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THIRD DIVISION [G.R. No. 166006, March 14, 2008] PLANTERS PRODUCTS, INC., Petitioner, vs. FERTIPHIL CORPORATION, Respondent. DECISION REYES, R.T., J.: THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes, executive orders, presidential decrees and other issuances. The Constitution vests that power not only in the Supreme Court but in all Regional Trial Courts. The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) affirming with modification that of the RTC in Makati City, [2] finding petitioner Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465. The Facts Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.[3] They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals. On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Philippines.[4] The LOI provides: 3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less than P10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring supplied) Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6] After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.[7] Fertiphil filed a complaint for collection and damages[8] against FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law. [9] Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry. In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller. RTC Disposition On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows: WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former: 1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand; 2) the sum of P100,000 as attorneys fees;

3) the cost of suit. SO ORDERED.[11] Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the RTC invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.: It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the exercise of the power of taxation. It is a settled principle that the power of taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations. One of the inherent limitations is that a tax may be levied only for public purposes: The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token, taxes may not be levied for purely private purposes, for building up of private fortunes, or for the redress of private wrongs. They cannot be levied for the improvement of private property, or for the benefit, and promotion of private enterprises, except where the aid is incident to the public benefit. It is well-settled principle of constitutional law that no general tax can be levied except for the purpose of raising money which is to be expended for public use. Funds cannot be exacted under the guise of taxation to promote a purpose that is not of public interest. Without such limitation, the power to tax could be exercised or employed as an authority to destroy the economy of the people. A tax, however, is not held void on the ground of want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371-372) In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount to the defendant Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc., another private domestic corporation, became richer by the amount of P6,698,144.00. Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and orders that the said amount should go to the defendant Planters Product, Inc. is unlawful because it violates the mandate that a tax can be levied only for a public purpose and not to benefit, aid and promote a private enterprise such as Planters Product, Inc. [12] PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court[14] allowed the appeal of PPI and remanded the case to the CA for proper disposition. CA Decision On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the following fallo: IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION that the award of attorneys fees is hereby DELETED.[15] In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality of LOI No. 1465, thus: The question then is whether it was proper for the trial court to exercise its power to judicially determine the constitutionality of the subject statute in the instant case. As a rule, where the controversy can be settled on other grounds, the courts will not resolve the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of political departments are valid, absent a clear and unmistakable showing to the contrary. However, the courts are not precluded from exercising such power when the following requisites are obtaining in a controversy before it: First, there must be before the court an actual case calling for the exercise of judicial review. Second, the question must be ripe for adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest opportunity; and lastly, the issue of

constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]). Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of the complaint also reveals that the instant action is founded on the claim that the levy imposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that the constitutionality of the law in question be the very lis mota of the case is present, making it proper for the trial court to rule on the constitutionality of LOI 1465.[16] The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still unconstitutional because it did not promote public welfare. The CA explained: In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law was an invalid exercise of the States power of taxation inasmuch as it violated the inherent and constitutional prescription that taxes be levied only for public purposes. It reasoned out that the amount collected under the levy was remitted to the depository bank of PPI, which the latter used to advance its private interest. On the other hand, appellant submits that the subject statutes passage was a valid exercise of police power. In addition, it disputes the court a quos findings arguing that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PPI. Of the three fundamental powers of the State, the exercise of police power has been characterized as the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It may be exercised as long as the activity or the property sought to be regulated has some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition). Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the test to determine the validity of a police measure as follows: (1) the interests of the public generally, as distinguished from those of a particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]). It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfar e. The governments commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals. [17] The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated: Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12, 1987, to wit: 2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by Planters and Planters Foundation) (such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the

Unpaid Capital), and subsequently for such capital increases as may be required for the continuing viability of Planters. The capital recovery component shall be in the minimum amount of P10 per bag, which will be added to the price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother company. In this connection, the Republic hereby acknowledges that the advances by Planters to Planters Foundation which were applied to the payment of the Planters shares now held in trust by Planters Foundation, have been assigned to, among others, the Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery component in the special trust account designated in the notice dated April 2, 1985, addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or before the 15th day of each month. The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currency-denominated obligations. (Records, pp. 42-43) Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister Virata taken together with the Justice Secretarys Opinion does not preponderantly demonstrate that the collections made were held in trust in favor of millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this Court is constrained to rely on what is explicitly provided in LOI 1465 that one of the primary aims in imposing the levy is to support the successful rehabilitation and continued viability of PPI. [18] PPI moved for reconsideration but its motion was denied.[19] It then filed the present petition with this Court. Issues Petitioner PPI raises four issues for Our consideration, viz.: I THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO. II LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES. III THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465. IV THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring supplied) Our Ruling We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve constitutional issues.

Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural technicality which may be waived. PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not have a personal and substantial interest in the case or will sustain direct injury as a result of its enforcement.[21] It asserts that Fertiphil did not suffer any damage from the CRC imposition because incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer company.[22] We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a real party in interest, which is defined as the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit. [23] In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public right on behalf of the general public because of conflicting public policy issues. [24] On one end, there is the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At the other end, there is the public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic public services. In this jurisdiction, We have adopted the direct injury test to determine locus standi in public suits. In People v. Vera,[25] it was held that a person who impugns the validity of a statute must have a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result. The direct injury test in public suits is similar to the real party in interest rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure. [26] Recognizing that a strict application of the direct injury test may hamper public interest, this Court relaxed the requirement in cases of transcendental importance or with far reaching implications. Being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest.[27] Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil. Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more expensive. The harm to their business consists not only in fewer clients because of the increased price, but also in adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus standi. Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided that the capital contribution shall be collected until adequate capital is raised to make PPI viable.

The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue. RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint; it is the lis mota of the case. PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the constitutionality of the LOI cannot be collaterally attacked in a complaint for collection.[28] Alternatively, the resolution of the constitutional issue is not necessary for a determination of the complaint for collection.[29] Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim without resolving the issue.[30] It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides: SECTION 5. The Supreme Court shall have the following powers: xxxx (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: (a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring supplied) In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to resolve constitutional issues, thus: On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the constitutionality of a statute, presidential decree, or executive order. The Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.[32] In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33] this Court reiterated: There is no denying that regular courts have jurisdiction over cases involving the validity or constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however, is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take cognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts.[34] Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in criminal actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality of laws prohibiting aliens from acquiring public lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota presented.[37] Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the complaint for collection filed with the RTC. The pertinent portions of the complaint allege:

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because: xxxx (c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense and disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation and were then exerting all efforts and maximizing management and marketing skills to remain viable; xxxx (e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been presumptuously masqueraded as the fertilizer industry itself, was the sole and anointed beneficiary; 7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount to illegal exaction amounting to a denial of due process since the persons of entities which had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary it was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the detriment of other distributors and importers.[38] (Underscoring supplied) The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be refunded under the civil code principle against unjust enrichment. The refund is a mere consequence of the law being declared unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lis mota of the complaint with the RTC. The P10 levy under LOI No. 1465 is an exercise of the power of taxation. At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI. PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI. Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is still unconstitutional because it did not promote the general welfare of the people or public interest. Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, [39] while the power of taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and lawful means tests are used to determine the validity of a law enacted under the police power.[40] The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power, [41] the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.[42] In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle registration fee is not an exercise by the State of its police power, but of its taxation power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation. Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a tax or fee. x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an additional tax. Rep. Act 4136 also speaks of other fees such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenueraising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61.[44] (Underscoring supplied) The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent.[45] A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly provided that the levy was imposed until adequate capital is raised to make PPI viable. Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI. An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons.[46] The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation.[47] The term public purpose is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that public purpose should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. While the categories of what may constitute a public purpose are continually expanding in light of the expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose. The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit from Clause 3 of the law, thus: 3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less than P10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring supplied) It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law would expressly name a private company as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony capitalism. Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming financially viable. This suggests that the levy was actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when PPI is deemed financially viable. Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy until adequate capital is raised for PPI. Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI. [49] This proves that PPI benefited from the LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage to PPI. Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial problem because of its huge corporate debts. There were pending petitions for rehabilitation against PPI before the Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding read: Republic of the Philippines Office of the Prime Minister Manila LETTER OF UNDERTAKING May 18, 1985 TO: THE BANKING AND FINANCIAL INSTITUTIONS LISTED IN ANNEX A HERETO WHICH ARE CREDITORS (COLLECTIVELY, THE CREDITORS) OF PLANTERS PRODUCTS, INC. (PLANTERS) Gentlemen: This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine Government confirms its awareness of the following: (1) that Planters has outstanding obligations in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial difficulties, and (3) that there are presently pending with the Securities and Exchange Commission of the Philippines a petition filed at Planters own behest for the suspension of payment of all its obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters. In connection with the foregoing, the Republic of the Philippines (the Republic ) confirms that it considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration of your expressed willingness to consider and participate in the effort to rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and obligates itself to the creditors and Planters, as follows:

10

xxxx

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by Planters and Planters Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital), and subsequently for such capital increases as may be required for the continuing viability of Planters. xxxx

The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currency-denominated obligations. REPUBLIC OF THE PHILIPPINES By: (signed) CESAR E. A. VIRATA Prime Minister and Minister of Finance[51] It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a private corporation. All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws. The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest. Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to comply with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. [52] For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was enacted to give undue advantage to a private corporation. We quote with approval the CA ratiocination on this point, thus: It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare. The governments commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of polic e power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of

11

appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals. (Underscoring supplied) The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable. PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks on the doctrine of operative fact, which provides that an unconstitutional law has an effect before being declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be unconstitutional. We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine of operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional law. At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid should be refunded in accordance with the general civil code principle against unjust enrichment. The general rule is supported by Article 7 of the Civil Code, which provides: ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary. When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play.[55] It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot always be erased by a new judicial declaration. [56] The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in double jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon a law creating it.[58] Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and deposited to its bank account. Quite the reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that every person who, through an act of performance by another comes into possession of something at the expense of the latter without just or legal ground shall return the same to him. We cannot allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil. WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED. SO ORDERED. Ynares-Santiago, (Chairperson), Austria-Martinez, Chico-Nazario, and Nachura, JJ., concur.

12

SECOND DIVISION

PETRON CORPORATION, Petitioner,

G.R. No. 158881 Present:

- versus -

MAYOR TOBIAS M. TIANGCO, and MUNICIPAL TREASURER MANUEL T. ENRIQUEZ of the MUNICIPALITY OF NAVOTAS, METRO MANILA, Respondents.

QUISUMBING, J., Chairperson, CARPIO MORALES, TINGA, VELASCO, JR, and BRION, JJ.

Promulgated: April 16, 2008 x----------------------------------------------------------------------------x

DECISION

TINGA, J.: The novel but important issue before us is whether a local government unit is empowered under the Local Government Code (the LGC) to impose business taxes on persons or entities engaged in the sale of petroleum products.

I. The present Petition for Review on Certiorari under Rule 45 filed by petitioner Petron Corporation (Petron) directly assails the Decision of the Regional Trial Court (RTC) of Malabon, Branch 74, which dismissed petitioners complaint for cancellation of assessment made by the the n municipality (now City) of Navotas (Navotas) for deficiency taxes, and ordering the payment of P10,204,916.17 pesos in business taxes to Navotas. As the issues raised are pure questions of law, we need not dwell on the facts at length. Petron maintains a depot or bulk plant at the Navotas Fishport Complex in Navotas. Through that depot, it has engaged in the selling of diesel fuels to vessels used in commercial fishing in and around Manila Bay.1[1] On 1 March 2002, Petron received a letter from the office of Navotas Mayor, respondent Toby Tiangco, wherein the corporation was assessed taxes relative to the figures covering sale of diesel declared by your Navotas Terminal from 1997 to 2001. 2[2] The stated total

13

amount due was P6,259,087.62, a figure derived from the gross sales of the depot during the years in question. The computation sheets3[3] that were attached to the letter made reference to Ordinance 9203, or the New Navotas Revenue Code (Navotas Revenue Code), though such enactment was not cited in the letter itself.

