1|Page

JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners, vs.

THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.

Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a

decision of the Court of Tax Appeals affirming that of the Board of Assessment
Appeals of Quezon City, which held that certain properties of said petitioners are
subject to assessment for purposes of real estate tax.

The facts and the issue are set forth in the aforementioned decision of the Court
of Tax Appeals, from which we quote:

On July 24, 1952, the Director of the Bureau of Hospitals authorized the
petitioners to establish and operate the "St. Catherine's Hospital", located at 58
D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or
about January 3, 1953, the petitioners sent a letter to the Quezon City Assessor
requesting exemption from payment of real estate tax on the lot, building and
other improvements comprising the hospital stating that the same was
established for charitable and humanitarian purposes and not for commercial
gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of the premises in
question and after a careful study of the case, the exemption from real property
taxes was granted effective the years 1953, 1954 and 1955.

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p.

65, CTA rec.) the Quezon City Assessor notified the petitioners that the
aforesaid properties were re-classified from exempt to "taxable" and thus
assessed for real property taxes effective 1956, enclosing therewith copies of
Tax Declarations Nos. 19321 to 19322 covering the said properties. The
petitioners appealed the assessment to the Quezon City Board of Assessment
Appeals, which, in a decision dated March 31, 1956 and received by the former
on May 17, 1956, affirmed the decision of the City Assessor. A motion for
reconsideration thereof was denied on March 8, 1957. From this decision, the
petitioners instituted the instant appeal.1awphîl.nèt

The building involved in this case is principally used as a hospital. It is

mainly a surgical and orthopedic hospital with emphasis on obstetrical cases,
the latter constituting 90% of the total number of cases registered therein. The
hospital has thirty-two (32) beds, of which twenty (20) are for charity-patients
and twelve (12) for pay-patients. From the evidence presented by petitioners, it
is made to appear that there are two kinds of charity patients — (a) those who
come for consultation only ("out-charity patients"); and (b) those who remain in
the hospital for treatment ("lying-in-patients"). The out-charity patients are given
free consultation and prescription, although sometimes they are furnished with
2|Page

free medicines which are not costly like aspirin, sulfatiazole, etc. The charity
lying-in-patients are given free medical service and medicine although the food
served to the pay-patients is very much better than that given to the former.
Although no condition is imposed by the hospital on the admission of charity
lying-in-patients, they however, usually give donations to the hospital. On the
other hand, the pay-patients are required to pay for hospital services ranging
from the minimum charge of P5.00 to the maximum of P40.00 for each day of
stay in the hospital. The income realized from pay-patients is spent for the
improvement of the charity wards. The hospital personnel is composed of three
nurses, two graduate midwives, a resident physician receiving a salary of
P170.00 a month and the petitioner, Dr. Ester Ochangco Herrera, as directress.
As such directress, the latter does not receive any salary.

Petitioners also operate within the premises of the hospital the "St.
Catherine's School of Midwifery" which was granted government
recognition by the Secretary of Education on February 1, 1955 (Exhibit "F-
3", p. 10, BIR rec.) This school has an enrollment of about two hundred
students. The students are charged a matriculation fee of P300.00 for 1-½
years, plus P50.00 a month for board and lodging, which includes
transportation to the St. Mary's Hospital. The students practice in the St.
Catherine's Hospital, as well as in the St. Mary's Hospital, which is also
owned by the petitioners. A separate set of accounting books is maintained
by the school for midwifery distinct from that kept by the hospital. The
petitioners alleged that the accounts of the school are not included in
Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which relate
to the hospital only. However, the petitioners have refused to submit a
separate statement of accounts of the school. A brief tabulation indicating
the amount of income of the hospital for the years 1954, 1955 and 1956,
and its operational expenses, is as follows:

1954

Income Expenses Deficit

P 5,280.04 P1,303.80
Charity P10,803.26
Ward P14,779.50
Pay Ward
P16,083.30

(Exhibits "A", "A-1" and "A-2")

3|Page

1955

Income Expenses Deficit

P 6,859.32
Charity 14,038.92
Ward P17,433.30 P3,464.94
Pay Ward
P20,898.24

(Exhibits "B", "B-1" and "B-2")

1956

Income Expenses Deficit

P 5,559.89 P 341.53
Charity 16,249.04
Ward P21,467.40
Pay Ward
P21,809.93

(Exhibits "C", "C-1" and "C-2")

Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that
they also own lands and coconut plantations in Quezon Province, and other real
estate in the City of Manila consisting of apartments for rent. The petitioner, Jose
V. Herrera, is an architect, actively engaged in the practice of his profession, with
office at Tuason Building, Escolta, Manila. He was formerly Chairman, Board of
Examiners for Architects and Chairman, Board of Architects connected with the
United Nations. He was also connected with the Allied Technologists which
constructed the Veterans Hospital in Quezon City.

The only issue raised, is whether or not the lot, building and other improvements
occupied by the St. Catherine Hospital are exempt from the real property tax.
The resolution of this question boils down to the corollary issue as to whether or
not the said properties are used exclusively for charitable or educational
purposes. (Petitioners' brief, pp. 24-29).
4|Page

The Court of Tax Appeals decided the issue in the negative, upon the ground
that the St. Catherine's Hospital "has a pay ward for ... pay-patients, who are
charged for the use of the private rooms, operating room, laboratory room,
delivery room, etc., like other hospitals operated for profit" and that "petitioners
and their family occupy a portion of the building for their residence." With respect
to petitioners' claim for exemption based upon the operation of the school of
midwifery, the Court conceded that "the proposition might be proper if the
property used for the school of midwifery were separate and distinct from the
hospital." It added, however, that, "in the instant case, the portions of the building
used for classrooms of the school of midwifery have not been shown to be
exclusively for school purposes"; that said portions "rather ... have a dual use,
i.e., for classroom and for hospital use, the latter not being a purpose that
renders the property tax exempt;" that part of the building and lot in question "is
used as a hospital, part as residence of the petitioners, part as garage, part as
dormitory and part as school"; and that "the portion dedicated to educational and
charitable purposes can not be identified from those destined to other uses; and
the building is itself an indivisible unit of property."

It should be noted, however, that, according to the very statement of facts

made in the decision appealed from, of the thirty-two (32) beds in the hospital,
twenty (20) are for charity-patients; that "the income realized from pay-patients is
spent for improvement of the charity wards;" and that "petitioners, Dr. Ester
Ochangco Herrera, as directress" of said hospital, "does not receive any salary,"
although its resident physician gets a monthly salary of P170.00. It is well settled,
in this connection, that the admission of pay-patients does not detract from the
charitable character of a hospital, if all its funds are devoted "exclusively to the
maintenance of the institution" as a "public charity" (84 C.J.S., 617; see, also, 51
Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In
other words, where rendering charity is its primary object, and the funds derived
from payments made by patients able to pay are devoted to the benevolent
purposes of the institution, the mere fact that a profit has been made will not
deprive the hospital of its benevolent character" (Prairie Du Chien Sanitarium Co.
vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).

Thus, we have held that the U.S.T. Hospital was not established for profit-making
purposes, although it had 140 paying beds maintained only to partly finance the
expenses of the free wards, containing 203 beds for charity patients (U.S.T.
Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May
24, 1954), that St. Paul's Hospital of Iloilo, a corporation organized for "charitable
educational and religious purposes" can not be considered as engaged in
business merely because its pharmacy department charges paying patients the
5|Page

cost of their medicine, plus 10% thereof, to partly offset the cost of medicines
supplied free of charge to charity patients (Collector of Internal Revenue vs. St.
Paul's Hospital of Iloilo, L-12127, May 25, 1959), and that the amendment of the
original articles of incorporation of the University of Visayas to convert it from a
non-stock to a stock corporation and the increase of its assets from P9,000 to
P50,000, distributed among the members of the original non-stock corporation in
terms of shares of stock, as well as the subsequent move of its board of trustees
to double the stock dividends of the corporation, in view of a gain of P200,000.00
in property, besides good-will, which was not carried out, does not justify the
inference that the corporation has become one for business and profit, none of its
profits having inured to the benefit of any stockholder or individual (Collector of
Internal Revenue vs. University of Visayas, L-13554, February 28, 1961).

Moreover, the exemption in favor of property used exclusively for charitable

or educational purposes is "not limited to property actually indispensable"
therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are
"incidental to and reasonably necessary for" the accomplishment of said
purposes, such as, in the case of hospitals, "a school for training nurses, a
nurses' home, property use to provide housing facilities for interns, resident
doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents" (84 C.J.S., 621),
such as "athletic fields," including "a farm used for the inmates of the institution"
(Cooley on Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St.
Catherine's Hospital is, therefore, a charitable institution, and the fact that it
admits pay-patients does not bar it from claiming that it is devoted exclusively to
benevolent purposes, it being admitted that the income derived from pay-patients
is devoted to the improvement of the charity wards, which represent almost two-
thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients"
who come only for consultation.

Again, the existence of "St. Catherine's School of Midwifery", with an

enrollment of about 200 students, who practice partly in St. Catherine's Hospital
and partly in St. Mary's Hospital, which, likewise, belongs to petitioners herein,
does not, and cannot, affect the exemption to which St. Catherine's Hospital is
entitled under our fundamental law. On the contrary, it furnishes another ground
for exemption. Seemingly, the Court of Tax Appeals was impressed by the fact
that the size of said enrollment and the matriculation fee charged from the
students of midwifery, aside from the amount they paid for board and lodging,
including transportation to St. Mary's Hospital, warrants the belief that petitioners
derive a substantial profit from the operation of the school aforementioned. Such
6|Page

factor is, however, immaterial to the issue in the case at bar, for "all lands,
building and improvements used exclusively for religious, charitable or
educational purposes shall be exempt from taxation," pursuant to the
Constitution, regardless of whether or not material profits are derived from the
operation of the institutions in question. In other words, Congress may, if it
deems fit to do so, impose taxes upon such "profits", but said "lands, buildings
and improvements" are beyond its taxing power.

Similarly, the garage in the building above referred to — which was obviously
essential to the operation of the school of midwifery, for the students therein
enrolled practiced, not only in St. Catherine's Hospital, but, also, in St. Mary's
Hospital, and were entitled to transportation thereto — for Mrs. Herrera received
no compensation as directress of St. Catherine's Hospital — were incidental to
the operation of the latter and of said school, and, accordingly, did not affect the
charitable character of said hospital and the educational nature of said school.

WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the
Assessment Board of Appeals of Quezon City, are hereby reversed and set
aside, and another one entered declaring that the lot, building and improvements
constituting the St. Catherine's Hospital are exempt from taxation under the
provisions of the Constitution, without special pronouncement as to costs. It is so
ordered.

G.R. No. L-49336 August 31, 1981

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial

Assessor, petitioner,vs.HONORABLE HAROLD M. HERNANDO, in his
capacity as Presiding Judge of Branch I, Court of First Instance Abra; THE
ROMAN CATHOLIC BISHOP OF BANGUED, INC., represented by Bishop
Odilo Etspueler and Reverend Felipe Flores, respondents.

