-
retroactivity is inapplicable in the present case in that General
Circular No. V-334 is a nullity because in effect, it changed the
law on the matter. The Court of Tax Appeals sustained this
position holding that: "Deductions are wholly and exclusively
within the power of Congress or the law-making body to grant,
condition or deny; and where the statute imposes a tax equal
to a specified rate or percentage of the gross or entire amount
received by the taxpayer, the authority of some administrative
officials to modify or change, much less reduce, the basis or
measure of the tax should not be read into law." Therefore,
4
the Tax Court concluded, petitioner did not acquire any vested
right thereunder as the same was a nullity.
The rationale behind General Circular No. V-334 was clearly
stated therein, however: "It ha(d) been determined that the tax
is still imposed on income derived from capital, or labor, or
both combined, in accordance with the basic principle of
income taxation ...and that a mere return of capital or
investment is not income ... ." "A part of the receipts of a non-
resident foreign film distributor derived from said film
represents, therefore, a return of investment." The Circular
thus fixed the return of capital at 50% to simplify the
administrative chore of determining the portion of the rentals
covering the return of capital."5
Were the "gross income" base clear from Sec. 24 (b), perhaps,
the ratiocination of the Tax Court could be upheld. It should be
noted, however, that said Section was not too plain and simple
to understand. The fact that the issuance of the General
Circular in question was rendered necessary leads to no other
conclusion than that it was not easy of comprehension and
could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra,
which was the basis of General Circular No. V-334, was just
one in a series of enactments regarding Sec. 24 (b) of the Tax
Code. Republic Act No. 3825 came next on June 22, 1963
without changing the basis but merely adding a proviso (in bold
letters).
(b) Tax on foreign corporation.(1) Non-
resident corporations. There shall be
levied, collected and paid for each taxable
year, in lieu of the tax imposed by the
preceding paragraph, upon the amount
received by every foreign corporation not
engaged in trade or business within the
Philippines, from all sources within the
Philippines, as interest, dividends, rents,
salaries, wages, premiums annuities,
compensations, remunerations, emoluments,
or other fixed or determinable annual or
periodical gains, profits, and income, a tax
equal to thirty per centum of such amount:
PROVIDED, HOWEVER, THAT PREMIUMS
SHALL NOT INCLUDE REINSURANCE
PREMIUMS. (double emphasis ours).
Republic Act No. 3841, dated likewise on June 22, 1963,
followed after, omitting the proviso and inserting some words
(also in bold letters).
(b) Tax on foreign corporations.(1) Non-
resident corporations.There shall be
levied, collected and paid for each taxable
year, in lieu of the tax imposed by the
preceding paragraph, upon the amount
received by every foreign corporation not
engaged in trade or business within the
Philippines, from all sources within the
Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities,
compensations, remunerations, emoluments,
or other fixed or determinable annual or
periodical OR CASUAL gains, profits and
income, AND CAPITAL GAINS, a tax equal
to thirty per centum of such
amount. (double emphasis supplied)
6
The principle of legislative approval of administrative
interpretation by re-enactment clearly obtains in this case. It
provides that "the re-enactment of a statute substantially
unchanged is persuasive indication of the adoption by
Congress of a prior executive construction. Note should be
7
taken of the fact that this case involves not a mere opinion of
the Commissioner or ruling rendered on a mere query, but a
Circular formally issued to "all internal revenue officials" by the
then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No.
5431, supra, which became the basis of Revenue
Memorandum Circular No. 4-71, that Sec. 24 (b) was amended
to refer specifically to 35% of the "gross income."
This Court is not unaware of the well-entrenched principle that
the Government is never estopped from collecting taxes
because of mistakes or errors on the part of its
agents. In fact, utmost caution should be taken in this
8
regard. But, like other principles of law, this also admits of
9
exceptions in the interest of justice and fairplay. The insertion
of Sec. 338-A into the National Internal Revenue Code, as held
in the case of Tuason, Jr. vs. Lingad, is indicative of
10
legislative intention to support the principle of good faith. In
fact, in the United States, from where Sec. 24 (b) was
patterned, it has been held that the Commissioner of Collector
is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom, or 11
where there has been a misrepresentation to the taxpayer. 12
We have also noted that in its Decision, the Court of Tax
Appeals further required the petitioner to pay interest and
surcharge as provided for in Sec. 51 (e) of the Tax Code in
addition to the deficiency withholding tax of P 525,897.06. This
additional requirement is much less called for because the
petitioner relied in good faith and religiously complied with no
less than a Circular issued "to all internal revenue officials" by
the highest official of the Bureau of Internal Revenue and
approved by the then Secretary of Finance. 13
With the foregoing conclusions arrived at, resolution of the
issue of prescription becomes unnecessary.
WHEREFORE, the judgment of the Court of Tax Appeals is
hereby reversed, and the questioned assessment set aside.
No costs.
SO ORDERED.