Petron duly filed with Navotas a letter-protest to the notice of assessment pursuant to Section 195 of the Code. It argued that it was exempt from local business taxes in view of Art. 232(h) of the Implementing Rules (IRR) of the Code, as well as a ruling of the Bureau of Local Government Finance of the Department of Finance dated 31 July 1995, the latter stating that sales of petroleum fuels are not subject to local taxation. The letter-protest was denied by the Navotas Municipal Treasurer, respondent Manuel T. Enriquez, in a letter dated 8 May 2002. 4[4] This was followed by a letter from the Mayor dated 15 May 2002, captioned Final Demand to Pay, requiring that Petron pay the assessed amount within five (5) days from receipt t hereof, with a threat of closure of Petrons operations within Navotas should there be no payment.5[5] Petron, through counsel, replied to the Mayor by another letter posing objections to the threat of closure. The Mayor did not respond to this last letter.6[6] Thus, on 20 May 2002, Petron filed with the Malabon RTC a Complaint for Cancellation of Assessment for Deficiency Taxes with Prayer for the Issuance of a Temporary Restraining Order (TRO) and/or Preliminary Injunction. The quested TRO was not issued by the Malabon RTC upon manifestation of respondents that they would not proceed with the closure of Petrons Navotas bulk plant until after the RTC shall have decided the case on the merits. 7[7] However, while the case was pending decision, respondents refused to issue a business permit to Petron, thus prompting Petron to file a Supplemental Complaint with Prayer for Preliminary Mandatory Injunction against respondents.8[8] On 5 May 2003, the Malabon RTC rendered its Decision dismissing Petrons c omplaint and ordering the payment of the assessed amount.9[9] Eleven days later, Petron received a Closure Order from the Mayor, directing Petron to cease and desist from operating the bulk plant. Petron sought a

14

TRO from the Malabon RTC, but this was denied.10[10] Petron also filed a motion for reconsideration of the order of denial, but this was likewise denied.11[11] On 4 August 2003, this Court issued a TRO, enjoining the respondents from closing Petrons Navotas bulk plant or otherwise interfering in its operations.12[12] II. As earlier stated, Petron has opted to assail the RTC Decision directly before this Court since the matter at hand involves pure questions of law, a characterization conceded by the RTC Decision itself. Particularly, the controversy hinges on the correct interpretation of Section 133(h) of the LGC, and the applicability of Article 232 (h) of the IRR. Section 133(h) of the LGC reads as follows: Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and Barangays shall not extend to the levy of the following: xxx (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; Evidently, Section 133 prescribes the limitations on the capacity of local government units to exercise their taxing powers otherwise granted to them under the LGC. Apparently, paragraph (h) of the Section mentions two kinds of taxes which cannot be imposed by local government units, namely: excise taxes on articles enumerated under the National Internal Revenue Code [(NIRC)], as amended; and taxes, fees or charges on petroleum products. The power of a municipality to impose business taxes is provided for in Section 143 of the LGC. Under the provision, a municipality is authorized to impose business taxes on a whole host of business activities. Suffice it to say, unless there is another provision of law which states otherwise, Section 143, broad in scope as it is, would undoubtedly cover the business of selling diesel fuels, or any other petroleum product for that matter.

Nonetheless, Article 232 of the IRR defines with more particularity the capacity of a municipality to impose taxes on businesses. The enumeration that follows is generally a positive list of businesses which may be subjected to business taxes, and paragraph (h) of Article 232 does allow the imposition of local business taxes [o]n any business not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax, but subject to this important qualification, thus:

15

xxx provided further, that in line with existing national policy, an y business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax imposed on this article.

Notably, the Malabon RTC declared Art. 232(h) of the IRR void because the Code purportedly does not contain a provision prohibiting the imposition of business taxes on petroleum products. 13[13] This submission warrants close examination as well. With all the relevant provisions of law laid out, we address the core issues submitted by Petron, namely: first, is the challenged tax on sale of the diesel fuels an excise tax on an article enumerated under the NIRC, thusly prohibited under Section 133(h) of the Code?; second, is the challenged tax prohibited by Section 133(h) under the proviso, taxes, fees or charges on petroleum products? and; third, does Art. 232(h) of the IRR similarly prohibit the imposition of the challenged tax? III As earlier observed, Section 133(h) provides two kinds of taxes which cannot be imposed by local government units: excise taxes on articles enumerated under the NIRC, as amended; and taxes, fees or charges on petroleum products. There is no doubt that among the excise taxes on articles enumerated under the NIRC are those levied on petroleum products, per Section 148 of the NIRC. We first consider Petrons argument that the business taxes on its sale of diesel fuels partakes of an excise tax, which if true, could invalidate the challenged tax solely on the basis of the phrase excise taxes on articles enumerated under the [NIRC]. To support this argument, it cites Cordero v. Conda,14[14] Allied Thread Co. Inc. v. City Mayor of Manila,15[15] and Iloilo Bottlers, Inc. v. City of Iloilo,16[16] as having explained that an excise tax is a tax upon the performance, carrying on, or the exercise of an activity.17[17] Respondents, on the other hand, argue that what the provision prohibits is the imposition of excise taxes on petroleum products, but not the imposition of business taxes on the same. They cite Philippine Petroleum Corporation v. Municipality of Pililia, 18[18] where the Court had noted, [a] tax on business is distinct from a tax on the article itself.19[19]

16

Petrons argument is fraught with far-reaching implications, for if it were sustained, it would mean that local government units are barred from imposing business taxes on any of the articles subject to excise taxes under the NIRC. These would include alcohol products,20[20] tobacco products,21[21] mineral products22[22] automobiles,23[23] and such non-essential goods as jewelry, goods made of precious metals, perfumes, and yachts and other vessels intended for pleasure or sports.24[24] Admittedly, the proffered definition of an excise tax as a tax upon the performance, carrying on, or exercise of some right, privilege, activity, calling or occupation derives from the compendium American Jurisprudence, popularly referred to as Am Jur,,25[25] and has been cited in previous decisions of this Court, including those cited by Petron itself. Such a definition would not have been

17

inconsistent with previous incarnations of our Tax Code, such as the NIRC of 1939, 26[26] as amended, or the NIRC of 197727[27] because in those laws the term excise tax was not used at all. In contrast, the nomenclature used in those prior laws in referring to taxes imposed on specific articles was specific tax.28[28] Yet beginning with the National Internal Revenue Code of 1986, as amended, the term excise taxes was used and defined as applicable to goods manufactured or produced in the Philippines and to things imported.29[29] This definition was carried over into the present NIRC of 1997.30[30] Further, these two latest codes categorize two different kinds of excise taxes: specific tax which is imposed and based on weight or volume capacity or any other physical unit of measurement; and ad valorem tax which is imposed and based on the selling price or o ther specified value of the goods. In other words, the meaning of excise tax has undergone a transformation, morphing from the Am Jur definition to its current signification which is a tax on certain specified goods or articles.

18

The change in perspective brought forth by the use of the term excise tax in a different connotation was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973 and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur definition of excise tax, Nolledo observed: Are specific taxes, taxes on property or excise taxes In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that the value of the property taxed is taken into account will not change the nature of the tax. It is correct to say that specific taxes are taxes on the privilege to import, manufacture and remove from storage certain articles specified by law.31[31] In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes, Nolledo, in his 1994 commentaries, wrote: 1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified goods or articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines. They are either specific or ad valorem. 2. Nature of excise taxes. They are imposed directly on certain specified goods. (infra) They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.)

19

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an incident to, or in connection with, the business to be taxed. 32[32] In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and observe that the term is synonymous with privilege tax and [both terms] are often used interchangeably.33[33] At the same time, they offer a caveat that [e]xcise tax, as [defined by Am Jur], is not to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured or produced in, or imported into, the Philippines, for domestic sale or consumption or for any other disposition.34[34] It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a specific article, rather than one upon the performance, carrying on, or the exercise of an activity. This current definition was already in place when the Code was enacted in 1991, and we can only presume that it was what the Congress had intended as it specified that local government units could not impose excise taxes on articles enumerated under the [NIRC]. This prohibition must pertain to the same kind of excise taxes as imposed by the NIRC, and not those p reviously defined excise taxes which were not integrated or denominated as such in our present tax law. It is quite apparent, therefore, that our current body of taxation law does not explicitly accommodate the traditional definition of excise tax offered by Petron. In fact, absent any statutory adoption of the traditional definition, it may be said that starting in 1986 excise taxes in this jurisdiction refer exclusively to specific or ad valorem taxes imposed under the NIRC. At the very least, it is this concept of excise tax which we can reasonably assume that Congress had in mind and actually adopted when it crafted the Code. The palpable absurdity that ensues should the alternative interpretation prevail all but strengthens this position. Thus, Petrons argument concerning excise taxes is founded not on what the NIRC or the Code actually provides, but on a non-statutory definition sourced from a legal paradigm that is no longer applicable in this jurisdiction. That such definition was referred to again in our 1998 decision in Province of Bulacan v. Court of Appeals35[35] is ultimately of little consequence, and so is Petrons reliance on such ruling. The Court therein had correctly nullified, on the basis of Section 133(h) of the Code, a province-imposed tax of 10% of the fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth and other quarry resources xxx extracted from public lands, because it noted that under Section 151 of the NIRC, all nonmetallic minerals and quarry resources were assessed with excise taxes of two percent (2%) based on the actual market value of the gross output thereof at the time of removal, in case of those locally extracted or produced. 36[36] Additionally, the Court also observed that the case had emanated from an attempt to impose the said tax on quarry resources from private lands, despite the clear language of the tax ordinance limiting the tax

20

to such resources extracted from public lands.37[37] On that score alone, the case could have been correctly decided. It is true that the Court had additionally reasoned in Province of Bulacan that [t]he tax imposed by the Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, or exercise of an activity. As earlier noted, such definition of excise tax however was not explicitly carried over into the NIRC and was even superseded beginning with the 1986 amendments thereto. To insist on utilizing this definition simply because it had been reiterated in Province of Bulacan, unnecessary as such reiteration may have been to the resolution of that case, would have the unfortunate effect of infusing life into a concept that is diametrically inconsistent with the present state of the law. We thus can assert with clear comfort that excise taxes, as imposed under the NIRC, do not pertain to the performance, carrying on, or exercise of an activity, at least not to the extent of equating excise with business taxes.