On the face of this certiorari and mandamus petition filed by the Province of
Abra, 1 it clearly appears that the actuation of respondent Judge Harold M.
Hernando of the Court of First Instance of Abra left much to be desired. First,
there was a denial of a motion to dismiss 2 an action for declaratory relief by
private respondent Roman Catholic Bishop of Bangued desirous of being
exempted from a real estate tax followed by a summary judgment 3 granting such
exemption, without even hearing the side of petitioner. In the rather vigorous
language of the Acting Provincial Fiscal, as counsel for petitioner, respondent
Judge “virtually ignored the pertinent provisions of the Rules of Court; …
wantonly violated the rights of petitioner to due process, by giving due course to
the petition of private respondent for declaratory relief, and thereafter without
7|Page

allowing petitioner to answer and without any hearing, adjudged the case; all in
total disregard of basic laws of procedure and basic provisions of due process in
the constitution, thereby indicating a failure to grasp and understand the law,
which goes into the competence of the Honorable Presiding Judge.” 4

It was the submission of counsel that an action for declaratory relief would be
proper only before a breach or violation of any statute, executive order or
regulation. 5 Moreover, there being a tax assessment made by the Provincial
Assessor on the properties of respondent Roman Catholic Bishop, petitioner
failed to exhaust the administrative remedies available under Presidential Decree
No. 464 before filing such court action. Further, it was pointed out to respondent
Judge that he failed to abide by the pertinent provision of such Presidential
Decree which provides as follows: “No court shall entertain any suit assailing the
validity of a tax assessed under this Code until the taxpayer, shall have paid,
under protest, the tax assessed against him nor shall any court declare any tax
invalid by reason of irregularities or informalities in the proceedings of the officers
charged with the assessment or collection of taxes, or of failure to perform their
duties within this time herein specified for their performance unless such
irregularities, informalities or failure shall have impaired the substantial rights of
the taxpayer; nor shall any court declare any portion of the tax assessed under
the provisions of this Code invalid except upon condition that the taxpayer shall
pay the just amount of the tax, as determined by the court in the pending
proceeding.” 6

When asked to comment, respondent Judge began with the allegation that there
“is no question that the real properties sought to be taxed by the Province of Abra
are properties of the respondent Roman Catholic Bishop of Bangued, Inc.” 7 The
very next sentence assumed the very point it asked when he categorically stated:
“Likewise, there is no dispute that the properties including their procedure
are actually, directly and exclusively used by the Roman Catholic Bishop of
Bangued, Inc. for religious or charitable purposes.” 8 For him then: “The proper
remedy of the petitioner is appeal and not this special civil action.” 9 A more
exhaustive comment was submitted by private respondent Roman Catholic
Bishop of Bangued, Inc. It was, however, unable to lessen the force of the
objection raised by petitioner Province of Abra, especially the due process
aspect. it is to be admitted that his opposition to the petition, pressed with vigor,
ostensibly finds a semblance of support from the authorities cited. It is thus
impressed with a scholarly aspect. It suffers, however, from the grave infirmity of
stating that only a pure question of law is presented when a claim for exemption
is made.

The petition must be granted.

8|Page

1. Respondent Judge would not have erred so grievously had he merely

compared the provisions of the present Constitution with that appearing in the
1935 Charter on the tax exemption of “lands, buildings, and improvements.”
There is a marked difference. Under the 1935 Constitution: “Cemeteries,
churches, and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation.” 10 The present Constitution
added “charitable institutions, mosques, and non-profit cemeteries” and required
that for the exemption of “:lands, buildings, and improvements,” they should not
only be “exclusively” but also “actually and “directly” used for religious or
charitable purposes. 11 The Constitution is worded differently. The change should
not be ignored. It must be duly taken into consideration. Reliance on past
decisions would have sufficed were the words “actually” as well as “directly” not
added. There must be proof therefore of the actual and direct use of the lands,
buildings, and improvements for religious or charitable purposes to be exempt
from taxation. According to Commissioner of Internal Revenue v.
Guerrero: 12 “From 1906, in Catholic Church v. Hastings to 1966, in Esso
Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the
constant and uniform holding that exemption from taxation is not favored and is
never presumed, so that if granted it must be strictly construed against the
taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an
exempting provision should be construed strictissimi juris.” 13 In Manila Electric
Company v. Vera, 14 a 1975 decision, such principle was reiterated, reference
being made to Republic Flour Mills, Inc. v. Commissioner of Internal
Revenue; 15 Commissioner of Customs v. Philippine Acetylene Co. &
CTA; 16 and Davao Light and Power Co., Inc. v. Commissioner of Customs. 17

2. Petitioner Province of Abra is therefore fully justified in invoking the protection

of procedural due process. If there is any case where proof is necessary to
demonstrate that there is compliance with the constitutional provision that allows
an exemption, this is it. Instead, respondent Judge accepted at its face the
allegation of private respondent. All that was alleged in the petition for
declaratory relief filed by private respondents, after mentioning certain parcels of
land owned by it, are that they are used “actually, directly and exclusively” as
sources of support of the parish priest and his helpers and also of private
respondent Bishop. 18 In the motion to dismiss filed on behalf of petitioner
Province of Abra, the objection was based primarily on the lack of jurisdiction, as
the validity of a tax assessment may be questioned before the Local Board of
Assessment Appeals and not with a court. There was also mention of a lack of a
cause of action, but only because, in its view, declaratory relief is not proper, as
there had been breach or violation of the right of government to assess and
9|Page

collect taxes on such property. It clearly appears, therefore, that in failing to

accord a hearing to petitioner Province of Abra and deciding the case
immediately in favor of private respondent, respondent Judge failed to abide by
the constitutional command of procedural due process.

WHEREFORE, the petition is GRANTED and the resolution of June 19, 1978
is SET ASIDE. Respondent Judge, or who ever is acting on his behalf, is ordered
to hear the case on the merit. No costs.

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V.

BORGONIA, petitioner, vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M.
CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal
Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE, respondents.

This is a petition for review on certiorari of the decision * of the defunct

Court of First Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil
Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V.
Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar
V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare,
defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued,
Abra, the Provincial Treasurer of said province against the lot and building of
the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia
located at Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay
all back taxes in the amount of P5,140.31 and back taxes and penalties from
the promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before
the trial, be confiscated to apply for the payment of the back taxes and for the
redemption of the property in question, if the amount is less than P6,000.00, the
remainder must be returned to the Director of Pedro Borgonia, who represents
the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also
before the trial must be returned to said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against
the plaintiff.SO ORDERED. (Rollo, pp. 22-23)
10 | P a g e

Petitioner, an educational corporation and institution of higher learning duly

incorporated with the Securities and Exchange Commission in 1948, filed a
complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare;
Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void
the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and penalties amounting to
P5,140.31. Said "Notice of Seizure" of the college lot and building covered by
Original Certificate of Title No. Q-83 duly registered in the name of petitioner,
plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and
Provincial Treasurer, defendants below, was issued for the satisfaction of the
said taxes thereon. The "Notice of Sale" was caused to be served upon the
petitioner by the respondent treasurers on July 8, 1972 for the sale at public
auction of said college lot and building, which sale was held on the same date.
Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest
bid of P6,000.00 which was duly accepted. The certificate of sale was
correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed
through counstel a motion to dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal

Treasurer, through then Provincial Fiscal Loreto C. Roldan, filed their answer
(Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-
100) to the complaint. This was followed by an amended answer (Annex "3," ibid,
Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex
"5," ibid; Rollo, pp. 106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public
auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First
Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the
respondents provincial and municipal treasurers to deliver to the Clerk of Court
the proceeds of the auction sale. Hence, on December 14, 1972, petitioner,
through Director Borgonia, deposited with the trial court the sum of P6,000.00
evidenced by PNB Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and
embodied by the trial court in its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court
respectfully enter into the following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of

the complaint is admitted; but the particular person of Mr. Armin M. Cariaga is
11 | P a g e

to be substituted, however, by anyone who is actually holding the position of

Provincial Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra under Original Certificate of Title
No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued,

Abra caused to be served upon the Abra Valley Junior College, Inc. a Notice of
Seizure on the property of said school under Original Certificate of Title No. 0-
83 for the satisfaction of real property taxes thereon, amounting to P5,140.31;
the Notice of Seizure being the one attached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College,
Inc. was sold at public auction for the satisfaction of the unpaid real property
taxes thereon and the same was sold to defendant Paterno Millare who offered
the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by
the defendant Municipal Treasurer.

5. That all other matters not particularly and specially covered by this stipulation
of facts will be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and

admit this stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes -Typ AGRIPINO BRILLANTES -Attorney for Plaintiff

Sgd. Loreto Roldan - Typ LORETO ROLDAN - Provincial Fiscal -Counsel for
Defendants
Provincial Treasurer of Abra and the Municipal ,Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre - Typ. DEMETRIO V. PRE Attorney for Defendant

Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the
following: (a) that the school is recognized by the government and is offering
Primary, High School and College Courses, and has a school population of more
than one thousand students all in all; (b) that it is located right in the heart of the
town of Bangued, a few meters from the plaza and about 120 meters from the
Court of First Instance building; (c) that the elementary pupils are housed in a
two-storey building across the street; (d) that the high school and college
students are housed in the main building; (e) that the Director with his family is in
the second floor of the main building; and (f) that the annual gross income of the
school reaches more than one hundred thousand pesos.
12 | P a g e

From all the foregoing, the only issue left for the Court to determine and as
agreed by the parties, is whether or not the lot and building in question are used
exclusively for educational purposes. (Rollo, p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant,
Hon. Eustaquio Z. Montero, filed a Memorandum for the Government on March
25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they
opined "that based on the evidence, the laws applicable, court decisions and
jurisprudence, the school building and school lot used for educational purposes
of the Abra Valley College, Inc., are exempted from the payment of taxes."
(Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because of the use of the second
floor by the Director of petitioner school for residential purposes. He thus ruled
for the government and rendered the assailed decision.

After having been granted by the trial court ten (10) days from August 6,
1974 within which to perfect its appeal (Per Order dated August 6, 1974; Annex
"G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for
review on certiorari with prayer for preliminary injunction before this Court, which
petition was filed on August 17, 1974 (Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE
COURSE to the petition (Rollo, p. 58). Respondents were required to answer
said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

I. THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND

SALE OF THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL
PURPOSES OF THE PETITIONER.

II. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR
EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT
RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY
TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY
TAXES.

IV. THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE

P6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT
OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used
exclusively for educational purposes."
13 | P a g e

Petitioner contends that the primary use of the lot and building for educational
purposes, and not the incidental use thereof, determines and exemption from
property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence,
the seizure and sale of subject college lot and building, which are contrary
thereto as well as to the provision of Commonwealth Act No. 470, otherwise
known as the Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building
in question which were subjected to seizure and sale to answer for the unpaid tax
are used: (1) for the educational purposes of the college; (2) as the permanent
residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his
family including the in-laws and grandchildren; and (3) for commercial purposes
because the ground floor of the college building is being used and rented by a
commercial establishment, the Northern Marketing Corporation (See photograph
attached as Annex "8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the
case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine
Constitution, which expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable or
educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as

amended by Republic Act No. 409, otherwise known as the Assessment Law,
provides:

The following are exempted from real property tax under the Assessment Law:
(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, scientific
or educational purposes.
In this regard petitioner argues that the primary use of the school lot and building
is the basic and controlling guide, norm and standard to determine tax
exemption, and not the mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil.

217 [1916], this Court ruled that while it may be true that the YMCA keeps a
lodging and a boarding house and maintains a restaurant for its members, still
these do not constitute business in the ordinary acceptance of the word, but an
institution used exclusively for religious, charitable and educational purposes,
and as such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51

Phil. 352 [1972], this Court included in the exemption a vegetable garden in an
adjacent lot and another lot formerly used as a cemetery. It was clarified that the
term "used exclusively" considers incidental use also. Thus, the exemption from
14 | P a g e

payment of land tax in favor of the convent includes, not only the land actually
occupied by the building but also the adjacent garden devoted to the incidental
use of the parish priest. The lot which is not used for commercial purposes but
serves solely as a sort of lodging place, also qualifies for exemption because this
constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by
this Court in the cases of Herrera vs. Quezon City Board of assessment Appeals,
3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the
Missionary District, 14 SCRA 991 [1965], thus —

Moreover, the exemption in favor of property used exclusively for charitable or

educational purposes is 'not limited to property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are
incidental to and reasonably necessary for the accomplishment of said purposes,
such as in the case of hospitals, "a school for training nurses, a nurses' home,
property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational
facilities for student nurses, interns, and residents' (84 CJS 6621), such as
"Athletic fields" including "a firm used for the inmates of the institution. (Cooley on
Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71
Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-
restrictive interpretation of the phrase "exclusively used for educational
purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935
Philippine Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably necessary
for the accomplishment of the main purposes. Otherwise stated, the use of the
school building or lot for commercial purposes is neither contemplated by law,
nor by jurisprudence. Thus, while the use of the second floor of the main building
in the case at bar for residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is complimentary to the
main or primary purpose—educational, the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.

It will be noted however that the aforementioned lease appears to have been
raised for the first time in this Court. That the matter was not taken up in the to
court is really apparent in the decision of respondent Judge. No mention thereof
was made in the stipulation of facts, not even in the description of the school
building by the trial judge, both embodied in the decision nor as one of the issues
to resolve in order to determine whether or not said properly may be exempted
15 | P a g e

from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is
noteworthy that such fact was not disputed even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up
for the first time on appeal. Nonetheless, as an exception to the rule, this Court
has held that although a factual issue is not squarely raised below, still in the
interest of substantial justice, this Court is not prevented from considering a
pivotal factual matter. "The Supreme Court is clothed with ample authority to
review palpable errors not assigned as such if it finds that their consideration is
necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA
645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that
the school building as well as the lot where it is built, should be taxed, not
because the second floor of the same is being used by the Director and his
family for residential purposes, but because the first floor thereof is being used
for commercial purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to the school
involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra,

Branch I, is hereby AFFIRMED subject to the modification that half of the
assessed tax be returned to the petitioner.SO ORDERED.

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and

CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court,
as amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-
G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its hospital
building constructed thereon are subject to assessment for purposes of real
property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit

entity established on January 16, 1981 by virtue of Presidential Decree No.
1823.[2] It is the registered owner of a parcel of land, particularly described as Lot
No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner
Elliptical Road, Central District, Quezon City. The lot has an area of 121,463
square meters and is covered by Transfer Certificate of Title (TCT) No. 261320
of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid
lot is a hospital known as the LungCenter of the Philippines. A big space at the
16 | P a g e

ground floor is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional
services. Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the right side, at
the corner of Quezon Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders

medical services to out-patients, both paying and non-paying. Aside from its
income from paying patients, the petitioner receives annual subsidies from the
government.

On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City
Assessor of Quezon City.[3] Accordingly, Tax Declaration Nos. C-021-01226 (16-
2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital
building, respectively.[4] On August 25, 1993, the petitioner filed a Claim for
Exemption[5] from real property taxes with the City Assessor, predicated on its
claim that it is a charitable institution. The petitioners request was denied, and a
petition was, thereafter, filed before the Local Board of Assessment Appeals of
Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City
Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987
Constitution, the property is exempt from real property taxes. It averred that a
minimum of 60% of its hospital beds are exclusively used for charity patients and
that the major thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as such, is exempt from
real property taxes. The QC-LBAA rendered judgment dismissing the petition and
holding the petitioner liable for real property taxes.[6]

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central

Board of Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled
that the petitioner was not a charitable institution and that its real properties were
not actually, directly and exclusively used for charitable purposes; hence, it was
not entitled to real property tax exemption under the constitution and the law. The
petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.[8]

Undaunted, the petitioner filed its petition in this Court contending that:
17 | P a g e

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT

ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT
ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF
ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND
EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX

EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of

Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a
charitable institution is not altered by the fact that it admits paying patients and
renders medical services to them, leases portions of the land to private parties,
and rents out portions of the hospital to private medical practitioners from which it
derives income to be used for operational expenses. The petitioner points out
that for the years 1995 to 1999, 100% of its out-patients were charity patients
and of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to
charity patients. It asserts that the fact that it receives subsidies from the
government attests to its character as a charitable institution. It contends that the
exclusivity required in the Constitution does not necessarily mean solely. Hence,
even if a portion of its real estate is leased out to private individuals from whom it
derives income, it does not lose its character as a charitable institution, and its
exemption from the payment of real estate taxes on its real property. The
petitioner cited our ruling in Herrera v. QC-BAA[9] to bolster its pose. The
petitioner further contends that even if P.D. No. 1823 does not exempt it from the
payment of real estate taxes, it is not precluded from seeking tax exemption
under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is
not a charitable entity. The petitioners real property is not exempt from the
payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and that the
said property is actually, directly and exclusively used for charitable
purposes. The respondents noted that in a newspaper report, it appears that
graft charges were filed with the Sandiganbayan against the director of the
petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the
Elliptical Orchids and Garden Center, for entering into a lease contract over
7,663.13 square meters of the property in 1990 for only P20,000 a month, when
the monthly rental should be P357,000 a month as determined by the
Commission on Audit; and that instead of complying with the directive of the COA
for the cancellation of the contract for being grossly prejudicial to the
18 | P a g e

government, the petitioner renewed the same on March 13, 1995 for a monthly
rental of only P24,000. They assert that the petitioner uses the subsidies granted
by the government for charity patients and uses the rest of its income from the
property for the benefit of paying patients, among other purposes. They aver that
the petitioner failed to adduce substantial evidence that 100% of its out-patients
and 170 beds in the hospital are reserved for indigent patients. The respondents
further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its
record of service. That before a patient is admitted for treatment in the Center,
first impression is that it is pay-patient and required to pay a certain amount as
deposit. That even if a patient is living below the poverty line, he is charged with
high hospital bills. And, without these bills being first settled, the poor patient
cannot be allowed to leave the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that even the remains of
deceased poor patients suffered the same fate. Moreover, before a patient is
admitted for treatment as free or charity patient, one must undergo a series of
interviews and must submit all the requirements needed by the Center, usually
accompanied by endorsement by an influential agency or person known only to
the Center. These facts were heard and admitted by the Petitioner LCP during
the hearings before the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with the Center, they
prefer to be treated at the Quezon Institute. Can such practice by the Center be
called charitable?[10]

The Issues

The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and the
1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and
(b) whether the real properties of the petitioner are exempt from real property
taxes.

The Courts Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its corporate purposes, its
constitution and by-laws, the methods of administration, the nature of the actual
19 | P a g e

work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.[11]

In the legal sense, a charity may be fully defined as a gift, to be applied

consistently with existing laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or otherwise lessening
the burden of government.[12] It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man.[13] The word charitable is
not restricted to relief of the poor or sick.[14] The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or
not is whether it exists to carry out a purpose reorganized in law as charitable or
whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office
of the President of the Philippineswith the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison detre for the creation of the petitioner is
stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having
been the leading cause of illness and death in the Philippines, comprising more
than 45% of the total annual deaths from all causes, thus, exacting a tremendous
toll on human resources, which ailments are likely to increase and degenerate
into serious lung diseases on account of unabated pollution, industrialization and
unchecked cigarette smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable,
and curable with early and adequate medical care, immunization and through
prompt and intensive prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs,

strategies and efforts at preventing, treating and rehabilitating people affected by
lung diseases, and to undertake research and training on the cure and
prevention of lung diseases, through a Lung Center which will house and nurture
the above and related activities and provide tertiary-level care for more difficult
and problematical cases;
20 | P a g e

Whereas, to achieve this purpose, the Government intends to provide material

and financial support towards the establishment and maintenance of
a Lung Center for the welfare and benefit of the Filipino people.[15]

The purposes for which the petitioner was created are spelled out in its
Articles of Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated

medical institution which shall specialize in the treatment, care, rehabilitation
and/or relief of lung and allied diseases in line with the concern of the
government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the people of
the Philippines and in pursuance of the policy of the State to secure the well-
being of the people by providing them specialized health and medical services
and by minimizing the incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the

prevention of lung or pulmonary ailments and the care of lung patients, including
the holding of a series of relevant congresses, conventions, seminars and
conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to collect and publish the
findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information

on lung consciousness or awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the general purposes or
objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers

and medical and technical personnel in the practical and scientific
implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung

diseases, to encourage advanced training in matters of the lung and related
fields and to support educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial

and/or city and local levels; and to coordinate their various efforts and activities
21 | P a g e

for the purpose of achieving a more effective programmatic approach on the

common problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;

9. To extend, whenever possible and expedient, medical services to the public

and, in general, to promote and protect the health of the masses of our people,
which has long been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor
and needy, all without regard to or discrimination, because of race, creed, color
or political belief of the persons helped; and to enable them to obtain treatment
when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and

carried on to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment,
educational materials and supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner, and, on such basis as the
Center shall, from time to time, deem proper and best, under the particular
circumstances, to serve its general and non-profit purposes and objectives;

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein mentioned;
and

14. To do everything necessary, proper, advisable or convenient for the

accomplishment of any of the powers herein set forth and to do every other act
and thing incidental thereto or connected therewith.[16]

Hence, the medical services of the petitioner are to be rendered to the public
in general in any and all walks of life including those who are poor and the needy
without discrimination. After all, any person, the rich as well as the poor, may fall
sick or be injured or wounded and become a subject of charity.[17]

As a general principle, a charitable institution does not lose its character as

such and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money
22 | P a g e

inures to the private benefit of the persons managing or operating the

institution.[18] In Congregational Sunday School, etc. v. Board of Review,[19] the
State Supreme Court of Illinois held, thus:

[A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are
able to pay are required to do so, where no profit is made by the institution and
the amounts so received are applied in furthering its charitable purposes, and
those benefits are refused to none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in favor of charitable institutions
are based is the benefit conferred upon the public by them, and a consequent
relief, to some extent, of the burden upon the state to care for and advance the
interests of its citizens.[20]

As aptly stated by the State Supreme Court of South Dakota in Lutheran

Hospital Association of South Dakota v. Baker:[21]

[T]he fact that paying patients are taken, the profits derived from attendance
upon these patients being exclusively devoted to the maintenance of the charity,
seems rather to enhance the usefulness of the institution to the poor; for it is a
matter of common observation amongst those who have gone about at all
amongst the suffering classes, that the deserving poor can with difficulty be
persuaded to enter an asylum of any kind confined to the reception of objects of
charity; and that their honest pride is much less wounded by being placed in an
institution in which paying patients are also received. The fact of receiving money
from some of the patients does not, we think, at all impair the character of the
charity, so long as the money thus received is devoted altogether to the
charitable object which the institution is intended to further. [22]

The money received by the petitioner becomes a part of the trust fund and
must be devoted to public trust purposes and cannot be diverted to private profit
or benefit.[23]

Under P.D. No. 1823, the petitioner is entitled to receive donations. The
petitioner does not lose its character as a charitable institution simply because
the gift or donation is in the form of subsidies granted by the government. As held
by the State Supreme Court of Utah in Yorgason v. County Board of Equalization
of Salt Lake County:[24]

Second, the government subsidy payments are provided to the project. Thus,
those payments are like a gift or donation of any other kind except they come
from the government. In both Intermountain Health Care and the present case,
the crux is the presence or absence of material reciprocity. It is entirely irrelevant
23 | P a g e

to this analysis that the government, rather than a private benefactor, chose to
make up the deficit resulting from the exchange between St. Marks Tower and
the tenants by making a contribution to the landlord, just as it would have been
irrelevant in Intermountain Health Care if the patients income supplements had
come from private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such
housing is by the government rather than private charitable contributions does
not dictate the denial of a charitable exemption if the facts otherwise support
such an exemption, as they do here.[25]

In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and 1992 for its
patients and for the operation of the hospital. It even incurred a net loss in 1991
and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent

the second issue, that those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are not actually, directly
and exclusively used for charitable purposes.