IV. We next consider whether the clause taxes, fees or charges on petroleum products in Section 133(h) precludes local government units from imposing business taxes based on the sale of petroleum products. The power of a municipality to impose business taxes derives from Section 143 of the Code that specifically enumerates several types of business on which it may impose taxes, including manufacturers, wholesalers, distributors, dealers of any article of commerce of whatever nature; 38[38] those engaged in the export or commerce of essential commodities; 39[39] retailers;40[40] contractors and other independent contractors;41[41] banks and financial institutions;42[42] and peddlers engaged in the sale of any merchandise or article of commerce.43[43] This obviously broad power is further supplemented by paragraph (h) of Section 143 which authorizes the sanggunian to impose taxes on

21

any other businesses not otherwise specified under Section 143 which the sanggunian concerned may deem proper to tax.44[44] This ability of local government units to impose business or other local taxes is ultimately rooted in the 1987 Constitution. Section 5, Article X assures that [e]ach local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges, though the power is subject to such guidelines and limitations as the Congress may provide. There is no doubt that following the 1987 Constitution and the Code, the fiscal autonomy of local government units has received greater affirmation than ever. Previous decisions that have been skeptical of the viability, if not the wisdom of reposing fiscal autonomy to local government units have fallen by the wayside. Respondents cite our declaration in City Government of San Pablo v. Reyes45[45] that following the 1987 Constitution the rule thenceforth in interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations. 46[46] Such policy is also echoed in Section 5(a) of the Code, which states that [a]ny provision on a power of a local government unit shall be liberally interpreted in its favor, and in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the lower local government unit. But somewhat conversely, Section 5(b) then proceeds to assert that [i]n case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local government unit enacting it, and liberally in favor of the taxpayer.47[47] And this latter qualification has to be respected as a constitutionally authorized limitation which Congress has seen fit to provide. Evidently, local fiscal autonomy should not necessarily translate into abject deference to the power of local government units to impose taxes. Congress has the constitutional authority to impose limitations on the power to tax of local government units, and Section 133 of the Code is one such limitation. Indeed, the provision is the explicit statutory impediment to the enjoyment of absolute taxing power by local government units, not to mention the reality that such power is a delegated power. To cite one example, under Section 133(g), local government units are disallowed from levying business taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and (4) four years, respectively from the date of registration. Section 133(h) states that local government units shall not extend to the levy of xxx taxes, fees or charges on petroleum products. Respondents assert that the phrase taxes, fees or charges on petroleum products pertains to the imposition of direct or excise taxes on petroleum products, and not business taxes. If the phrase actually pertains to excise taxes, then it would be an exercise in utter redundancy, since the preceding phrase already prohibits the imposition of excise taxes on articles already subject to such taxes under the NIRC, such as petroleum products. There would be no sense on the part of the legislature to twice emphasize in the same sentence that excise taxes on petroleum products are beyond the pale of local government taxation.

22

It appears that this argument of respondents was fashioned on the basis of the pronouncement of the Court in Philippine Petroleum Corporation v. Municipality of Pililla, thus:48[48] xxx [W]hile Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum products, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as amended by P.D. 426, wherein the municipality is granted the right to levy taxes on business of manufacturers, importers, producers of any article of commerce of whatever kind or nature. A tax on business is distinct from a tax on the article itself. Thus, if the imposition of tax on business of manufacturers, etc. in petroleum products contravenes a declared national policy, it should have been expressly stated in P.D. No. 436. The dicta that [a] tax on a business is distinct from a tax on the article itself might at firs t blush somehow lend support to respondents position, yet that dicta has not since been reprised by this Court. It is likewise worth observing that Pililla did involve a tax ordinance that imposed business taxes on an enterprise engaged in the manufacture and storage of petroleum products. Significantly, the legal milieu governing Pililla is vastly different from that existing at bar, to the extent that the earlier case could not be presently controlling.

At the time the taxes sought to be collected in Pililla were imposed, there was no national law in place similar to Section 133(h) of the Code that barred local taxes, fees or charges on petroleum products. There were circulars to that effect issued by t he Finance Department, yet the Court could not validate such issuances since under the tax laws then in place no exemptions were given to manufacturers, wholesalers, retailers, or dealers in petroleum products.49[49] In fact, the Court tellingly observed that if the imposition of tax on business of manufacturers, etc. in petroleum products contravenes a declared national policy, it should have been expressly stated in P.D. No. 436. 50[50] Such expression conspiciously missing in P.D. No. 436 is now found in Section 133(h). In view of the difference in statutory paradigm between this case and Pililla, the latter case is severely diminished as applicable precedent at bar. The Court then was correct in observing that a mere administrative circular could not prohibit a local tax that is not otherwise barred under a national statute, yet in this case that conflict is not present since the Code explicitly prohibits the imposition of several classes of local taxes, including those on petroleum products. The final and only straw Pililla provides that respondents can still grasp at is the bare statement that [a] tax on a business is distinct from a tax on the article itself,51[51] a sentence which could have been omitted from that decision without any effect. We can concede that a tax on a business is distinct from a tax on the article itself, or for that matter, that a business tax is distinct from an excise tax. However, such distinction is immaterial insofar as the latter part of Section 133(h) is concerned, for the phrase taxes, fees or charges on

23

petroleum products does not qualify the kind of taxes, fees or charges that could withstand the absolute prohibition imposed by the provision. It would have been a different matter had Congress, in crafting Section 133(h), barred excise taxes or direct taxes, or any category of taxes only, for then it would be understood that only such specified taxes on petroleum products could not be imposed under the prohibition. The absence of such a qualification leads to the conclusion that all sorts of taxes on petroleum products, including business taxes, are prohibited by Section 133(h). Where the law does not distinguish, we should not distinguish. The language of Section 133(h) makes plain that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all taxes, fees and charges. The earlier reference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation: all articles already covered by excise taxation under the NIRC, such as alcohol products, tobacco products, mineral products, automobiles, and such non-essential goods as jewelry, goods made of precious metals, perfumes, and yachts and other vessels intended for pleasure or sports. In contrast, the later reference to taxes, fees and charges pertains only to one class of articles of the many subjects of excise taxes, specifically, petroleum products. While local government units are authorized to burden all such other class of goods with taxes, fees and charges, excepting excise taxes, a specific prohibition is imposed barring the levying of any other type of taxes with respect to petroleum products. V. We no longer need to dwell on the arguments centering on Article 232 of the IRR. As earlier stated, the provision explicitly stipulates that in line with existing national policy, any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax imposed on this article [on business taxes]. The RTC went as far as to declare Article 232 as invalid on the premise that the prohibition was not similarly warranted under the Code. Assuming that the Code does not, in fact, prohibit the imposition of business taxes on petroleum products, we would agree that the IRR could not impose such a prohibition. With our ruling that Section 133(h) does indeed prohibit the imposition of local business taxes on petroleum products, however, the RTC declaration that Article 232 was invalid is, in turn, itself invalid. Even absent Article 232, local government units cannot impose business taxes on petroleum products. If anything, Article 232 merely reiterates what the Code itself already provides, with the additional explanation that such prohibition was in line with existing national policy.

VI. We have said all that need be said for the resolution of this case, but there is one more line of argument raised by respondents that deserves a remark. Respondents argue, assuming... that the Oversight Committee [that drafted the IRR] can legislate, that the existing national policy referred to in Article 232 had been superseded by Republic Act No. 8180, or the Oil Deregulation Law. Boiled down to its essence, the argument is that since the oil industry is presently deregulated the basis for exempting petroleum products from business taxes no longer exists. Of course, the starting premise for this argument, that the IRR can establish a tax or an exemption, is false and has been flatly rejected by this Court before. 52[52] The Code itself does not connect its prohibition on taxation of petroleum products with any existing or future national oil policy, so the change in such national policy with the regime of oil deregulation is ultimately of no moment. Still, we can divine the reasoning behind singling out petroleum products, among all other commodities, as beyond the power of local government units to levy local taxes.

24

Why the special concern over petroleum products? The answer is quite evident to all sentient persons. In this age where unfortunately dependence on petroleum as fuel has yet no equally feasible alternative, the cost of petroleum products, though fully controlled by private enterprise, remains an area of public concern. To be blunt about it, there is an inevitable link between the fluctuation of oil prices and the prices of every other commodity. The reality, indeed, is oil is a political commodity. Such fact has received recognition from this Court. [O]il [is] a commodity whose supply and price affect the ebb and flow of the lifeblood of the nation. Its shortage of supply or a slight, upward spiral in its price shakes our economic foundation. Studies show that the areas most impacted by the movement of oil are food manufacture, land transport, trade, electricity and water. 53[53] [T]he upswing and downswing of our economy materially depend on the oscillation of oil. 54[54] Fluctuations in the supply and price of oil products have a dramatic effect on economic development and public welfare.55[55] It can be reasonably presumed that if municipalities, cities and provinces were authorized to impose business taxes on manufacturers and retailers of petroleum products, the resulting losses to these enterprises would be passed on to the consumers, triggering the chain of increases that normally accompany the increase in oil prices. No similarly massive trigger effect would ensue upon the imposition of business taxes on other commodities, including those already subject to excise taxation under the NIRC.

It may very well be that the policy of deregulation, which was not yet in effect at the time of the enactment of the Local Government Code, has changed the complexion of the issue, for unlike before, oil companies are free at will to increase oil prices, thus mitigating the similarly arbitrary consequences that could develop if petroleum products were subject to local taxes. Still, it cannot be denied that subjecting petroleum products to business taxes apart from the taxes already imposed by Congress in this age of deregulation would lead to the same result had they been so taxed during the era of oil regulation the increase of oil prices. We do not discount the authority of Congress to enact measures that facilitate the increase in oil prices; witness the Oil Deregulation Law and the most recent Expanded VAT Law. Yet these hard choices are presumably made by Congress with the expectation that the negative effects of increased oil prices are offset by the other economic benefits promised by those new laws (i.e., a more vibrant oil industry; increased government revenue). The Court defers to the other branches of government in the formulation of oil policy, but when the choices are made through legislation, the Court expects that the choices are deliberate, considering that the stakes are virtually all-in. Herein, respondents may be bolstered by the constitutional and statutory policy favoring local fiscal autonomy, but it would be utter indolence to reflexively affirm such policy when the inevitable effect is an increase in oil prices. Any prudent adjudication should fully ascertain the mandate of local government units to impose taxes on petroleum products, and such mandate should be cast in so specific terms as to leave no dispute as to the legislative intendment to extend such power in the name of local autonomy. What we have found instead, from the plain letter of the law is an explicit disinclination on the part of the legislature to impart that particular taxing power to local government units. While Section 133(h) does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from

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extending the levy of any kind of taxes, fees or charges on petroleum products. Accordingly, the subject tax assessment is ultra vires and void. WHEREFORE, the Petition is GRANTED. The Decision of the Regional Trial Court of Malabon City in Civil Case No. 3380-MN is REVERSED and SET ASIDE and the subject assessment for deficiency taxes on petitioner is ordered CANCELLED. The Temporary Restraining Order dated 4 August 2003 is hereby made PERMANENT. No pronouncement as to costs. SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING Associate Justice Chairperson

CONCHITA CARPIO MORALES Associate Justice

PRESBITERO J. VELASCO, JR. Associate Justice

ARTURO D. BRION Associate Justice

ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING Associate Justice Chairperson, Second Division

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CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

PHILIPPINE JURISPRUDENCE - FULL TEXT The Lawphil Project - Arellano Law Foundation G.R. No. 169836 July 31, 2007 PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY vs. COURT OF APPEALS, ET AL. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