The settled rule in this jurisdiction is 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 effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the law too plain
to be mistaken.[26] As held in Salvation Army v. Hoehn:[27]

An intention on the part of the legislature to grant an exemption from the taxing
power of the state will never be implied from language which will admit of any
other reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed
strictly against the property owner and in favor of the public. This principle
applies with peculiar force to a claim of exemption from taxation . [28]

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,

specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock

corporation organized primarily to help combat the high incidence of lung and
24 | P a g e

pulmonary diseases in the Philippines, all donations, contributions, endowments

and equipment and supplies to be imported by authorized entities or persons and
by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual
use and benefit of the Lung Center, shall be exempt from income and gift taxes,
the same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal
Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for
the Lung Center.[29]

It is plain as day that under the decree, the petitioner does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have
been among the enumeration of tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one

person, thing, or consequence implies the exclusion of all others. The rule is
expressed in the familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of

ways. One variation of the rule is principle that what is expressed puts an end to
that which is implied. Expressium facit cessare tacitum.Thus, where a statute, by
its terms, is expressly limited to certain matters, it may not, by interpretation or
construction, be extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural
workings of the human mind. They are predicated upon ones own voluntary act
and not upon that of others. They proceed from the premise that the legislature
would not have made specified enumeration in a statute had the intention been
not to restrict its meaning and confine its terms to those expressly mentioned. [30]

The exemption must not be so enlarged by construction since the reasonable

presumption is that the State has granted in express terms all it intended to grant
at all, and that unless the privilege is limited to the very terms of the statute the
favor would be intended beyond what was meant.[31]

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

25 | P a g e

(3) Charitable institutions, churches and parsonages or convents appurtenant

thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.[32]

The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes.[34]

Consequently, the constitutional provision is implemented by Section 234(b)

of Republic Act No. 7160 (otherwise known as the Local Government Code of
1991) as follows:

SECTION 234. Exemptions from Real Property Tax. The following are exempted
from payment of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant

thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35]

We note that under the 1935 Constitution, ... all lands, buildings, and
improvements used exclusively for charitable purposes shall be exempt from
taxation.[36] However, under the 1973 and the present Constitutions, for lands,
buildings, and improvements of the charitable institution to be considered
exempt, the same should not only be exclusively used for charitable purposes; it
is required that such property be used actually and directly for such purposes. [37]

In light of the foregoing substantial changes in the Constitution, the petitioner

cannot rely on our ruling in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961 before the 1973 and
1987 Constitutions took effect.[38] As this Court held in Province of Abra v.
Hernando:[39]

Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents

appurtenant thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable, or educational purposes shall be exempt from taxation.
The present Constitution added charitable institutions, mosques, and non-profit
26 | P a g e

cemeteries and required that for the exemption of lands, buildings, and
improvements, they should not only be exclusively but also actually and directly
used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words
actually as well as directly not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious
or charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. Exclusive is defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and exclusively is defined,
in a manner to exclude; as enjoying a privilege exclusively.[40] If real property is
used for one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.[41] The words dominant use or
principal use cannot be substituted for the words used exclusively without doing
violence to the Constitutions and the law.[42] Solely is synonymous with
exclusively.[43]

What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is organized. It
is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.[44]

The petitioner failed to discharge its burden to prove that the entirety of its
real property is actually, directly and exclusively used for charitable
purposes. While portions of the hospital are used for the treatment of patients
and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a
canteen.Further, a portion of the land is being leased to a private individual for
her business enterprise under the business name Elliptical Orchids
and Garden Center. Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the
said lessees.

Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes.[45] On the other hand, the portions of the land occupied by the
27 | P a g e

hospital and portions of the hospital used for its patients, whether paying or non-
paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY

GRANTED. The respondent Quezon City Assessor is hereby DIRECTED to
determine, after due hearing, the precise portions of the land and the area
thereof which are leased to private persons, and to compute the real property
taxes due thereon as provided for by law.SO ORDERED.

[G.R. No. 127105. June 25, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON

AND SON, INC., and COURT OF APPEALS, respondents.

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 [respondents] case fall squarely
28 | P a g e

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). [Respondents] claim for the refund
of P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

______ _______ __________ __________
______

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 P963,266[1]

======== ======== ======= =======

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.
29 | P a g e

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. Johnsons invocation of the most
favored nation clause is in the nature of a claim 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
30 | P a g e

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 Commissioners 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 petitioners 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 clauses application.

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:

31 | P a g e

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; xxx

(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; xxx

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. Petitioners 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
petitioners 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 Code[4] 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-
32 | P a g e

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.

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

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
33 | P a g e

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:

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:

dd) royalties, as defined in paragraph 3 of Article 12;

c) For the purpose of the credit referred in subparagraph b) the Philippine tax
shall be deemed to be

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.

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. Petitioners 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.
34 | P a g e

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.[6] On 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 taxation[7] 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], citing the Committee on Fiscal Affairs of the Organization for
35 | P a g e

Economic Co-operation and Development (OECD).11 The apparent rationale for

doing away with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic
economies.[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 taxpayers 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
36 | P a g e

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
37 | P a g e

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. xxx.

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
38 | P a g e

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 favored nation clause to 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
39 | P a g e

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.

GREPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.

MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

From the decision of the Court of First Instance of Manila (in Civil Case No.
34100) ordering it to pay to plaintiff Republic of the Philippines the sum of
P4,802.37 with 6% interest thereon from the date of the filing of the complaint
until fully paid, plus costs, defendant Mambulao Lumber Company interposed the
present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as
follows: (a) under the first cause of action, for forest charges covering the period
from September 10, 1952 to May 24, 1953, defendants admitted that they have
a liability of P587.37, which liability is covered by a bond executed by defendant
General Insurance & Surety Corporation for Mambulao Lumber Company,
jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b)
under the second cause of action, both defendants admitted a joint and several
liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated
November 27, 1953; and (c) under the third cause of action, both defendants
admitted a joint and several liability in favor of plaintiff for P3,928.30, also
covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already
mentioned is admitted, then what is the defense interposed by the defendants?
The defense presented by the defendants is quite unusual in more ways than
one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956,
defendant Mambulao Lumber Company paid to the Republic of the Philippines
P8,200.52 for 'reforestation charges' and for the period commencing from April
30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the
Philippines for 'reforestation charges'. These reforestation were paid to the
plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there
shall be collected, in addition to the regular forest charges provided under
Section 264 of Commonwealth Act 466 known as the National Internal Revenue
40 | P a g e

Code, the amount of P0.50 on each cubic meter of timber... cut out and
removed from any public forest for commercial purposes. The amount collected
shall be expended by the director of forestry, with the approval of the secretary
of agriculture and commerce, for reforestation and afforestation of watersheds,
denuded areas ... and other public forest lands, which upon investigation, are
found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it
is the contention of the defendant Mambulao Lumber Company that since the
Republic of the Philippines has not made use of those reforestation charges
collected from it for reforesting the denuded area of the land covered by its
license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao
Lumber Company owed the Republic of the Philippines for reforestation
charges. In line with this thought, defendant Mambulao Lumber Company wrote
the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of
which said defendant requested "that our account with your bureau be credited
with all the reforestation charges that you have imposed on us from July 1,
1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of
defendant Mambulao Lumber Company was answered by the director of
forestry on March 12, 1957, marked Exh. 2, in which the director of forestry
quoted an opinion of the secretary of justice, to the effect that he has no
discretion to extend the time for paying the reforestation charges and also
explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid
by defendant-appellant company to plaintiff-appellee as reforestation charges
from 1947 to 1956 may be set off or applied to the payment of the sum of
P4,802.37 as forest charges due and owing from appellant to appellee. It is
appellant's contention that said sum of P9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or
may be applied in compensation of said sum of P4,802.37 due from it as forest
charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115,
provides:

SECTION 1. There shall be collected, in addition to the regular forest

charges provided for under Section two hundred and sixty-four of
Commonwealth Act Numbered Four Hundred Sixty-six, known as the
National Internal Revenue Code, the amount of fifty centavos on each
cubic meter of timber for the first and second groups and forty centavos for
the third and fourth groups cut out and removed from any public forest for
41 | P a g e

commercial purposes. The amount collected shall be expended by the

Director of Forestry, with the approval of the Secretary of Agriculture and
Natural Resources (commerce), for reforestation and afforestation of
watersheds, denuded areas and cogon and open lands within forest
reserves, communal forest, national parks, timber lands, sand dunes, and
other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the
growing of economic trees for timber, tanning, oils, gums, and other minor
forest products or medicinal plants, or for watersheds protection, or for
prevention of erosion and floods and preparation of necessary plans and
estimate of costs and for reconnaisance survey of public forest lands and
for such other expenses as may be deemed necessary for the proper
carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the
preceding paragraph and from the sale of barks, medical plants and other
products derived from plantations as herein provided shall constitute a fund
to be known as Reforestation Fund, to be expended exclusively in carrying
out the purposes provided for under this Act. All provincial or city treasurers
and their deputies shall act as agents of the Director of Forestry for the
collection of the revenues or incomes derived from the provisions of this
Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as
reforestation charges from a timber licenses or concessionaire shall constitute a
fund to be known as the Reforestation Fund, and that the same shall be
expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources for the reforestation or afforestation, among
others, of denuded areas which, upon investigation, are found to be needing
reforestation or afforestation. Note that there is nothing in the law which requires
that the amount collected as reforestation charges should be used exclusively for
the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same should be refunded to him.
Observe too, that the licensee's area may or may not be reforested at all,
depending on whether the investigation thereof by the Director of Forestry shows
that said area needs reforestation. The conclusion seems to be that the amount
paid by a licensee as reforestation charges is in the nature of a tax which forms a
part of the Reforestation Fund, payable by him irrespective of whether the area
covered by his license is reforested or not. Said fund, as the law expressly
provides, shall be expended in carrying out the purposes provided for
42 | P a g e

thereunder, namely, the reforestation or afforestation, among others, of denuded

areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the

new Civil Code2 is applicable, such that the sum of P9,127.50 paid by it as
reforestation charges may compensate its indebtedness to appellee in the sum of
P4,802.37 as forest charges. But in the view we take of this case, appellant and
appellee are not mutually creditors and debtors of each other. Consequently, the
law on compensation is inapplicable. On this point, the trial court correctly
observed: .

Under Article 1278, NCC, compensation should take place when two
persons in their own right are creditors and debtors of each other. With
respect to the forest charges which the defendant Mambulao Lumber
Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe
anything, crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other,
because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as
the forest charges in question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is

allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued
on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no

set-off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is
that taxes are not in the nature of contracts between the party and party but
grow out of a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of individual
taxpayers is not required. ... If the taxpayer can properly refuse to pay his
tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that
some legitimate and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax must await and abide
43 | P a g e

the result of a lawsuit, and meanwhile the financial affairs of the

government will be thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in
all respects, with costs against the defendant-appellant. So ordered.

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.

This is a petition for certiorari and mandamus against the Judge of the Court of
First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul
certain orders of the court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No.
L-14674, January 30, 1960, this Court declared as final and executory the order
for the payment by the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of First Instance of
Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate
of the Late Walter Scott Price." In order to enforce the claims against the estate
the fiscal presented a petition dated June 21, 1961, to the court below for the
execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the
estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as
follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K.

Price, Administratrix of the estate of her late husband Walter Scott Price and
Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra, legal adviser in
Malacañang to Executive Secretary De Leon dated December 14, 1956, the
note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated
August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00,
and an extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented
by the administratrix Simeona K. Price, as directed in the above note of the
President. Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of Internal
44 | P a g e

Revenue as ordered paid by this Court on July 5, 1960 in accordance with the
order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be
deducted from the amount of P262,200.00 due and payable to the
Administratrix Simeona K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and
it orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only
fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially
taking into consideration that the amount due to the Government draws
interests while the credit due to the present state does not accrue any interest.
(Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the
execution of the claim of the Government against the estate must be denied for
lack of merit. The ordinary procedure by which to settle claims of indebtedness
against the estate of a deceased person, as an inheritance tax, is for the claimant
to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of
this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R.
No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court
for the payment of debts and expenses of administration. The proper procedure
is for the court to order the sale of personal estate or the sale or mortgage of
real property of the deceased and all debts or expenses of administrator and
with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when
sale or mortgage of real estate is to be made, the regulations contained in Rule
90, section 7, should be complied with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order for that purpose, after hearing,
settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances
45 | P a g e

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. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner, vs.

INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

The petitioner invokes legal and equitable grounds to reverse the

questioned decision of the Intermediate Appellate Court, to set aside the auction
sale of his property which took place on December 5, 1977, and to allow him to
46 | P a g e

recover a 203 square meter lot which was, sold at public auction to Ho
Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story

house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay
City, Metro Manila. The lot, with an area of about 328 square meters, is
described and covered by Transfer Certificate of Title No. 4739 (37795) of the
Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00
representing the estimated amount equivalent to the assessed value of the
aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
Thus, on December 5, 1977, his property was sold at public auction by the City
Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464
known as the Real Property Tax Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No.

1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez,
seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name
of a new certificate of title. Upon verification through his lawyer, Francia
discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by
the City Treasurer on December 11, 1978. The auction sale and the final bill of
sale were both annotated at the back of TCT No. 4739 (37795) by the Register of
Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He
later amended his complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered

dismissing the amended complaint and ordering:
47 | P a g e

(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of
Title in favor of the defendant Ho Fernandez over the parcel of land including
the improvements thereon, subject to whatever encumbrances appearing at the
back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795)
cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as

attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of
law:

I. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A

GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO
PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE
AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE
FORMER.

II. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A

GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS
NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN
ALLEGED TAX DELINQUENCY OF P2,400.00.

III. RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER

COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO
FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE
AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the
petitioner's allegations that his property was sold at public auction without notice
to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought
the problems raised in his petition upon himself. While we commiserate with him
48 | P a g e

at the loss of his property, the law and the facts militate against the grant of his
petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax
obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation,

obligations of persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article
1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;

(3) that the two debts be due.

This principal contention of the petitioner has no merit. We have

consistently ruled that there can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results of a
lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court
ruled that Internal Revenue Taxes can not be the subject of set-off or
compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is

allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374).
"The general rule based on grounds of public policy is well-settled that no set-
off admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow
out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of individual taxpayers is not required.
..."
49 | P a g e

We stated that a taxpayer cannot refuse to pay his tax when called upon by
the collector because he has a claim against the governmental body not included
in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where
we stated that: "... internal revenue taxes can not be the subject of
compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The
tax was due to the city government while the expropriation was effected by the
national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the
Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that
he knew about the P4,116.00 deposited with the bank but he did not withdraw it.
It would have been an easy matter to withdraw P2,400.00 from the deposit so
that he could pay the tax obligation thus aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as
well be shown later, he claimed that he pocketed the notice of the auction sale
without reading it.

Petitioner contends that "the auction sale in question was made without
complying with the mandatory provisions of the statute governing tax sale. No
evidence, oral or otherwise, was presented that the procedure outlined by law on
sales of property for tax delinquency was followed. ... Since defendant Ho
Fernandez has the affirmative of this issue, the burden of proof therefore rests
upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the
auction sale, has the burden of proof to show that there was compliance with all
the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

... [D]ue process of law to be followed in tax proceedings must be established

by proof and the general rule is that the purchaser of a tax title is bound to take
upon himself the burden of showing the regularity of all proceedings leading up
to the sale. (emphasis supplied)
50 | P a g e

There is no presumption of the regularity of any administrative action which

results in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa
Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is
actually an exception to the rule that administrative proceedings are presumed to
be regular.

But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that
he did receive the notice for the auction sale. The records sustain the lower
court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he
was not properly notified of the auction sale. Surprisingly, however, he admitted
in his testimony that he received the letter dated November 21, 1977 (Exhibit
"I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he
was not present on December 5, 1977 the date of the auction sale because he
went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed ...
.

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez

notified you that the property in question shall be sold at public auction to the
highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you
tell the Court whether you received the original of this letter?

A. I just signed it because I was not able to read the same. It was just sent by
mail carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his
part when he ignored such notice. By his very own admission that he received
the notice, his now coming to court assailing the validity of the auction sale loses
its force.
51 | P a g e

Petitioner's third assignment of grave error likewise lacks merit. As a general

rule, gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA
567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289;
Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v.
Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of
price is not material when the law gives the owner the right to redeem as when a
sale is made at public auction, upon the theory that the lesser the price, the
easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA
985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands
were sold are unconscionable considering the wide divergence between their
assessed values and the amounts for which they had been actually sold.
However, while in ordinary sales for reasons of equity a transaction may be
invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem, as when a sale is
made at public auction, upon the theory that the lesser the price the easier it is
for the owner to effect the redemption. And so it was aptly said: "When there is
the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and
thus recover the loss he claims to have suffered by reason of the price obtained
at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et.
ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for

taxes, the collection of taxes in this manner would be greatly embarrassed, if
not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the inadequacy of
the price given is not a valid objection to the sale." This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be
useless to offer the property. Indeed, it is notorious that the prices habitually
paid by purchasers at tax sales are grossly out of proportion to the value of the
land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v.
Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of

hardship from which we would be glad to relieve, but do so would unsettle long-
52 | P a g e

established rules and lead to uncertainty and difficulty in the collection of taxes
which are the life blood of the state. We are convinced that the present rules
are just, and that they bring hardship only to those who have invited it by their
own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has
greatly appreciated in value. Precisely because of the widening of Buendia
Avenue in Pasay City, which necessitated the expropriation of adjoining areas,
real estate values have gone up in the area. However, the price quoted by the
petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the
petition.

And finally, even if we are inclined to give relief to the petitioner on

equitable grounds, there are no strong considerations of substantial justice in his
favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of
the auction sale. He claims to have pocketed the notice of sale without reading it
which, if true, is still an act of inexplicable negligence. He did not withdraw from
the expropriation payment deposited with the Philippine National Bank an
amount sufficient to pay for the back taxes. The petitioner did not pay attention to
another notice sent by the City Treasurer on November 3, 1978, during the
period of redemption, regarding his tax delinquency. There is furthermore no
showing of bad faith or collusion in the purchase of the property by Mr.
Fernandez. The petitioner has no standing to invoke equity in his attempt to
regain the property by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is

DISMISSED. The decision of the respondent court is affirmed.SO ORDERED.

CALTEX PHILIPPINES, INC., petitioner, vs.THE HONORABLE COMMISSION

ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ
and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

This is a petition erroneously brought under Rule 44 of the Rules of

Court 1 questioning the authority of the Commission on Audit (COA) in
disallowing petitioner's claims for reimbursement from the Oil Price Stabilization
Fund (OPSF) and seeking the reversal of said Commission's decision denying its
claims for recovery of financing charges from the Fund and reimbursement of
underrecovery arising from sales to the National Power Corporation, Atlas
Consolidated Mining and Development Corporation (ATLAS) and Marcopper
Mining Corporation (MAR-COPPER), preventing it from exercising the right to
offset its remittances against its reimbursement vis-a-vis the OPSF and
53 | P a g e

disallowing its claims which are still pending resolution before the Office of
Energy Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the

Constitutional Commissions 3 may be brought to this Court on certiorari by the
aggrieved party within thirty (30) days from receipt of a copy thereof.
The certiorari referred to is the special civil action for certiorari under Rule 65 of
the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no
respect for the findings and rulings of the administrator of the fund itself and in
disallowing a claim which is still pending resolution at the OEA level, and (b)
"grave abuse of discretion and completely without jurisdiction" 5 in declaring that
petitioner cannot avail of the right to offset any amount that it may be required
under the law to remit to the OPSF against any amount that it may receive by
way of reimbursement therefrom are sufficient to bring this petition within Rule 65
of the Rules of Court, and, considering further the importance of the issues
raised, the error in the designation of the remedy pursued will, in this instance, be
excused.

The issues raised revolve around the OPSF created under Section 8 of
Presidential Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No.
137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the
Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for
the purpose of minimizing frequent price changes brought about by exchange
rate adjustments and/or changes in world market prices of crude oil and
imported petroleum products. The Oil Price Stabilization Fund may be sourced
from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the
54 | P a g e

Board of Energy requiring payment by persons or companies engaged in the

business of importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than
the peso costs computed using the reference foreign exchange rate as fixed by
the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustment and/or increase in
world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as

a result of the reduction of domestic prices of petroleum products. The
magnitude of the underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of
Energy.

The material operative facts of this case, as gathered from the pleadings of
the parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI),
hereinafter referred to as Petitioner, directing the latter to remit to the OPSF its
collection, excluding that unremitted for the years 1986 and 1988, of the
additional tax on petroleum products authorized under the aforesaid Section 8 of
P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00
and informing it that, pending such remittance, all of its claims for reimbursement
from the OPSF shall be held in abeyance. 6
55 | P a g e

On 9 March 1989, the COA sent another letter to petitioner informing it that
partial verification with the OEA showed that the grand total of its unremitted
collections of the above tax is P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty
(60) days from receipt of the letter; advising it that the COA will hold in abeyance
the audit of all its claims for reimbursement from the OPSF; and directing it to
desist from further offsetting the taxes collected against outstanding claims in
1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early
release of its reimbursement certificates from the OPSF covering claims with the
Office of Energy Affairs since June 1987 up to March 1989, invoking in support
thereof COA Circular No. 89-299 on the lifting of pre-audit of government
transactions of national government agencies and government-owned or
controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for
the early release of the reimbursement certificates from the OPSF and
repeated its earlier directive to petitioner to forward payment of the latter's
unremitted collections to the OPSF to facilitate COA's audit action on the
reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA
a proposal for the payment of the collections and the recovery of claims, since
the outright payment of the sum of P1.287 billion to the OEA as a prerequisite for
the processing of said claims against the OPSF will cause a very serious
impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of

payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF.
56 | P a g e

(3) The COA audit will commence immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to

preclude further accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down
Decision No. 921 accepting the above-stated proposal but prohibiting petitioner
from further offsetting remittances and reimbursements for the current and
ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella,

President, Petron Corporation, and Mr. Francis Ablan, President and Managing
Director, Caltex (Philippines) Inc., for reconsideration of this Commission's
adverse action embodied in its letters dated February 2, 1989 and March 9,
1989, the former directing immediate remittance to the Oil Price Stabilization
Fund of collections made by the firms pursuant to P.D. 1956, as amended by
E.O. No. 137, S. 1987, and the latter reiterating the same directive but further
advising the firms to desist from offsetting collections against their claims with
the notice that "this Commission will hold in abeyance the audit of all . . . claims
for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy

Regulatory Board, the aforenamed oil companies were allowed to offset the
amounts due to the Oil Price Stabilization Fund against their outstanding claims
from the said Fund for the calendar years 1987 and 1988, pending with the then
Ministry of Energy, the government entity charged with administering the OPSF.
This Commission, however, expressing serious doubts as to the propriety of the
offsetting of all types of reimbursements from the OPSF against all categories
of remittances, advised these oil companies that such offsetting was bereft of
legal basis. Aggrieved thereby, these companies now seek reconsideration and
in support thereof clearly manifest their intent to make arrangements for the
remittance to the Office of Energy Affairs of the amount of collections equivalent
to what has been previously offset, provided that this Commission authorizes
the Office of Energy Affairs to prepare the corresponding checks representing
reimbursement from the OPSF. It is alleged that the implementation of such an
arrangement, whereby the remittance of collections due to the OPSF and the
reimbursement of claims from the Fund shall be made within a period of not
more than one week from each other, will benefit the Fund and not unduly
jeopardize the continuing daily cash requirements of these firms.
57 | P a g e

Upon a circumspect evaluation of the circumstances herein obtaining, this

Commission perceives no further objectionable feature in the proposed
arrangement, provided that 15% of whatever amount is due from the Fund is
retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be noted in
the course of audit and surcharges for late remittances without prejudice to
similar future retentions to answer for any deficiency in such surcharges, and
provided further that no offsetting of remittances and reimbursements for the
current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter
to Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7,

1989, and based on our initial verification of documents submitted to us by your
Office in support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to
May 31, 1989, as well as its outstanding claims against the Oil Price
Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your
Office that Caltex (Philippines), Inc. shall be required to remit to OPSF an
amount of P1,505,668,906, representing remittances to the OPSF which were
offset against its claims reimbursements (net of unsubmitted claims). In
addition, the Commission hereby authorize (sic) the Office of Energy Affairs
(OEA) to cause payment of P1,959,182,612 to Caltex, representing claims
initially allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled

P387,683,535, which included P130,420,235 representing those claims
disallowed by OEA, details of which is (sic) shown in Schedule 1 as
summarized as follows:

Disallowance of COA
ParticularsAmount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300
58 | P a g e

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to

indicate that recovery of financing charges by oil companies is not among the
items for which the OPSF may be utilized. Therefore, it is our view that recovery
of financing charges has no legal basis. The mechanism for such claims
is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA

Order No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity
date that (sic) oil companies should pay OPSF impost on export sales of
petroleum products. Effective February 7, 1987 sales to international
vessels/airlines should not be included as part of its domestic sales. Changing
the effectivity date of the resolution from February 7, 1987 to October 20, 1987
as covered by subsequent ERB Resolution No. 88-12 dated November 18,
1988 has allowed Caltex to include in their domestic sales volumes to
international vessels/airlines and claim the corresponding reimbursements from
OPSF during the period. It is our opinion that the effectivity of the said
resolution should be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions

including the related BLA agreement, as they affect the claims for
reimbursements of ad valorem taxes. We observed that oil companies
immediately settle ad valorem taxes for BLA transaction (sic). Loan balances
therefore are not tax paid inventories of Caltex subject to reimbursements but
those of the borrower. Hence, we recommend reduction of the claim for July,
August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges
whether direct or indirect due and payable by the copper mining companies in
distress to the national and local governments." It is our opinion that LOI 1416
59 | P a g e

which implements the exemption from payment of OPSF imposts as effected by

OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of

the amount as herein authorized shall be subject to availability of funds of
OPSF as of May 31, 1989 and applicable auditing rules and regulations. With
regard to the disallowances, it is further informed that the aggrieved party has
30 days within which to appeal the decision of the Commission in accordance
with law.