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G.R. No. 169836 July 31, 2007 PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, petitioner, vs. COURT OF APPEALS, OFFICE OF THE PRESIDENT, DEPARTMENT OF FINANCE and the CITY OF ILOILO, respondents. DECISION YNARES-SANTIAGO, J.: Assailed in this petition for review is the June 21, 2005 Decision 1 of the Court of Appeals in CA-G.R. SP No. 81228, which held that petitioner Philippine Fisheries Development Authority (hereafter referred to as Authority) is liable to pay real property taxes on the land and buildings of the Iloilo Fishing Port Complex (IFPC) which are owned by the Republic of the Philippines but operated and governed by the Authority. The facts are not disputed. On August 11, 1976, then President Ferdinand E. Marcos issued Presidential Decree No. 977 (PD 977) creating the Authority and placing it under the direct control and supervision of the Secretary of Natural Resources. On February 8, 1982, Executive Order No. 772 (EO 772) was issued amending PD 977, and renaming the Authority as the now "Philippine Fisheries Development Authority," and attaching said agency to the Ministry of Natural Resources. Upon the effectivity of the Administrative Code (EO 292), the Authority became an attached agency of the Department of Agriculture.2 Meanwhile, beginning October 31, 1981, the then Ministry of Public Works and Highways reclaimed from the sea a 21-hectare parcel of land in Barangay Tanza, Iloilo City, and constructed thereon the IFPC, consisting of breakwater, a landing quay, a refrigeration building, a market hall, a municipal shed, an administration building, a water and fuel oil supply system and other port related facilities and machineries. Upon its completion, the Ministry of Public Works and Highways turned over IFPC to the Authority, pursuant to Section 11 of PD 977, which places fishing port complexes and related facilities under the governance and operation of the Authority. Notwithstanding said turn over, title to the land and buildings of the IFPC remained with the Republic. The Authority thereafter leased portions of IFPC to private firms and individuals engaged in fishing related businesses. Sometime in May 1988, the City of Iloilo assessed the entire IFPC for real property taxes. The assessment remained unpaid until the alleged total tax delinquency of the Authority for the fiscal years 1988 and 1989 amounted to P5,057,349.67, inclusive of penalties and interests. To satisfy the tax delinquency, the City of Iloilo scheduled on August 30, 1990, the sale at public auction of the IFPC. The Authority filed an injunction case with the Regional Trial Court. At the pre-trial, the parties agreed to avail of administrative proceedings, i.e., for the Authority to file a claim for tax exemption with the Iloilo City Assessors Office. The latter, however, denied the claim for exemption, hence, the Authority elevated the case to the Department of Finance (DOF). In its letter-decision3 dated March 6, 1992, the DOF ruled that the Authority is liable to pay real property taxes to the City of Iloilo because it enjoys the beneficial use of the IFPC. The DOF added, however, that in satisfying the amount of the unpaid real property taxes, the property that is owned by the Authority shall be auctioned, and not the IFPC, which is a property of the Republic.4 The Authority filed a petition before the Office of the President but it was dismissed.5 It also denied the motion for reconsideration filed by the Authority. 6 On petition with the Court of Appeals, the latter affirmed the decision of the Office of the President. It opined, however, that the IFPC may be sold at public auction to satisfy the tax delinquency of the Authority.7 The dispositive portion thereof, reads: WHEREFORE, premises considered, the instant Petition for Review is DENIED, and accordingly the June 30, 2003 Decision and December 3, 2003 Order of the Office of the President are hereby AFFIRMED. SO ORDERED.8 Hence, this petition. The issues are as follows: Is the Authority liable to pay real property tax to the City of Iloilo? If the answer is in the affirmative, may the IFPC be sold at public auction to satisfy the tax delinquency? To resolve said issues, the Court has to determine (1) whether the Authority is a government owned or controlled corporation (GOCC) or an instrumentality of the national

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government; and (2) whether the IFPC is a property of public dominion. The Court rules that the Authority is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. With respect to these properties, the Authority is liable to pay real property tax. Nonetheless, the IFPC, being a property of public dominion cannot be sold at public auction to satisfy the tax delinquency. In Manila International Airport Authority (MIAA) v. Court of Appeals,9 the Court made a distinction between a GOCC and an instrumentality. Thus: Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as follows: SEC. 2. General Terms Defined. x x x (13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x (Emphasis supplied) A government-owned or controlled corporation must be "organized as a stock or non-stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting shares. xxxx Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation. MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code defines a non-stock corporation as "one where no part of its income is distributable as dividends to its members, trustees or officers." A non-stock corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from qualifying as a non-stock corporation. Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic airport for public use. Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled corporation.10 (Emphasis supplied) Thus, for an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for non-stock corporations, they must have members and must not distribute any part of their income to said members.11 On the basis of the parameters set in the MIAA case, the Authority should be classified as an instrumentality of the national government. As such, it is generally exempt from payment of real property tax, except those portions which have been leased to private entities. In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as among the instrumentalities of the national government. Thus Some of the national government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng Pilipinas, Philippine Rice Research Institute, Laguna Lake Development Authority, Fisheries Development Authority, Bases

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Conversion Development Authority, Philippine Ports Authority, Cagayan de Oro Port Authority, San Fernando Port Authority, Cebu Port Authority, and Philippine National Railways. Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a capital stock but it is not divided into shares of stocks. 12 Also, it has no stockholders or voting shares. Hence, it is not a stock corporation. Neither it is a non-stock corporation because it has no members. The Authority is actually a national government instrumentality which is defined as an agency of the national government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter.13 When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Thus, the Authority which is tasked with the special public function to carry out the governments policy "to promote the development of the countrys fishing industry and improve the efficiency in handling, preserving, marketing, and distribution of fish and other aquatic products," exercises the governmental powers of eminent domain, 14 and the power to levy fees and charges.15 At the same time, the Authority exercises "the general corporate powers conferred by laws upon private and government-owned or controlled corporations."16 The MIAA case held17 that unlike GOCCs, instrumentalities of the national government, like MIAA, are exempt from local taxes pursuant to Section 133(o) of the Local Government Code. This exemption, however, admits of an exception with respect to real property taxes. Applying Section 234(a) of the Local Government Code, the Court ruled that when an instrumentality of the national government grants to a taxable person the beneficial use of a real property owned by the Republic, said instrumentality becomes liable to pay real property tax. Thus, while MIAA was held to be an instrumentality of the national government which is generally exempt from local taxes, it was at the same time declared liable to pay real property taxes on the airport lands and buildings which it leased to private persons. It was held that the real property tax assessments and notices of delinquencies issued by the City of Pasay to MIAA are void except those pertaining to portions of the airport which are leased to private parties. Pertinent portions of the decision, reads: Section 193 of the Local Government Code expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code." Now, Section 133(o) of the Local Government Code expressly provides otherwise, specifically prohibiting local governments from imposing any kind of tax on national government instrumentalities. Section 133(o) states: SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxxx (o) Taxes, fees or charges of any kinds on the National Government, its agencies and instrumentalities, and local government units. By express mandate of the Local Government Code, local governments cannot impose any kind of tax on national government instrumentalities like the MIAA. Local governments are devoid of power to tax the national government, its agencies and instrumentalities. The taxing powers of local governments do not extend to the national government, its agencies and instrumentalities, "[u]nless otherwise provided in this Code" as stated in the saving clause of Section 133. x x x xxxx The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the Code, which makes the national government subject to real estate tax when it gives the beneficial use of its real properties to a taxable entity . Section 234(a) of the Local Government Code provides: SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its

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political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. x x x18 (Emphasis supplied) WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real estate tax imposed by the City of Paraaque. We declare VOID all the real estate tax assessments, including the final notices of real estate tax delinquencies, issued by the City of Paraaque on the Airport Lands and Buildings of the Manila International Airport Authority, except for the portions that the Manila International Airport Authority has leased to private parties. We also declare VOID the assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila International Airport Authority. x x x x.19 (Emphasis added) In light of the foregoing, the Authority should be classified as an instrumentality of the national government which is liable to pay taxes only with respect to the portions of the property, the beneficial use of which were vested in private entities. When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation. This rule applies with greater force when local governments seek to tax national government instrumentalities.20 Thus, the real property tax assessments issued by the City of Iloilo should be upheld only with respect to the portions leased to private persons. In case the Authority fails to pay the real property taxes due thereon, said portions cannot be sold at public auction to satisfy the tax delinquency. In Chavez v. Public Estates Authority it was held that reclaimed lands are lands of the public domain and cannot, without Congressional fiat, be subject of a sale, public or private, thus:21 The salient provisions of CA No. 141, on government reclaimed, foreshore and marshy lands of the public domain, are as follows: Sec. 59. The lands disposable under this title shall be classified as follows: (a) Lands reclaimed by the Government by dredging, filling, or other means; (b) Foreshore; (c) Marshy lands or lands covered with water bordering upon the shores or banks of navigable lakes or rivers; (d) Lands not included in any of the foregoing classes. xxxx Sec. 61. The lands comprised in classes (a), (b), and (c) of section fifty-nine shall be disposed of to private parties by lease only and not otherwise, as soon as the President, upon recommendation by the Secretary of Agriculture, shall declare that the same are not necessary for the public service and are open to disposition under this chapter. The lands included in class (d) may be disposed of by sale or lease under the provisions of this Act." (Emphasis supplied) xxxx Since then and until now, the only way the government can sell to private parties government reclaimed and marshy disposable lands of the public domain is for the legislature to pass a law authorizing such sale. CA No. 141 does not authorize the President to reclassify government reclaimed and marshy lands into other nonagricultural lands under Section 59 (d). Lands classified under Section 59 (d) are the only alienable or disposable lands for non-agricultural purposes that the government could sell to private parties. (Emphasis supplied) In the same vein, the port built by the State in the Iloilo fishing complex is a property of the public dominion and cannot therefore be sold at public auction. Article 420 of the Civil Code, provides: ARTICLE 420. The following things are property of public dominion: (1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character;

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(2) Those which belong to the State, without being for public use, and are intended for some public service or for the development of the national wealth. The Iloilo fishing port which was constructed by the State for public use and/or public service falls within the term "port" in the aforecited provision. Being a property of public dominion the same cannot be subject to execution or foreclosure sale.22 In like manner, the reclaimed land on which the IFPC is built cannot be the object of a private or public sale without Congressional authorization. Whether there are improvements in the fishing port complex that should not be construed to be embraced within the term "port," involves evidentiary matters that cannot be addressed in the present case. As for now, considering that the Authority is a national government instrumentality, any doubt on whether the entire IFPC may be levied upon to satisfy the tax delinquency should be resolved against the City of Iloilo. In sum, the Court finds that the Authority is an instrumentality of the national government, hence, it is liable to pay real property taxes assessed by the City of Iloilo on the IFPC only with respect to those portions which are leased to private entities. Notwithstanding said tax delinquency on the leased portions of the IFPC, the latter or any part thereof, being a property of public domain, cannot be sold at public auction. This means that the City of Iloilo has to satisfy the tax delinquency through means other than the sale at public auction of the IFPC. WHEREFORE, the petition is GRANTED and the June 21, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 81228 is SET ASIDE. The real property tax assessments issued by the City Iloilo on the land and buildings of the Iloilo Fishing Port Complex, is declared VOID except those pertaining to the portions leased to private parties. The City of Iloilo is DIRECTED to refrain from levying on the Iloilo Fishing Port Complex to satisfy the payment of the real property tax delinquency. No costs. SO ORDERED. Austria-Martinez, Chico-Nazario, Nachura, Reyes, JJ., concur. Footnotes 1 Rollo, pp. 47-55. Penned by Associate Justice Rosmari D. Carandang and concurred in by Associate Justices Remedios A. Salazar-Fernando and Monina Arevalo-Zenarosa. 2 Book IV, Title IV, Chapter 6, Section 47, Executive Order No. 292 (1987). 3 Rollo, pp. 128-131. 4 Id. at 131. 5 Id. at 87-89. 6 Id. at 90. 7 Id. at 54. 8 Id. at 55. Petitioner filed a motion for reconsideration but was denied (Rollo, pp. 5758). 9 G.R. No. 155650, July 20, 2006, 495 SCRA 591, 615. The decision became final and executory on November 3, 2006. 10 Id. at 615-617. 11 Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, vol. 3, 1998 edition, pp. 54-55. 12 Sec. 5. Capitalization; Sinking Fund. The Authority shall have an authorized capital stock of Five Hundred Million Pesos (P500,000,000.00) which shall be fully subscribed by the Republic of the Philippines, and the following amounts shall be paid in: (a) The net assets of the Authority, including the Navotas fishing port complex, the valuation of which shall be determined jointly with the Office of Budget and Management and the Commission on Audit; (b) The amount corresponding to the balance of the programmed appropriations for the Authority for calendar year 1981; and (c) The amount corresponding to the programmed appropriations for the Authority for the calendar year 1982. The Authority is authorized to establish a sinking fund necessary to meet such obligations as may be incurred by the Authority. The annual contributions to the sinking fund shall come from the revenues derived from its fishing port complexes