On 8 September 1989, petitioner filed an Omnibus Request for the

Reconsideration of the decision based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING

RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE
DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD
PURSUANT TO EXECUTIVE ORDER NO. 137.

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE

OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY
REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR
REPEALED BY LEGISLATION.

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS
VALID.

On 6 November 1989, petitioner filed with the COA a Supplemental

Omnibus Request for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and
with Commissioner Fernandez dissenting in part, handed down Decision No.
1171 affirming the disallowance for recovery of financing charges, inventory
losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of
product sales or those arising from export sales. 15 Decision No. 1171 reads as
follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has
the .authority to recover financing charges from the OPSF on the basis of
Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which
allowed oil companies to "recover cost of financing working capital associated
with crude oil shipments," and provided a schedule of reimbursement in terms
60 | P a g e

of peso per barrel. It appears that on November 6, 1989, the DOF issued a
memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies

(were authorized) to refinance their imports of crude oil and petroleum
products from the normal trade credit of 30 days up to 360 days from date of
loading . . . Conformably . . ., the oil companies deferred their foreign
exchange remittances for purchases by refinancing their import bills from the
normal 30-day payment term up to the desired 360 days. This refinancing of
importations carried additional costs (financing charges) which then became,
due to government mandate, an inherent part of the cost of the purchases of
our country's oil requirement.

We beg to disagree with such contention. The justification that financing

charges increased oil costs and the schedule of reimbursement rate in peso
per barrel (Exhibit 1) used to support alleged increase (sic) were not validated
in our independent inquiry. As manifested in Exhibit 2, using the same formula
which the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable conclusion is that
the oil companies are actually gaining rather than losing from the extension of
credit because such extension enables them to invest the collections in
marketable securities which have much higher rates than those they incur due
to the extension. The Data we used were obtained from CPI (CALTEX)
Management and can easily be verified from our records.

With respect to product sales or those arising from sales to international

vessels or airlines, . . ., it is believed that export sales (product sales) are
entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It

is the considered view of this Commission that the OPSF is not liable to refund
such surtax on inventory losses because these are paid to BIR and not OPSF,
in view of which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that

you are entitled to claim recovery from the OPSF pursuant to LOI 1416 issued
on July 17, 1984, since these copper mining companies did not pay CPI
(CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds

that the CPI (CALTEX) has no authority to claim reimbursement for this
uncollected OPSF impost because LOI 1416 dated July 17, 1984, which
61 | P a g e

exempts distressed mining companies from "all taxes, duties, import fees and
other charges" was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation. Moreover, it is
evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present
petition wherein it imputes to the COA the commission of the following errors: 16

I.RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF

FINANCING CHARGES FROM THE OPSF.

II. RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING
FROM SALES TO NPC.

III. RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV. RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM

EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST
ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

V. RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS

WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE
DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment
on the petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez

and Cruz, assisted by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and
required the parties to file their respective Memoranda within twenty (20) days
from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General

prays that the Comment filed on 6 September 1990 be considered as the
Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support

thereof, that:
62 | P a g e

(1) In view of the expanded role of the OPSF pursuant to Executive Order No.
137, which added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a

result of the reduction of domestic prices of petroleum products. The magnitude
of the underrecovery, if any, shall be determined by the Ministry of Finance.
"Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry
(now Department) of Finance may include financing charges for "in essence,
financing charges constitute unrecovered cost of acquisition of crude oil incurred
by the oil companies," as explained in the 6 November 1989 Memorandum to the
President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at
the same time the tax on interest income increases. The relationship is such that
the presence of underrecovery or overrecovery is directly dependent on the
amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis;
it was filed on the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital

associated with crude oil shipments, the following guidelines on the utilization of
the Oil Price Stabilization Fund pertaining to the payment of the foregoing (sic)
exchange risk premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one
(1) percent for the first (6) months and 1/32 of one percent per month thereafter
up to a maximum period of one year, to be applied on crude oil' shipments from
January 1, 1987. Shipments with outstanding financing as of January 1, 1987
shall be charged on the basis of the fee applicable to the remaining period of
financing.
63 | P a g e

2. In addition, for shipments loaded after January 1987, oil companies shall be
allowed to recover financing charges directly from the OPSF per barrel of crude
oil based on the following schedule:

Financing Period

Reimbursement Rate
Pesos per Barrel

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days.

Pursuant to this circular, the Department of Finance, in its letter of 18 February

1987, advised the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

D ear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and
February 5, 1987 and subsequent discussions held by the Price Review
committee on February 6, 1987.

On the basis of the representations made, the Department of Finance

recognizes the necessity to reduce the foreign exchange risk premium accruing
to the Oil Price Stabilization Fund (OPSF). Such a reduction would allow the
industry to recover partly associated financing charges on crude oil imports.
Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat
charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter
up to a maximum period of one year, effective January 1, 1987. In addition,
since the prevailing company take would still leave unrecovered financing
64 | P a g e

charges, reimbursement may be secured from the OPSF in accordance with the
provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which
contains the guidelines for the computation of the foreign exchange risk fee and
the recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the
OPSF for both crude and product shipments loaded after January 1, 1987
based on the following rates:

Financing Period Reimbursement Rate

(PBbl.)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28
24
2. The above rates shall be subject to review every sixty days.

Then on 22 November 1988, the Department of Finance issued Circular No. 4-

88 imposing further guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-

87 dated February 18, 1987 which allowed the recovery of financing charges
directly from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the
claim on peso cost differential for a particular shipment and duly certified
supporting documents providedfor under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex

A) to be issued by the Office of Energy Affairs. The said certificate may be used
to offset against amounts payable to the OPSF. The oil companies may also
redeem said certificates in cash if not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum
Circular No. 88-12-017. 26
65 | P a g e

The COA can neither ignore these issuances nor formulate its own
interpretation of the laws in the light of the determination of executive agencies.
The determination by the Department of Finance and the OEA that financing
charges are recoverable from the OPSF is entitled to great weight and
consideration. 27 The function of the COA, particularly in the matter of allowing
or disallowing certain expenditures, is limited to the promulgation of accounting
and auditing rules for, among others, the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or uses
of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable.

Additionally, COA's claim that petitioner is gaining, instead of losing, from the
extension of credit, is belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular

or unnecessary government expenditures and as the monetary claims of
petitioner are not allowed by law, the COA acted within its jurisdiction in denying
them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing
charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-

87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do

not likewise allow reimbursement of financing
29
charges.

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy,
We find the theory of petitioner –– that such does not extend to the
disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or use of government funds and properties, but
only to the promulgation of accounting and auditing rules for, among others,
such disallowance –– to be untenable in the light of the provisions of the 1987
Constitution and related laws.
66 | P a g e

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts
of, and expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity, directly or indirectly,
from or through the government, which are required by law or the granting
institution to submit to such audit as a condition of subsidy or equity. However,
where the internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special pre-
audit, as are necessary and appropriate to correct the deficiencies. It shall keep
the general accounts, of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers pertaining
thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in
this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.

These present powers, consistent with the declared independence of the

Commission, 30 are broader and more extensive than that conferred by the
1973 Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any
of its subdivisions, agencies, or instrumentalities including government-owned
or controlled corporations, keep the general accounts of the Government and,
for such period as may be provided by law, preserve the vouchers pertaining
thereto; and promulgate accounting and auditing rules and regulations including
those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31
67 | P a g e

Upon the other hand, under the 1935 Constitution, the power and authority of
the COA's precursor, the General Auditing Office, were, unfortunately, limited;
its very role was markedly passive. Section 2 of Article XI thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts
pertaining to the revenues and receipts from whatever source, including trust
funds derived from bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or property pertaining to or
held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the preserve the
vouchers pertaining thereto. It shall be the duty of the Auditor General to bring
to the attention of the proper administrative officer expenditures of funds or
property which, in his opinion, are irregular, unnecessary, excessive, or
extravagant. He shall also perform such other functions as may be prescribed
by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or

extravagant expenditures or uses of funds, the 1935 Constitution did not grant
the Auditor General the power to issue rules and regulations to prevent the
same. His was merely to bring that matter to the attention of the proper
administrative officer.

The ruling on this particular point, quoted by petitioner from the cases
of Guevarra vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling
as the two (2) were decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General
under the 1935 Constitution and the Commission on Audit under the 1973
Constitution authorized them to disallow illegal expenditures of funds or uses of
funds and property. Our present Constitution retains that same power and
authority, further strengthened by the definition of the COA's general jurisdiction
in Section 26 of the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting
and auditing rules and regulations for the prevention of irregular, unnecessary,
excessive or extravagant expenditures or uses of funds, 36 the COA
promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
responsible for the enforcement of the rules and regulations, it goes without
saying that failure to comply with them is a ground for disapproving the payment
of the proposed expenditure. As observed by one of the Commissioners of the
1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37
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It should be noted, however, that whereas under Article XI, Section 2, of the
1935 Constitution the Auditor General could not correct "irregular, unnecessary,
excessive or extravagant" expenditures of public funds but could only "bring
[the matter] to the attention of the proper administrative officer," under the 1987
Constitution, as also under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations including those for
the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures or uses of government funds and
properties." Hence, since the Commission on Audit must ultimately be
responsible for the enforcement of these rules and regulations, the failure to
comply with these regulations can be a ground for disapproving the payment of
a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the
COA a more active role and invested it with broader and more extensive
powers, they did not intend merely to make the COA a toothless tiger, but rather
envisioned a dynamic, effective, efficient and independent watchdog of the
Government.