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and, where such revenues are deficient, from such other corporate funds not otherwise intended for any specific purpose as may be designated by the Board. Unless otherwise directed by the Board, the sinking fund shall be placed under the custody of any government bank which shall invest the same in such manner as may be advantageous to the Authority. 13 Section 2(10) of the Introductory Provisions of the Administrative Code. 14 Section 4 (k) of PD 977, as amended by EO 772. 15 Section 4 (e) of PD 977, as amended by EO 772. 16 Section 4 (j) of PD 977, as amended by EO 772. 17 Supra note 9 at 645. 18 Id. at 631-634. 19 Id. at 646. 20 Id. at 619. 21 Chavez v. Public Estates Authority, G.R. No. 133250, July 9, 2002, 384 SCRA 152, 202-203. 22 Manila International Airport Authority (MIAA) v. Court of Appeals, supra note 9 at 646; Laurel v. Garcia, G.R. Nos. 92013 & 92047, July 25, 1990, 187 SCRA 797, 808-809. The Lawphil Project - Arellano Law Foundation

FIRST DIVISION [G.R. No. 150301, October 02, 2007] PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, PETITIONER, VS. THE HONORABLE COURT OF APPEALS, THE HONORABLE REGIONAL TRIAL COURT, BRANCH 169, MALABON, METRO MANILA, THE MUNICIPALITY OF NAVOTAS, METRO MANILA, HON. FLORANTE M. BARREDO, IN HIS OFFICIAL CAPACITY AS MUNICIPAL TREASURER OF NAVOTAS, METRO MANILA, AND HON. NORBERTO E. AZARCON, IN HIS CAPACITY AS CHAIRMAN OF THE PUBLIC AUCTION SALE COMMITTEE OF NAVOTAS, METRO MANILA, RESPONDENTS. DECISION AZCUNA, J.: This is a petition for review[1] of the decision and resolution of the Court of Appeals (CA), dated July 19, 2001 and September 19, 2001, respectively, in CA-G.R. CV No. 42472, entitled Philippine Fisheries Development Authority v. The Municipality of Navotas, Metro Manila, et al.

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The facts appear as follows: The controversy arose when respondent Municipality of Navotas assessed the real estate taxes allegedly due from petitioner Philippine Fisheries Development Authority (PFDA) for the period 19811990 on properties under its jurisdiction, management and operation located inside the Navotas Fishing Port Complex (NFPC). The assessed taxes had remained unpaid despite the demands made by the municipality which prompted it, through Municipal Treasurer Florante M. Barredo, to give notice to petitioner on October 29, 1990 that the NFPC will be sold at public auction on November 30, 1990 in order that the municipality will be able to collect on petitioners delinquent realty taxes which, as of June 30, 1990, amounted to P23,128,304.51, inclusive of penalties. Petitioner sought the deferment of the auction sale claiming that the NFPC is owned by the Republic of the Philippines, and pursuant to Presidential Decree (P.D.) No. 977, it (PFDA) is not a taxable entity. In view of the refusal of PFDA to pay the assessed realty taxes, the matter was referred to the Department of Finance (DOF). On July 14, 1990 the DOF stated that: This Department takes cognizance of the allegations of [the Office of the Mayor of Navotas] that PFDA has leased its properties to beneficial users, such as businessmen, private persons and entities who are taxable persons. For this reason, it is imperative that the Municipality should conduct an ocular inspection on the real properties (land and building owned by PFDA) in order to identify the properties actually leased and the taxable persons enjoying the beneficial use thereof. The ocular inspection is necessary for reason that the real properties, the use of which has been granted to taxable persons, for consideration or otherwise, are subject to the payment of real property taxes which must be paid by the grantees pursuant to the provisions of the Real Property Tax Code, as amended. Therefore, it is imperative to determine who the actual users of th e properties concerned [are]. If used by a non-taxable person other than PFDA itself, it remains to be non-taxable. Otherwise, if said properties are being used by taxable persons, same becomes taxable properties. For this purpose, it is also incumbent upon PFDA to furnish the Municipality copies of the deed of lease or other relevant documents showing the leased properties and their beneficial users for proper assessment. [2] Notwithstanding the DOFs instruction, respondent Municipality proceeded to publ ish the notice of sale of NFPC in the November 2, 1990 issue of Balita, a local newspaper. On November 19, 1990, petitioner instituted Civil Case No. 1524 in the Regional Trial Court (RTC) of Malabon, Metro Manila against respondent Municipality, its Municipal Treasurer and the Chairman of the Public Auction Sale Committee. Petitioner asked the RTC to enjoin the auction of the NFPC on the ground that the properties comprising the NFPC are owned by the Republic of the Philippines and are, thus, exempt from taxation. According to petitioner, only a small portion of NFPC which had been leased to private parties may be subjected to real property tax which should be paid by the latter. Respondent Municipality, on the other hand, insisted that: 1) the real properties within NFPC are owned entirely by petitioner which, despite the opportunity given, had failed to submit proof to the Municipal Assessor that the properties are indeed owned by the Republic of the Philippines; 2) if the properties in question really belong to the government, then the complaint should have been instituted in the name of the Republic of the Philippines, represented by the Office of the Solicitor General; and 3) the complaint is fatally defective because of non-compliance with a condition precedent, which is, payment of the disputed tax assessment under protest. On December 8, 1990, the RTC issued a writ of preliminary injunction enjoining respondent Municipality from proceeding with the public auction. On February 19, 1993, however, the RTC dismissed the case and dissolved the writ of preliminary injunction, thus:

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[T]he plaintiff [petitioner] failed to present convincing evidence to support its claim of realty tax exemption and ownership of the property by the Republic of the Philippines as mandated by Sec. 9 of P.D. 464. Notwithstanding receipt of the notices of tax assessments from the defendants [public respondent], the plaintiff did not avail of the remedies under the law by raising on appeal the said tax assessments to the Local Board of Assessment Appeals, then to the Central Board of Assessment Appeals and ultimately, to the Court of Tax Appeals. Instead, the plaintiff continuously ignored the notices of tax assessments on the pretext that the properties inside the NFPC are exempt from payment of real estate taxes as they are owned by the Republic of the Philippines. Assailing the validity of the tax assessments of the NFPC properties is not the proper recourse for the plaintiff but to pay first the tax assessments under protest and then raise the same on appeal to the Local Board of Assessment Appeals, then to the Central Board of Assessment Appeals, then ultimately, to the Court of Tax Appeals pursuant to the Real Property Tax Code. The plaintiff failed in this regard, hence the Municipality, exercising its power to assess and collect taxes on real properties within its jurisdiction, did the right thing, that is, to schedule the NFPC properties for public auction. Furthermore, while the plaintiff is insisting that the NFPC properties are owned by the Republic of the Philippines, and is therefore exempt from payment of real estate taxes, yet it admitted that there are those lessees who leased portion[s] of the complex, and [it was] even willing to submit [a] list of these lessees for proper tax assessments. ... WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendant [public respondent Municipality of Navotas] and against the plaintiff, ordering: 1. The DISMISSAL of this case; 2. The preliminary injunction previously issued in this case DISSOLVED; and 3. The plaintiff to pay the defendant [public respondent] Municipality the sum of P13,767.00 as actual damages. SO ORDERED.[3] The CA affirmed the ruling of the RTC in a Decision dated July 19, 2001, the pertinent portions of which read: The thrust of appellant PFDAs arguments has shoved to the fore the fact that the 67 -hectare land on which the NFPC Navotas Fishing Port Complex stands was reclaimed from the sea which explains why it was bounded on the North by the Manila Bay, on the East by Roxas Boulevard, on the South by the Manila Bay and on the West, by the breakwater. Even the Municipalitys counsel, Atty. Victorino Landas; Assessor, Arturo Coronel; and Treasurer, Florante Barredo have admitted that much, as pointed out by PFDA.[4] Such being the origin of the land, its ownership by the State as property of public dominion[5] can hardly be disputed. The reclaimed land; breakwaters; piers; wharves and quaywalls; and, fish market build ing forming part of the Navotas Fish Port were furthermore certified by the Undersecretary of Public Works and Highways[6] as belonging to the national government since they were built using the proceeds of the loan agreement entered into by and between the Republic of the Philippines and the Asian Development Bank on December 12, 1971.[7] On August 11, 1976, the Philippine Fish Marketing Authority (PFMA) was created as a body corporate by P.D. No. 977 to carry out the policy of the Government to promote the development of the fishing industry and improve efficiency in the handling, preserving, marketing and distribution of fish and fishery/aquatic products through the establishment and operation of fish markets and the efficient operation of fishing ports harbors and other marketing facilities.[8] ... The PFMA was furthermore extended exemption from the payment of income tax in this tenor: The authority shall be exempted from the payment of income tax. The foregoing exemption may, however, be entirely or partly lifted by the President of the Philippines, upon recommendation of the Secretary of Finance, not earlier than five years from the approval of this Decree, if the President shall find the authority to be self-sustaining and financially capable to pay

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such tax after providing for debt service requirements of the authority and its projected capital and operating expenditures.[9] Meanwhile, harbor operations at the Navotas Fishing Port Complex (NFPC) commenced on January 15, 1997 while the market operation started on April 3, 1977. On February 8, 1982, P.D. No. 977 was amended by Executive Order No. 772. Insofar as material to the case at bar, the salient features of the amendments introduced by the E.O. are: (a) The creation of the Philippine Fisheries Development Authority (PFDA) to replace the Philippine Fish Marketing Authority (PFMA). ... The capitalization of the PFDA has included the Navotas Fishing Port Complex (NFPC). ... The NFPC has been transferred to the exclusive jurisdiction, control, administration, and supervision of the PFDA. ...

(b) (c)

There can, therefore, [be] no escaping the conclusion that the appellant PFDA became the owner of the Navotas Fishing Port Complex as of February 8, 1982. It cannot be any sooner because under P.D. No. 977, the NFPC was not made part of the capital of the Philippine Fish Marketing Authority (PFMA), PFDAs predecessor, as only the Navotas Fish Landing was made part of such capital while the Navotas Fishing Port and Fish Market were transferred merely to the exclusive jurisdiction, control, administration, and supervision of the PFMA. It was not then altogether clear if the Navotas Fishing Port Complex (NFPC) was conveyed to the PFMA. ... Indeed, it is quite true that a property continues to be part of the public domain, and not available for alienation, private appropriation or ownership, until it is withdrawn from being such by the Government through the Executive Department or the Legislative,[10] and that it is not for the President to convey valuable real property of the Government on his own sole will as any such conveyance requires executive and legislative concurrence.[11] But the stark reality is that at the time E.O. No, 772 was issued on February 8, 1982, President Marcos was exercising both executive and legislative powers.[12] Hence, his conveyance of the NFPC to form part of the capital of PFDA cannot but be valid. The fact that the PFDA has up to now no certificate of title to the NFPC nor has the PFDA declared it for tax purposes is of no consequence. Such a certificate is merely an evidence of ownership and not the title itself,[13] while a tax declaration does not prove nor disprove ownership. What is significant is that the PFDA has openly declared and represented that it owns, maintains and operates the NFPC when it leased a portion thereof to the Frabelle Fishing Corporation on March 13, 1989. All told, the PFDA being the owner of the NFPC beginning February 8, 1982 is liable for the realty taxes due thereon, its tax exemption being only from the payment of income tax. [14] WHEREFORE, the appealed decision is AFFIRMED, without pronouncement as to costs. SO ORDERED.[15] Petitioner filed a motion for reconsideration but the same was denied by the CA. Petitioner now raises the following arguments: One, the CA acknowledged that the property in question is a reclaimed land. As such, it is a property of public dominion (Art. 420, Civil Code) and is owned by the State. Notwithstanding this, the CA erroneously ruled that the government had validly transferred ownership of the land to PFDA in 1982 when P.D. No. 977 was amended by E.O. No. 772 by virtue of which the property became part of the assets of PFDA (Sec. 5 of E.O. No. 772); Two, as a reclaimed land, the port complex should be considered a reserved land. In NDC v. Cebu