The issue of the financing charges boils down to the validity of Department of
Finance Circular No. 1-87, Department of Finance Circular No. 4-88 and the
implementing circulars of the OEA, issued pursuant to Section 8, P.D. No.
1956, as amended by E.O. No. 137, authorizing it to determine "other factors"
which may result in cost underrecovery and a consequent reimbursement from
the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis,
financing charges are not included in "cost underrecovery" and, therefore,
cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956,
as amended by E.O. No. 137, does not explicitly define what "cost
underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without

the corresponding reduction in the landed cost of oil inventories in the
possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery.
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These "other factors" can include only those which are of the same class or
nature as the two specifically enumerated in subparagraphs (i) and (ii). A
common characteristic of both is that they are in the nature of government
mandated price reductions. Hence, any other factor which seeks to be a part of
the enumeration, or which could qualify as a cost underrecovery, must be of the
same class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the
Department of Finance broad and unrestricted authority to determine or define
"other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an
enumeration of persons or things, by words of a particular and specific
meaning, such general words are not to be construed in their widest extent, but
are held to be as applying only to persons or things of the same kind or class as
those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily
discloses that they do not have a common characteristic. The first relates to
price reduction as directed by the Board of Energy while the second refers to
reduction in internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be
limited by the enumeration in these subparagraphs. What should be considered
for purposes of determining the "other factors" in subparagraph (iii) is the first
sentence of paragraph (2) of the Section which explicitly allows cost
underrecovery only if such were incurred as a result of the reduction of
domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost

underrecovery in the sense that such were incurred as a result of the inability to
fully offset financing expenses from yields in money market placements, they do
not, however, fall under the foregoing provision of P.D. No. 1956, as amended,
because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended,
is further amended by Congress, this Court can do nothing. The duty of this
Court is not to legislate, but to apply or interpret the law. Be that as it may, this
Court wishes to emphasize that as the facts in this case have shown, it was at
the behest of the Government that petitioner refinanced its oil import payments
from the normal 30-day trade credit to a maximum of 360 days. Petitioner could
be correct in its assertion that owing to the extended period for payment, the
financial institution which refinanced said payments charged a higher interest,
thereby resulting in higher financing expenses for the petitioner. It would appear
then that equity considerations dictate that petitioner should somehow be
70 | P a g e

allowed to recover its financing losses, if any, which may have been sustained
because it accommodated the request of the Government. Although under
Section 29 of the National Internal Revenue Code such losses may be
deducted from gross income, the effect of that loss would be merely to reduce
its taxable income, but not to actually wipe out such losses. The Government
then may consider some positive measures to help petitioner and others
similarly situated to obtain substantial relief. An amendment, as aforestated,
may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on

the part of the Department of Finance to determine or define "other factors" is to
uphold an undue delegation of legislative power, it clearly appearing that the
subject provision does not provide any standard for the exercise of the
authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise
is provided and that the legislature, in making the delegation, has prescribed
the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is

rendered irrelevant by reason of the foregoing disquisitions. It may nevertheless
be stated that petitioner failed to disprove COA's claim that it had in fact gained
in the process. Otherwise stated, petitioner failed to sufficiently show that it
incurred a loss. Such being the case, how can petitioner claim for
reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We
find for the petitioner. The respondents themselves admit in their Comment that
underrecovery arising from sales to NPC are reimbursable because NPC was
granted full exemption from the payment of taxes; to prove this, respondents
trace the laws providing for such exemption. 40 The last law cited is the Fiscal
Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which
provides, in part, "that the tax and duty exemption privileges of the National
Power Corporation, including those pertaining to its domestic purchases of
petroleum and petroleum products . . . are restored effective March 10, 1987."
In a Memorandum issued on 5 October 1987 by the Office of the President,
NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of

petroleum products to the NPC is evident in the recently passed Republic Act
No. 6952 establishing the Petroleum Price Standby Fund to support the
OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952 provides:
71 | P a g e

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost
increases of imported crude oil and finished petroleum products resulting from
foreign exchange rate adjustments and/or increases in world market prices of
crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the
National Power Corporation (NPC); and (c) other cost underrecoveries incurred
as may be finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products
to the National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and
MARCOPPER, petitioner relies on Letter of Instruction (LOI) 1416, dated 17
July 1984, which ordered the suspension of payments of all taxes, duties, fees
and other charges, whether direct or indirect, due and payable by the copper
mining companies in distress to the national government. Pursuant to this LOI,
then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular
No. 84-11-22 advising the oil companies that Atlas Consolidated Mining
Corporation and Marcopper Mining Corporation are among those declared to be
in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the
COA, in its 18 August 1989 letter to Executive Director Wenceslao R. de la Paz,
states that "it is our opinion that LOI 1416 which implements the exemption
from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its
Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to
claim reimbursement for this uncollected impost because LOI 1416 dated July
17, 1984, . . . was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation." 43 It is further
stated that: "Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by stabilizing oil
prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416

could not have intended to exempt said distressed mining companies from the
payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D.
1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137,
amending P.D. 1956, was issued on February 25, 1987.
72 | P a g e

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies
in line with the government's effort to prevent the collapse of the copper
industry. P.D No. 1956, as amended, was issued for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or
changes in world market prices of crude oil and imported petroleum product's;
and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining
companies in distress to the Notional and Local Governments . . ." On the other
hand, OPSF dues are not payable by (sic) distressed copper companies but by
oil companies. It is to be noted that the copper mining companies do not pay
OPSF dues. Rather, such imposts are built in or already incorporated in the
prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes
by distressed mining companies, it does not accord petitioner the same
privilege with respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons,
however, it is apparent that LOI 1416 was never published in the Official
Gazette 45 as required by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their
publication in the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official

Gazette all unpublished presidential issuances which are of general application,
and unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its
Resolution promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and
private laws, shall be published as a condition for their effectivity, which shall
begin fifteen days after publication unless a different effectivity date is fixed by
the legislature.

Covered by this rule are presidential decrees and executive orders promulgated
by the President in the exercise of legislative powers whenever the same are
validly delegated by the legislature or, at present, directly conferred by the
Constitution. Administrative rules and regulations must also be published if their
73 | P a g e

purpose is to enforce or implement existing laws pursuant also to a valid

delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall

immediately upon their approval, or as soon thereafter as possible, be
published in full in the Official Gazette, to become effective only after fifteen
days from their publication, or on another date specified by the legislature, in
accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in
the Official Gazette after its issuance or at any time after the decision in the
abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No.
200, issued on 18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their
publication either in the Official Gazette or in a newspaper of general circulation
in the Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general
circulation pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect,
petitioner's claim must still fail. Tax exemptions as a general rule are construed
strictly against the grantee and liberally in favor of the taxing authority. 48The
burden of proof rests upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed. The party claiming exemption must
therefore be expressly mentioned in the exempting law or at least be within its
purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence

of its sales to ATLAS and MARCOPPER, to claim reimbursement from the
OPSF under LOI 1416. Though LOI 1416 may suspend the payment of taxes
by copper mining companies, it does not give petitioner the same privilege with
respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner

maintains that the Department of Finance has still to issue a final and definitive
ruling thereon; accordingly, it was premature for COA to disallow it. By doing so,
the latter acted beyond its jurisdiction. 49 Respondents, on the other hand,
contend that said amount was already disallowed by the OEA for failure to
74 | P a g e

substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-
audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove
or substantiate its contention that the amount of P130,420,235.00 is still
pending before the OEA and the DOF. Additionally, We find no reason to doubt
the submission of respondents that said amount has already been passed upon
by the OEA. Hence, the ruling of respondent COA disapproving said claim must
be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due
to the OPSF from petitioner may be offset against petitioner's outstanding
claims from said fund. Petitioner contends that it should be allowed to offset its
claims from the OPSF against its contributions to the fund as this has been
allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New
Civil Code on compensation and Section 21, Book V, Title I-B of the Revised
Administrative Code which provides for "Retention of Money for Satisfaction of
Indebtedness to Government." 52 Petitioner also mentions communications from
the Board of Energy and the Department of Finance that supposedly authorize
compensation.

Respondents, on the other hand, citing Francia vs. IAC and

53
Fernandez, contend that there can be no offsetting of taxes against the
claims that a taxpayer may have against the government, as taxes do not arise
from contracts or depend upon the will of the taxpayer, but are imposed by law.
Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-
B of the Revised Administrative Code, is misplaced because "while this
provision empowers the COA to withhold payment of a government
indebtedness to a person who is also indebted to the government and apply the
government indebtedness to the satisfaction of the obligation of the person to
the government, like authority or right to make compensation is not given to the
private person." 54 The reason for this, as stated in Commissioner of Internal
Revenue vs. Algue, Inc., 55 is that money due the government, either in the form
of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-
off, the Revised Administrative Code makes it the respondents' duty to collect
petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it
do not arise as a result of taxation because "P.D. 1956, amended, did not
75 | P a g e

create a source of taxation; it instead established a special fund . . .," 56 and that
the OPSF contributions do not go to the general fund of the state and are not
used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a
public purpose behind OPSF exactions distinguishes such from a tax. Hence,
the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby
Fund to support the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to
pay any oil company which has an outstanding obligation to the Government
without said obligation being offset first, subject to the requirements of
compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are

not for a public purpose because they go to a special fund of the government.
Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the government; taxes may be levied with a regulatory
purpose to provide means for the rehabilitation and stabilization of a threatened
industry which is affected with public interest as to be within the police power of
the state. 57 There can be no doubt that the oil industry is greatly imbued with
public interest as it vitally affects the general welfare. Any unregulated increase
in oil prices could hurt the lives of a majority of the people and cause economic
crisis of untold proportions. It would have a chain reaction in terms of, among
others, demands for wage increases and upward spiralling of the cost of basic
commodities. The stabilization then of oil prices is of prime concern which the
state, via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that
the source of OPSF is taxation. No amount of semantical juggleries could dim
this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he
may have against the government. 58Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off. 59
76 | P a g e

We may even further state that technically, in respect to the taxes for the
OPSF, the oil companies merely act as agents for the Government in the
latter's collection since the taxes are, in reality, passed unto the end-users ––
the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes
collected to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be considered merely
as a debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its
claims for reimbursement, no compensation is likewise legally feasible. Firstly,
the Government and the petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that petitioner's claim is
already due and liquidated. Under Article 1279 of the Civil Code, in order that
compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been
stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by

third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid
precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952 does not
authorize oil companies to offset their claims against their OPSF contributions.
Instead, it prohibits the government from paying any amount from the
Petroleum Price Standby Fund to oil companies which have outstanding
obligations with the government, without said obligation being offset first subject
to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered

AFFIRMING the challenged decision of the Commission on Audit, except that
portion thereof disallowing petitioner's claim for reimbursement of
underrecovery arising from sales to the National Power Corporation, which is
hereby allowed.With costs against petitioner.SO ORDERED.
77 | P a g e

PHILEX MINING CORPORATION vs COMMISSIONER OF INTERNAL

REVENUE,

This is a petition for review on certiorari of the June 30, 2000 Decision[1] of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision[2] of the
Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3,
2001 Resolution[3] denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining),

entered into an agreement[4] with Baguio Gold Mining Company (Baguio Gold) for
the former to manage and operate the latters mining claim, known as the Sto.
Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement
was denominated as Power of Attorney and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio
Gold) shall make available to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as
from time to time may be required by the MANAGERS within the said
3-year period, for use in the MANAGEMENT of the STO. NINO
MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owners account in the
Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from
the STO. NINO MINE, which is left with the Sto. Nino PROJECT,
shall be added to such owners account.

5. Whenever the MANAGERS shall deem it necessary and

convenient in connection with the MANAGEMENT of the STO. NINO
MINE, they may transfer their own funds or property to the Sto. Nino
PROJECT, in accordance with the following arrangements:
78 | P a g e

(a) The properties shall be appraised and, together with the cash,
shall be carried by the Sto. Nino PROJECT as a special fund to be
known as the MANAGERS account.

(b) The total of the MANAGERS account shall not exceed

P11,000,000.00, except with prior approval of the PRINCIPAL;
provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT,
the amount not so paid in cash shall be added to the MANAGERS
account.

(c) The cash and property shall not thereafter be withdrawn from the
Sto. Nino PROJECT until termination of this Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the
desire of the PRINCIPAL to extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a projected termination of
this Agency, the ratio which the MANAGERS account has to the
owners account will be determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE, excluding the claims,
shall be transferred to the MANAGERS, except that such transferred
assets shall not include mine development, roads, buildings, and
similar property which will be valueless, or of slight value, to the
MANAGERS. The MANAGERS can, on the other hand, require at
their option that property originally transferred by them to the Sto.
Nino PROJECT be re-transferred to them. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.