36

City,[16] the Supreme Court held that a reserved land is a public land that has been withheld or kept back from sale or disposition. The land remains an absolute property of the government. As its title remains with the State, the reserved land is tax exempt; Three, in Government v. Cabangis[17] and Lampria v. Director of Lands,[18] this Court declared that the land reclaimed from the sea, as a result of the construction by the government of a breakwater fronting the place where it is situated, belongs to the State in accordance with Article 5 of the Law of Waters of 1866; Four, petitioner merely operates the area or the NFPC complex in favor of the Republic of the Philippines. Section 4.A of P.D. No. 977, as amended by E.O. No. 772, provides that PFDA shall: [M]anage, administer, operate, improve and modernize, coordinate and otherwise govern the activities, operation and facilities in the fishing ports, markets and landings that may hereinafter be placed under, or transferred to the Authority, and such other fish markets, fishing ports/harbors and infrastructure facilities as may be established under this Decree; to investigate, prepare, adopt, implement and execute a comprehensive plan for the overall development of fishing port and market complexes and update such plan as may be necessary from time to time; to construct or authorize the construction in the land area under its jurisdiction, of infrastructure facilities, factory buildings, warehouses, cold storage and ice plants, and other structures related to the fishing industry or necessary and useful in the conduct of its business or in the attainment of the purpose and objectives of this Decree; to acquire, hold and dispose real and personal property in the exercise of its functions and powers. Lastly, the NFPC property is intended for public use and public service. As such, it is owned by the State, hence, exempt from real property tax. The issue is whether petitioner is liable to pay real property tax. Local government units, pursuant to the fiscal autonomy granted by the provisions of Republic Act No. 7160 or the 1991 Local Government Code, can impose realty taxes on juridical persons [19] subject to the limitations enumerated in Section 133 of the Code: SEC. 133. Common Limitations on the Taxing Power of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (o) taxes, fees, charges of any kind on the national government, its agencies and instrumentalities, and local government units. Nonetheless, the above exemption does not apply when the beneficial use of the government property has been granted to a taxable person. Section 234 (a) of the Code states that real property owned by the Republic of the Philippines or any of its political subdivisions is exempted from payment of the real property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. Thus, as a rule, petitioner PFDA, being an instrumentality[20] of the national government, is exempt from real property tax but the exemption does not extend to the portions of the NFPC that were leased to taxable or private persons and entities for their beneficial use. This is in consonance with the ruling in Philippine Fisheries Development Authority v. Court of Appeals[21] where this Court held that: On the basis of the parameters set in the MIAA [Manila International Airport Authority v. Court of Appeals][22] case, the Authority should be classified as an instrumentality of the national government. As such, it is generally exempt from payment of real property tax, except those portions which have been leased to private entities. In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as among the instrumentalities of the national government [23] Indeed, the Authority is not a GOCC[24] but an instrumentality of the government. The Authority has a capital stock but it is not divided into shares of stocks.[25] Also, it has no stockholders or voting shares. Hence, it is not a stock corporation. Neither it is a non-stock corporation because it has no members.

37

The real property tax assessments issued by the City of Iloilo should be upheld only with respect to the portions leased to private persons. In case the Authority fails to pay the real property taxes due thereon, said portions cannot be sold at public auction to satisfy the tax delinquency. The port built by the State in the Iloilo fishing complex is a property of public dominion and cannot therefore be sold at public auction. Article 420 of the Civil Code provides: ARTICLE 420. The following things are property of public dominion: (1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character; (2) Those which belong to the State, without being for public use, and are intended for some public service or for the development of national wealth. The Iloilo [F]ishing [P]ort [Complex/IFPC] which was constructed by the State for public use and/or public service falls within the term port in the aforecited provision. Being a property of public dominion the same cannot be subject to execution or foreclosure sale. [26] Whether there are improvements in the fishing port complex that should not be construed to be embraced within the term port involves evidentiary matters that cannot be addressed in the present case. As for now, considering that the Authority is a national government instrumentality, any doubt on whether the entire IFPC may be levied upon to satisfy the tax delinquency should be resolved against the City of Iloilo. Similarly, for the same reason, the NFPC cannot be sold at public auction in satisfaction of the tax delinquency assessments made by the Municipality of Navotas on the entire complex. Additionally, the land on which the NFPC property sits is a reclaimed land, which belongs to the State. In Chavez v. Public Estates Authority,[27] the Court declared that reclaimed lands are lands of the public domain and cannot, without Congressional fiat, be subject of a sale, public or private. [28] In light of the above, petitioner is only liable to pay the amount of P62,841,947.79 representing the total taxes due as of December 31, 2001 from PFDA-owned properties that were leased, as shown in the Summary of Realty Taxes Due Properties Owned and/or Managed by PFDA as per Realty Tax Order of Payment dated September 16, 2002.[29] WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court of Appeals, dated July 19, 2001 and September 19, 2001, respectively, in CA-G.R. CV No. 42472 are SET ASIDE. The Realty Tax Order of Payment issued by respondent Municipality of Navotas on September 16, 2002 is declared VOID EXCEPT as to the amount of P62,841,947.79 representing the total taxes due as of December 31, 2001 on the properties leased by petitioner to private parties. Respondent Municipality of Navotas is DIRECTED to refrain from levying on the Navotas Fishing Port Complex (NFPC) to satisfy the payment of the real property tax delinquency. No costs. SO ORDERED. Puno, C.J., (Chairperson), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.
[1]

Under Rule 45 of the Rules of Court. Rollo, pp.100-101. Id. at 95-96. Appellants Brief; CA Rollo, pp. 38-39. Article 420, Civil Code; Government v. Cabangis, 53 Phil. 112 (1929). Exhibit L.

[2] [3]

[4] [5]

[6]

38

[7]

Exhibit K. Section 1, Presidential Decree No. 977. Section 10, id. Ignacio v. Director of Lands, 108 Phil. 316 (1960). Laurel v. Garcia, G.R. No. 92013, July 25, 1990, 187 SCRA 797. Legaspi v. Minister of Finance, No. L-58289, 115 SCRA 418. Noblejas and Noblejas, Registration of Land Titles and Deeds, 1992 ed., p. 4. Supra note 7, Section 10. Rollo, pp. 20-27. G.R. No. 51593, November 5, 1992, 215 SCRA 382. 53 Phil. 112 (1929). 67 Phil. 338 (1939).

[8] [9]

[10]

[11]

[12]

[13] [14]

[15]

[16]

[17]

[18]

[19]

Section 193 of the Local Government Code expressly withdrew the tax exemption of all juridical persons unless otherwise provided in this Code.
[20]

A national government instrumentality is an agency of the national government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some, if not all, corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter (Section 2 [10] of the Introductory Provisions of the Administrative Code). The PFDA (then Philippine Fish Marketing Authority/PFMA), pursuant to P.D. No. 977, as amended by E.O. No. 772, is tasked with the special function of promoting the development of the countrys fishing industry and improve the efficiency in handling, preserving, marketing, and distribution of fish and other aquatic products.
[21]

G.R. No. 169836, July 31, 2007. G.R. No. 155650, July 20, 2006, 495 SCRA 591.

[22]

[23]

Some of the national government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng Pilipinas, Philippine Rice Research Institute, Laguna Lake Development Authority, Fisheries Development Authority, Bases Conversion Development Authority, Philippine Ports Authority, Cagayan de Oro Port Authority, San Fernando Port Authority, and Philippine National Railways.
[24]

For an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for non-stock corporations, they must have members and must not distribute any part of their income to said members (Supra note 21, citing Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, vol. 3, 1998 edition, pp. 54-55).
[25]

Sec. 5. Capitalization; Sinking Fund. The Authority shall have an authorized capital stock of Five Hundred Million Pesos (P500,000,000.00) which shall be fully subscribed by the Republic of the Philippines, and the following amounts shall be paid in: (a) The net assets of the Authority, including the Navotas Fishing Port Complex, the valuation of

39

(b) (c)

which shall be determined jointly with the Office of Budget and Management and the Commission on Audit; The amount corresponding to the balance of the programmed appropriations for the Authority for calendar year 1981; and The amount corresponding to the programmed appropriations for the Authority for the calendar year 1982 (P.D. No. 977, as amended by E.O. No. 772).

The Authority is authorized to establish a sinking fund necessary to meet such obligations as may be incurred by the Authority. The annual contributions to the sinking fund shall come from the revenues derived from its fishing port complexes and, where such revenues are deficient, from such other corporate funds not otherwise intended for any specific purpose as may be designated by the Board. Unless otherwise directed shall invest the same in such manner as may be advantageous to the Authority.
[26]

Manila International Airport Authority (MIAA) v. Court of Appeals, supra note 22. G.R. No. 133250, July 9, 2002, 384 SCRA 152.

[27]

[28]

It is axiomatic that when public property is involved, exemption is the rule and taxation, the exception (Social Security System v. City of Bacolod, G.R. No. L-35726, July 21, 1982, 115 SCRA 412).
[29]

Rollo, p. 212.

THIRD DIVISION [G.R. No. 140944, April 30, 2008] RAFAEL ARSENIO S. DIZON, IN HIS CAPACITY AS THE JUDICIAL ADMINISTRATOR OF THE ESTATE OF THE DECEASED JOSE P. FERNANDEZ, PETITIONER, VS. COURT OF TAX APPEALS AND COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS. DECISION NACHURA, J.: Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure seeking the reversal of the Court of Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4] The Facts On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will[5] was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator,

40

respectively, of the Estate of Jose (Estate). In a letter[7] dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special proceedings for the Estate. Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR Regional Director for San Pablo City and filed the estate tax return[10] with the same BIR Regional Office, showing therein a NIL estate tax liability, computed as follows: COMPUTATION OF TAX Conjugal Real Property (Sch. 1) P10,855,020.00 Conjugal Personal Property (Sch.2) 3,460,591.34 Taxable Transfer (Sch. 3) Gross Conjugal Estate 14,315,611.34 Less: Deductions (Sch. 4) 187,822,576.06 Net Conjugal Estate NIL Less: Share of Surviving Spouse NIL. Net Share in Conjugal Estate NIL xxx Net Taxable Estate NIL. Estate Tax Due NIL.[11] On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of real and personal properties [14] of Jose had been fully paid and said properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator of the Estate.[15] Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with the probate court since it had security over several real estate properties forming part of the Estate.[16] However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,[17] demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as follows: Deficiency Estate Tax- 1987 Estate tax P31,868,414.48 25% surcharge- late filing 7,967,103.62 late payment 7,967,103.62 Interest 19,121,048.68 Compromise-non filing 25,000.00 non payment 25,000.00 no notice of death 15.00 no CPA Certificate 300.00 Total amount due & collectible P66,973,985.40[18] [19] In his letter dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her letter[20] dated April 12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA. Trial on the merits ensued. As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

41

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the following: Nature of Document (sic) Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of Internal Revenue informing the latter of the special proceedings for the settlement of the estate (p. 126, BIR records); Petition for the probate of the will and issuance of letter of administration filed with the Regional Trial Court (RTC) of Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records); Pleading entitled "Compliance" filed with the probate Court submitting the final inventory of all the properties of the deceased (p. 106, BIR records); Attachment to Exh. "C" which is the detailed and complete listing of the properties of the deceased (pp. 89-105, BIR rec.); Claims against the estate filed by Equitable Banking Corp. with the probate Court in the amount of P19,756,428.31 as of March 31, 1988, together with the Annexes to the claim (pp. 64-88, BIR records); Claim filed by Banque de L' Indochine et de Suez with the probate Court in the amount of US $4,828,905.90 as of January 31, 1988 (pp. 262-265, BIR records); Claim of the Manila Banking Corporation (MBC) which as of November 7, 1987 amounts to P65,158,023.54, but recomputed as of February 28, 1989 at a total amount of P84,199,160.46; together with the demand letter from MBC's lawyer (pp. 194-197, BIR records); Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and Associates Law Offices addressed to Fernandez Hermanos, Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records); Claim of State Investment House, Inc. filed with the RTC, Branch VII of Manila, docketed as Civil Case No. 86-38599 entitled "State Investment House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or Jose P. Fernandez, Defendants," (pp. 200-215, BIR records); Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M. Gonzales, (p. 184, BIR records); Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of BIR in San Pablo City (p. 183, BIR records); Estate Tax Return filed by the estate of the late Jose P. Fernandez through its authorized representative, Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182, BIR records); Certified true copy of the Letter of Administration issued by RTC Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing Atty. Rafael S. Dizon as Judicial Administrator of the estate of Jose P. Fernandez; (p. 102, CTA records) and Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April 27, 1990, issued by the Office of the Regional Director, Revenue Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA records.). Exhibits

1.

"A"

2.

"B" & "B-1"

3.

"C"

4.

"C-1" to "C-17"

5.

"D" to "D-24"

6.

"E" to "E-3"

7.

"F" to "F-3"

8.

"G" & "G-1"

9.

"H" to "H-16" "I"

10. 11.

"J"

12.

"K" to "K-5"

13.

"L"

14.

"M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto

42

Enriquez, who was one of the revenue examiners who conducted the investigation on the estate tax case of the late Jose P. Fernandez. In the course of the direct examination of the witness, he identified the following: Documents/Signatures Estate Tax Return prepared by the BIR; Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower Portion of Exh. "1"; Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by Maximino V. Tagle Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh. "2"; Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2"; Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 of Exh. "2"; Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991; Signature of Alberto Enriquez at the lower portion of Exh. "3"; Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3"; Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; Signature of Maximino V. Tagle at the lower portion of Exh. "3"; Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for the Commissioner of Internal Revenue, demanding payment of the amount of P66,973,985.40; and Assessment Notice FAS-E-87-91-00 The CTA's Ruling BIR Record p. 138 -do-

1. 2. 3.

pp. 143-144 -do-do-do-dop. 139 -do-do-do-do-

4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

14.

p. 169 pp. 169-170[22]

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated: Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still they could be considered as evidence for respondent since they were properly identified during the presentation of respondent's witness, whose testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's exhibits formed part of the BIR records of the case.[24] Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of the deficiency estate tax, to wit: Conjugal Real Property P 5,062,016.00 Conjugal Personal Prop. 33,021,999.93 Gross Conjugal Estate 38,084,015.93 Less: Deductions 26,250,000.00 Net Conjugal Estate P 11,834,015.93 Less: Share of Surviving Spouse 5,917,007.96 Net Share in Conjugal Estate P 5,917,007.96 Add: Capital/Paraphernal Properties - P44,652,813.66 Less: Capital/Paraphernal Deductions 44,652,813.66 Net Taxable Estate P 50,569,821.62

43

Estate Tax Due P 29,935,342.97 Add: 25% Surcharge for Late Filing Add: Penalties for-No notice of death No CPA certificate Total deficiency estate tax

7,483,835.74 15.00 300.00 P 37,419,493.71

exclusive of 20% interest from due date of its payment until full payment thereof [Sec. 283 (b), Tax Code of 1987].[25] Thus, the CTA disposed of the case in this wise: WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20% interest from the due date of its payment until full payment thereof as estate tax liability of the estate of Jose P. Fernandez who died on November 7, 1987. SO ORDERED.[26] Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. [27] The CA's Ruling On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the petitioner's act of filing an estate tax return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority to re-examine or reassess the said return filed on behalf of the Estate.[28] On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA denied in its Resolution[30] dated November 3, 1999. Hence, the instant Petition raising the following issues: 1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings of this Honorable Court; 2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax return prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been issued in the estate's favor; 3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable claims of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and 4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double imputation of values on the very same estate properties in the estate tax return it prepared and filed which effectively bloated the estate's assets. [31] The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been abandoned in a long line of cases in which the Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to formally offer said pieces of evidence and depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in evidence; that assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply with the doctrine's requisites because the documents herein remained simply part of the BIR records and were not duly incorporated in the court records; that the BIR failed to consider that although the actual payments made to the Estate creditors were lower than their respective claims, such were compromise agreements reached long after the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the settlement of the estate tax due should be at the time the estate tax return was filed by the judicial administrator and the issuance of said BIR Certifications and not at the time the aforementioned Compromise Agreements were entered into with the Estate's creditors.[32]

44

On the other hand, respondent counters that the documents, being part of the records of the case and duly identified in a duly recorded testimony are considered evidence even if the same were not formally offered; that the filing of the estate tax return by the Estate and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the return and assess the estate tax; and that the factual findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a petition for review.[33] The Issues There are two ultimate issues which require resolution in this case: First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which were not formally offered by the BIR; and Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax imposed against the Estate. The Court's Ruling The Petition is impressed with merit. Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally offered before the CTA.[34] Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads: SEC. 34. Offer of evidence. -- The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified. The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous rulings in People v. Napat-a[35] and People v. Mate[36] on the admission and consideration of exhibits which were not formally offered during the trial. Although in a long line of cases many of which were decided after Vda. de Oate, we held that courts cannot consider evidence which has not been formally offered,[37] nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has already been abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted and considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,[39] the Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de Oate, we held that: From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules to consider the same. However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial court provided the following requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second, the same must have been incorporated in the records of the case.[40] From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to the general rule. Being an exception, it may be applied only when there is strict compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should prevail. In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence

45

were presented and marked during the trial particularly when Alberto took the witness stand. Alberto identified these pieces of evidence in his direct testimony.[41] He was also subjected to crossexamination and re-cross examination by petitioner.[42] But Alberto's account and the exchanges between Alberto and petitioner did not sufficiently describe the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions relative to the working papers.[43] The lead examiner never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents themselves were not incorporated in the records of the case. A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly incorporated in the records of the case. Thus, we held in Ramos: In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by respondents' counsel... xxxx But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.[44] While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure are not ends in themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate.[46] The BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact that not even a single reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR. Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation would be considered waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear. [50] Thus, in its Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed to do so.[52] In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:[53] A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review documents not previously scrutinized by the trial court. Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would "condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless delays and derail the speedy administration of justice." Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the efficient, effective, and expeditious dispensation of justice.

46

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case. Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be disturbed on appeal unless it is shown that the lower courts committed gross error in the appreciation of facts.[54] In this case, however, we find the decision of the CA affirming that of the CTA tainted with palpable error. It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an obligation,[55] condonation or remission of debt[56] is defined as: an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives.[57] Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors. "Claims against the estate," as allowable deductions from the gross estate under Section 79 of the Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant to established rules of statutory construction, the decisions of American courts construing the federal tax code are entitled to great weight in the interpretation of our own tax laws.[60] It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against the estate is fixed as of the decedent's death which is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement between the parties results in the reduction of the amount actually paid. [61] On one hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim had at the date of the decedent's death.[62] Also, as held in Propstra v. U.S., [63] where a lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that post-death developments are not material in determining the amount of the deduction. On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken into consideration and the claim should be allowed as a deduction only to the extent of the amount actually paid.[64] Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that the deduction would be limited to the actual amount paid. [65] In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held: We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust dateof-death valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation principle, it was making a judgment about the nature of the federal estate tax specifically, that it is a tax imposed on the act of transferring property by will or intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of the property transferred should be ascertained, as nearly as possible, as of that time. This analysis supports broad application of the date-of-death valuation rule.[67] We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States.[68] First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value

47

of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government.[69] Any doubt on whether a person, article or activity is taxable is generally resolved against taxation.[70] Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.[71] Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs. SO ORDERED. Ynares-Santiago, (Chairperson), Austria-Martinez, Chico-Nazario, and Reyes, JJ., concur.
[1]

Dated January 20, 2000, rollo, pp. 8-20.

[2]

Particularly docketed as CA-G.R. SP No. 46947; penned by Associate Justice Marina L. Buzon, with Presiding Justice Jesus M. Elbinias (now retired) and Associate Justice Eugenio S. Labitoria (now retired), concurring; id. at 22-31.
[3]

Particularly docketed as CTA Case No. 5116; penned by Associate Judge Ramon O. De Veyra and concurred in by Presiding Judge Ernesto D. Acosta and Associate Judge Amancio Q. Saga; id. at 33-61.
[4]

This case was decided before the CTA was elevated by law to the same level as the CA by virtue of Republic Act (RA) No. 9282 otherwise known as "An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, otherwise known as The Law Creating the Court of Tax Appeals, and for other purposes, " which was approved on March 30, 2004. Hence, upon its effectivity, decisions of the CTA are now appealable directly to the Supreme Court.
[5]

BIR Records, pp. 1-88.

[6]

The said petition is entitled: In the Matter of the Petition to Approve the Will of Jose P. Fernandez, Carlos P. Fernandez, Petitioner, particularly docketed as Special Proceedings No. 87-42980; BIR Record, pp. 107-108.
[7]

Id. at 126. Id. at 184. Id. at 183. Id. at 182. Id. Rollo, p. 68. Id. at 69. Lists of Personal and Real Properties of Jose; id. at 70-73.

[8]

[9]

[10]

[11] [12]

[13]

[14]

48
[15] [16]

CTA Record, p. 102. Rollo, p. 10. BIR Records, p. 169. Id. Id. at 171. By then BIR Commissioner Liwayway Vinzons-Chato; id. at 277-278. CTA Records, pp. 1-7. Rollo, pp. 37-40 (Emphasis supplied).

[17]

[18]

[19]

[20]

[21] [22]

[23]

G.R. No. 116149, November 23, 1995, 250 SCRA 283, 287, citing People v. Napat-a, 179 SCRA 403 (1989) and People v. Mate, 103 SCRA 484 (1981).
[24]

CTA Records, p. 148. Id. at 166-167. Id. at 167. CA rollo, pp. 3-17. Citing Section 16 of the 1993 National Internal Revenue Code. Rollo, pp. 22-31. Id. at 32. Id. at 114-115. Id. Respondent BIR's Memorandum dated October 16, 2000; id. at 140-144.

[25]

[26] [27]

[28] [29]

[30]

[31]

[32]

[33] [34]

Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005, 468 SCRA 571, 588-589.
[35]

Supra note 23. Supra note 23.

[36] [37]

Far East Bank & Trust Company v. Commissioner of Internal Revenue , G.R. No. 149589, September 15, 2006, 502 SCRA 87; Ala-Martin v. Sultan, G.R. No. 117512, October 2, 2001, 366 SCRA 316, citing Ong v. Court of Appeals, 301 SCRA 391 (1999), which further cited Candido v. Court of Appeals, 253 SCRA 78, 82-83 (1996); Republic v. Sandiganbayan, 255 SCRA 438, 456 (1996); People v. Peralta, 237 SCRA 218, 226 (1994); Vda. De Alvarez vs. Court of Appeals, 231 SCRA 309, 317-318 (1994); and People v. Cario, et al., 165 SCRA 664, 671 (1988); See also De los Reyes v. Intermediate Appellate Court, G.R. No.74768, August 11, 1989, 176 SCRA 394, 401-402 (1989) and People v. Mate, supra note 23, at 493.
[38]

G.R. No. 137247, August 7, 2006, 498 SCRA 17, 30-31. Supra note 29, at 91. Underscoring supplied.