12. The compensation of the MANAGER shall be fifty per cent (50%)
of the net profit of the Sto. Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.
79 | P a g e

16. The PRINCIPAL has current pecuniary obligation in favor of the

MANAGERS and, in the future, may incur other obligations in favor of
the MANAGERS. This Power of Attorney has been executed as
security for the payment and satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been
paid and satisfied in full, this Agency shall be revocable by the
PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the

PRINCIPAL and the MANAGERS to the contrary, the MANAGERS
may withdraw from this Agency by giving 6-month notice to the
PRINCIPAL. The MANAGERS shall not in any manner be held liable
to the PRINCIPAL by reason alone of such withdrawal. Paragraph
5(d) hereof shall be operative in case of the MANAGERS withdrawal.

In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the
agreement. However, the mine suffered continuing losses over the years which
resulted to petitioners withdrawal as manager of the mine on January 28,
1982 and in the eventual cessation of mine operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with

Dation in Payment[7] wherein Baguio Gold admitted an indebtedness to petitioner
in the amount of P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Golds tangible assets to petitioner,
transferring to the latter Baguio Golds equitable title in its Philodrill assets and
finally settling the remaining liability through properties that Baguio Gold may
acquire in the future.

On December 31, 1982, the parties executed an Amendment to Compromise

with Dation in Payment[8] where the parties determined that Baguio Golds
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indebtedness to petitioner actually amounted to P259,137,245.00, which sum

included liabilities of Baguio Gold to other creditors that petitioner had assumed
as guarantor. These liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT &
SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two
segments by first assigning its tangible assets for P127,838,051.00 and then
transferring its equitable title in its Philodrill assets for P16,302,426.00. The
parties then ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982
operations.

In its 1982 annual income tax return, petitioner deducted from its gross income
the amount of P112,136,000.00 as loss on settlement of receivables from Baguio
Gold against reserves and allowances.[9] However, the Bureau of Internal
Revenue (BIR) disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed
since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a
valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it
was charged off within the taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it
entered into with Baguio Gold. The bad debt deduction represented advances
made by petitioner which, pursuant to the management contract, formed part of
Baguio Golds pecuniary obligations to petitioner. It also included payments made
by petitioner as guarantor of Baguio Golds long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
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Petitioner also asserted that due to Baguio Golds irreversible losses, it

became evident that it would not be able to recover the advances and payments
it had made in behalf of Baguio Gold. For a debt to be considered worthless,
petitioner claimed that it was neither required to institute a judicial action for
collection against the debtor nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to
enforce collection and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal
and factual basis. It held that the alleged debt was not ascertained to be
worthless since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting debt
considering that, under the management contract, petitioner was to be paid fifty
percent (50%) of the projects net profit.[10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for

Review is hereby DENIED for lack of merit. The assessment in question,
viz: FAS-1-82-88-003067 for deficiency income tax in the amount of
P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby

ORDERED to PAY respondent Commissioner of Internal Revenue the
amount of P62,811,161.39, plus, 20% delinquency interest due computed
from February 10, 1995, which is the date after the 20-day grace period
given by the respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the
Sto. Nino mine were in the nature of a loan. It instead characterized the
advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the
Power of Attorney executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioners gross
income.
82 | P a g e

The CTA likewise held that the amount paid by petitioner for the long-term
loan obligations of Baguio Gold could not be allowed as a bad debt deduction. At
the time the payments were made, Baguio Gold was not in default since its loans
were not yet due and demandable. What petitioner did was to pre-pay the loans
as evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank
imposed and collected a pre-termination penalty for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon
denial of its motion for reconsideration,[13] petitioner took this recourse under Rule
45 of the Rules of Court, alleging that:

I. The Court of Appeals erred in construing that the advances made by

Philex in the management of the Sto. Nino Mine pursuant to the Power of
Attorney partook of the nature of an investment rather than a loan.

II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net
profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio
Gold in the development of the Sto. Nino Mine notwithstanding the clear
absence of any intent on the part of Philex and Baguio Gold to form a
partnership.

III. The Court of Appeals erred in relying only on the Power of Attorney and
in completely disregarding the Compromise Agreement and the Amended
Compromise Agreement when it construed the nature of the advances
made by Philex.

IV. The Court of Appeals erred in refusing to delve upon the issue of the
propriety of the bad debts write-off.[14]

Petitioner insists that in determining the nature of its business relationship

with Baguio Gold, we should not only rely on the Power of Attorney, but also on
the subsequent Compromise with Dation in Payment and Amended Compromise
with Dation in Payment that the parties executed in 1982. These documents,
allegedly evinced the parties intent to treat the advances and payments as a loan
and establish a creditor-debtor relationship between them.
83 | P a g e

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument
that is material in determining the true nature of the business relationship
between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be discovered
from the expressed language of the primary contract under which the parties
business relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties pursuant to
the termination of their business relationship created under the Power of
Attorney. On the other hand, it is the latter which established the juridical relation
of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be

considered as a subsequent or contemporaneous act that is reflective of the
parties true intent. The compromise agreements were executed eleven years
after the Power of Attorney and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made under the Power of
Attorney. The parties entered into the compromise agreements as a
consequence of the dissolution of their business relationship. It did not define
that relationship or indicate its real character.

An examination of the Power of Attorney reveals that a partnership or joint

venture was indeed intended by the parties. Under a contract of partnership, two
or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.[15] While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it has been held
that it may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no

precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar
community of interest in the business, sharing of profits and losses, and a
mutual right of control. x x x The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a general
84 | P a g e

business with some degree of continuity, while the joint venture is formed
for the execution of a single transaction, and is thus of a temporary
nature. x x x This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific undertaking.
x x x It would seem therefore that under Philippine law, a joint venture is a
form of partnership and should be governed by the law of partnerships.
The Supreme Court has however recognized a distinction between these
two business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint venture
with others. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates

that the parties had intended to create a partnership and establish a common
fund for the purpose. They also had a joint interest in the profits of the business
as shown by a 50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to

contribute money, property and industry to the common fund known as the Sto.
Nio mine.[17] In this regard, we note that there is a substantive equivalence in the
respective contributions of the parties to the development and operation of the
mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio
Gold were to contribute equally to the joint venture assets under their respective
accounts. Baguio Gold would contribute P11M under its owners account plus any
of its income that is left in the project, in addition to its actual mining
claim. Meanwhile, petitioners contribution would consist of its expertise in the
management and operation of mines, as well as the managers account which is
comprised of P11M in funds and property and petitioners compensation as
manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not bind itself to contribute money or
property to the project; that under paragraph 5 of the agreement, it was only
optional for petitioner to transfer funds or property to the Sto. Nio project
(w)henever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NIO MINE.[18]

The wording of the parties agreement as to petitioners contribution to the

common fund does not detract from the fact that petitioner transferred its funds
85 | P a g e

and property to the project as specified in paragraph 5, thus rendering effective

the other stipulations of the contract, particularly paragraph 5(c) which prohibits
petitioner from withdrawing the advances until termination of the parties business
relations. As can be seen, petitioner became bound by its contributions once the
transfers were made. The contributions acquired an obligatory nature as soon as
petitioner had chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c)

against withdrawal of advances should not be taken as an indication that it had
entered into a partnership with Baguio Gold; that the stipulation only showed that
what the parties entered into was actually a contract of agency coupled with an
interest which is not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked

or withdrawn by the principal due to an interest of a third party that depends
upon it, or the mutual interest of both principal and agent.[19] In this case, the non-
revocation or non-withdrawal under paragraph 5(c) applies to
the advances made by petitioner who is supposedly the agentand not the
principal under the contract. Thus, it cannot be inferred from the stipulation that
the parties relation under the agreement is one of agency coupled with an
interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that

the relationship of the parties was one of agency and not a partnership. Although
the said provision states that this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive
of the MANAGERS account, it does not necessarily follow that the parties
entered into an agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not
to confer a power in favor of petitioner to contract with third persons on behalf of
Baguio Gold but to create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latters mine through
the parties mutual contribution of material resources and industry. The essence
of an agency, even one that is coupled with interest, is the agents ability
to represent his principal and bring about business relations between the latter
and third persons.[20] Where representation for and in behalf of the principal is
merely incidental or necessary for the proper discharge of ones paramount
undertaking under a contract, the latter may not necessarily be a contract of
agency, but some other agreement depending on the ultimate undertaking of the
parties.[21]
86 | P a g e

In this case, the totality of the circumstances and the stipulations in the
parties agreement indubitably lead to the conclusion that a partnership was
formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by petitioner under the agreement. Paragraph 5 (d)
thereof provides that upon termination of the parties business relations, the ratio
which the MANAGERS account has to the owners account will be determined,
and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims shall be transferred to petitioner.[22] As pointed out by the
Court of Tax Appeals, petitioner was merely entitled to a proportionate return of
the mines assets upon dissolution of the parties business relations. There was
nothing in the agreement that would require Baguio Gold to make payments of
the advances to petitioner as would be recognized as an item of obligation or
accounts payable for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision that is
more consistent with a partnership than a creditor-debtor relationship. It should
be pointed out that in a contract of loan, a person who receives a loan or money
or any fungible thing acquires ownership thereof and is bound to pay the creditor
an equal amount of the same kind and quality.[23] In this case, however, there
was no stipulation for Baguio Gold to actually repay petitioner the cash and
property that it had advanced, but only the return of an amount pegged at a ratio
which the managers account had to the owners account.

In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business
relations over the Sto. Nino mine. The Power of Attorney clearly provides that
petitioner would only be entitled to the return of a proportionate share of the mine
assets to be computed at a ratio that the managers account had to the owners
account. Except to provide a basis for claiming the advances as a bad debt
deduction, there is no reason for Baguio Gold to hold itself liable to petitioner
87 | P a g e

under the compromise agreements, for any amount over and above the
proportion agreed upon in the Power of Attorney.

Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation with
neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date
for the advances to become due and demandable, and the manner of payment
was unclear. All these point to the inevitable conclusion that the advances were
not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is
the fact that it would receive 50% of the net profits as compensation under
paragraph 12 of the agreement. The entirety of the parties contractual
stipulations simply leads to no other conclusion than that petitioners
compensation is actually its share in the income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a
person of a share in the profits of a business is prima facie evidence that he is a
partner in the business. Petitioner asserts, however, that no such inference can
be drawn against it since its share in the profits of the Sto Nio project was in the
nature of compensation or wages of an employee, under the exception provided
in Article 1769 (4) (b).[24]

On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid wages pursuant to an employer-
employee relationship. To begin with, petitioner was the manager of the project
and had put substantial sums into the venture in order to ensure its viability and
profitability. By pegging its compensation to profits, petitioner also stood not to be
remunerated in case the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if it were truly just an
ordinary employee.

Consequently, we find that petitioners compensation under paragraph 12 of

the agreement actually constitutes its share in the net profits of the
partnership. Indeed, petitioner would not be entitled to an equal share in the
income of the mine if it were just an employee of Baguio Gold.[25] It is not
surprising that petitioner was to receive a 50% share in the net profits,
considering that the Power of Attorney also provided for an almost equal
88 | P a g e

contribution of the parties to the St. Nino mine. The compensation agreed upon
only serves to reinforce the notion that the parties relations were indeed of
partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as
investments in a partnership known as the Sto. Nino mine. The advances were
not debts of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the Power of
Attorney. As for the amounts that petitioner paid as guarantor to Baguio Golds
creditors, we find no reason to depart from the tax courts factual finding that
Baguio Golds debts were not yet due and demandable at the time that petitioner
paid the same. Verily, petitioner pre-paid Baguio Golds outstanding loans to its
bank creditors and this conclusion is supported by the evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed.[27] In this case,
petitioner failed to substantiate its assertion that the advances were subsisting
debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt
deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in

CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of the
Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex
Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income
in the amount of P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the payment of the
deficiency income tax, up to the actual date of payment. SO ORDERED.