[39]

[40]

49
[41]

TSN, June 26, 1995. TSN, July 12, 1995. Id. at 42-49.

[42]

[43] [44]

Supra note 29, at 31 and 34, citing Marmont Resort Hotel Enterprises v. Guiang, 168 SCRA 373, 379-380 (1988).
[45]

Calamba Steel Center, Inc. (formerly JS Steel Corporation) v. Commissioner of Internal Revenue , G.R. No. 151857, April 28, 2005, 457 SCRA 482, 494.
[46]

Commissioner of Internal Revenue v. Manila Mining Corporation, supra note 28, at 593-594. Far East Bank & Trust Company v. Commissioner of Internal Revenue, supra note 29, at 90. CTA Resolution dated January 19, 1996; CTA Records, p. 113-114. CTA Records, p. 117. Id. at 119. Id. at 120. CTA Order dated June 17, 1996, CTA Records, p. 138.

[47]

[48]

[49]

[50]

[51]

[52] [53]

G.R. No. 155483, April 27, 2007, 522 SCRA 410, 416, citing Constantino v. Court of Appeals, G.R. No. 116018, November 13, 1996, 264 SCRA 59 (Other citations omitted; Emphasis supplied ).
[54]

Filinvest Development Corporation v. Commissioner of Internal Revenue and Court of Tax Appeals, G.R. No. 146941, August 9, 2007, 529 SCRA 605, 609-610, citing Carrara Marble Philippines, Inc. v. Commissioner of Customs, 372 Phil. 322, 333-334 (1999) and Commissioner of Internal Revenue v. Court of Appeals, 358 Phil. 562, 584 (1998).
[55]

Article 1231 of the Civil Code of the Philippines provides:

Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. (Emphasis ours.)
[56]

Article 1270 of the Civil Code of the Philippines provides:

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation.

50
[57]

Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1991 ed., p. 353, citing 8 Manresa 365.
[58]

SEC. 79. Computation of net estate and estate tax. -- For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (a) In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate -(1) Expenses, losses, indebtedness, and taxes. -- Such amounts -(A) For funeral expenses in an amount equal to five per centum of the gross estate but in no case to exceed P50,000.00; (B) For judicial expenses of the testamentary or intestate proceedings; (C) For claims against the estate; Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. (As amended by PD No. 1994) (D) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; and (E) For unpaid mortgages upon, or any indebtedness in respect to property, where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness, shall when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full reconsideration in money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than last day for the payment of the estate tax as prescribed in subsection (a) of Section 84.
[59]

This refers to the 1977 National Internal Revenue Code, as amended which was effective at the time of Jose's death on November 7, 1987.
[60]

Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 123206, March 22, 2000, 328 SCRA 666, 676-677 (citations omitted).
[61]

47B Corpus Juris Secundum, Internal Revenue 533. Smith v. C.I.R., 82 T.C.M. (CCH) 909 (2001), aff'd 54 Fed. Appx. 413. 680 F.2d 1248. 47B Corpus Juris Secundum, Internal Revenue 524. Prop. Treas. Reg. . 20.2053-1 (b) (1), published as REG-143316-03. Supra note 63.

[62]

[63] [64]

[65]

[66]

[67]

`Smith's Est. v. CIR, 198 F3d 515, 525 (5th Cir. 1999). See also O'Neal's Est. v. US, 228 F. Supp. 2d 1290 (ND Ala. 2002).
[68]

279 U.S. 151, 49 S. Ct. 291, 73 L.Ed. 647 (1929).

51
[69]

Commissioner of Internal Revenue v. The Court of Appeals, Central Vegetable Manufacturing Co., Inc., and the Court of Tax Appeals, G.R. No. 107135, February 23, 1999, 303 SCRA 508, 516-517, citing Province of Bulacan v. Court of Appeals, 299 SCRA 442 (1998); Republic v. IAC, 196 SCRA 335 (1991); CIR v. Firemen's Fund Ins. Co., 148 SCRA 315 (1987); and CIR v. CA, 204 SCRA 182 (1991).
[70]

Manila International Airport Authority v. Court of Appeals, G.R. No. 155650, July 20, 2006, 495 SCRA 591, 619.
[71]

Quirino v. Grospe, G.R. No. 58797, January 31, 1989, 169 SCRA 702, 704-705, citing Gabin v. Melliza, 84 Phil. 794, 796 (1949).

FIRST DIVISION COMMISSIONER OF INTERNAL G.R. No. 134062 REVENUE,

52

Petitioner,

-versus-

Present: PUNO, C.J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, AZCUNA and GARCIA, JJ.

BANK OF THE PHILIPPINE ISLANDS, Respondent.

Promulgated: April 17, 2007

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION CORONA, J.: This is a petition for review on certiorari56[1] of a decision57[2] of the Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 58[3] and resolution59[4] of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715. In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63: 1986 Deficiency Percentage Tax Deficiency percentage tax Add: 25% surcharge 20% interest from 1-21-87 to 10-28-88 Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE 1986 Deficiency Documentary Stamp Tax Deficiency percentage tax Add: 25% surcharge P93,723,372.40 23,430,843.10 P 7, 270,892.88 1,817,723.22 3,215,825.03 15,000.00 P12,319,441.13

53

Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE

15,000.00 P117,169,215.50.60[5]

Both notices of assessment contained the following note: Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown above. Said assessment has been based on return (filed by you) (as verified) (made by this Office) (pending investigation) (after investigation). You are requested to pay the above amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx61[6] In a letter dated December 10, 1988, BPI, through counsel, replied as follows: 1. Your deficiency assessments are no assessments at all. The taxpayer is not informed, even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can make an intelligent decision on whether to pay or to protest the assessment. This is all the more so when the assessment involves astronomical amounts, as in this case. We therefore request that the examiner concerned be required to state, even in the briefest form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the percentage tax, it is important that the taxpayer be informed also as to what particular percentage tax the assessment refers to. 2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged between your office and the Bankers Association of the Philippines [BAP] on this issue and of BPIs submission of its computations under this compromise. There is therefore no basis whatsoever for this assessment, assuming it is on the subject of the BAP compromise. On the other hand, if it relates to documentary stamp tax on some other issue, we should like to be informed about what those issues are. 3. As to the alleged deficiency percentage tax, we are completely at a loss on how such assessment may be protested since your letter does not even tell the taxpayer what particular percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment.62[7]

On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that: although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as no valid issue was raised against the validity of our assessment still we obliged to explain the basis of the assessments. xxx xxx xxx

54

this constitutes the final decision of this office on the matter.63[8] On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8, 1991 letter.64[9] This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992.65[10] On February 18, 1992, BPI filed a petition for review in the CTA.66[11] In a decision dated November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125.67[12] It denied reconsideration in a resolution dated May 27, 1996.68[13] On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the CTA69[14] for a decision on the merits.70[15] It ruled that the October 28, 1988 notices were not valid assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared that the proper assessments were those contained in the May 8, 1991 letter which provided the reasons for the claimed deficiencies.71[16] Thus, it held that BPI filed the petition for review in the CTA on time.72[17] The CIR elevated the case to this Court. This petition raises the following issues:

55

1) 2)

whether or not the assessments issued to BPI for deficiency percentage and documentary stamp taxes for 1986 had already become final and unappealable and whether or not BPI was liable for the said taxes.

The former Section 27073[18] (now renumbered as Section 228) of the NIRC stated: Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the [CIR] shall issue an assessment based on his findings. xxx xxx xxx (emphasis supplied)

WERE THE OCTOBER 28, 1988 NOTICES VALID ASSESSMENTS? The first issue for our resolution is whether or not the October 28, 1988 notices74[19] were valid assessments. If they were not, as held by the CA, then the correct assessments were in the May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the findings which the CIR denied in his December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on February 18, 1992 would be well within the 30-day period provided by law.75[20] The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the precise purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof.76[21] He contends that there was no law or jurisprudence then that required notices to state the reasons for assessing deficiency tax liabilities.77[22] BPI counters that due process demanded that the facts, data and law upon which the assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228), specifically provides that: [t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.

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According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due process requires even under the former Section 270. BPIs contention has no merit. The present Section 228 of the NIRC provides: Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: xxx xxx xxx

The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of the tax liabilities and a demand for payment thereof within 30 days after receipt. In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 78[23] In CIR v. Reyes,79[24] we held that: In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997. First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid. It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law.80[25] (emphasis supplied; italics in the original)

Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to notify or inform the taxpayer of his findings. Nothing in the old law required a written statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less.

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Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period.81[26] Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence. The sentence [t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void

was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted sentence.82[27] The fact that the amendment was necessary showed that, prior to the introduction of the amendment, the statute had an entirely different meaning.83[28] Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation of what the law required under the former Section 270. The amendment introduced by RA 8424 was an innovation and could not be reasonably inferred from the old law. 84[29] Clearly, the legislature intended to insert a new provision regarding the form and substance of assessments issued by the CIR.85[30] In ruling that the October 28, 1988 notices were not valid assessments, the CA explained: xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the legal and factual basis of the formers decision to charge the latter for deficiency documentary stamp and gross receipts taxes.86[31] In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to inform it in writing of the factual and legal bases of the assessments even if these were not called for under the old law. We disagree.

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Indeed, the underlying reason for the law was the basic constitutional requirement that no person shall be deprived of his property without due process of law. 87[32] We note, however, what the CTA had to say: xxx xxx xxx From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to discuss with the [CIR] when the latter issued the former a PreAssessment Notice (which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel honestly tell this Court that they did not know anything about the assessments? Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which contain his analysis regarding the findings of the [CIRs] examiner, Mr. San Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI]. xxx xxx xxx

From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and basis of the assessments, and was given all the opportunity to contest the same but ignored it despite the notice conspicuously written on the assessments which states that "this ASSESSMENT becomes final and unappealable if not protested within 30 days after receipt." Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately, such strategy proved fatal to the cause of his client. 88[33] The CA never disputed these findings of fact by the CTA: [T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the [CTA].89[34]

Under the former Section 270, there were two instances when an assessment became final and unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision:90[35] Sec. 270. Protesting of assessment.

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xxx

xxx

xxx

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by the implementing regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and unappealable. If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said decision; otherwise, the decision shall become final, executory and demandable.

IMPLICATIONS OF A VALID ASSESSMENT

Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify as a protest since the letter itself stated that [a]s soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment.91[36] Hence, by its own declaration, BPI did not regard this letter as a protest against the assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the October 28, 1988 notices as valid or proper assessments. The inevitable conclusion is that BPIs failure to protest the assessments within the 30 -day period provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the correctness of the assessments or invoking any defense that would reopen the question of its liability on the merits.92[37] Not only that. There arose a presumption of correctness when BPI failed to protest the assessments: Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.93[38] Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to have failed to appeal the CIRs final decision regarding the disputed assessments within the 30-day period provided by law. The CIR, in his May 8, 1991 res ponse, stated that it was his final decision on the matter. BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its omission. We have already declared that:

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the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the basis of his statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the [CIR], this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the [CIR] from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action.94[39] (emphasis supplied) Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject tax assessments. We realize that these assessments (which have been pending for almost 20 years) involve a considerable amount of money. Be that as it may, we cannot legally presume the existence of something which was never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will not be held liable for the proper taxes assessed against them: Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.95[40] WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.

SO ORDERED.

RENATO C. CORONA Associate Justice

WE CONCUR:

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REYNATO S. PUNO Chief Justice Chairperson

ANGELINA SANDOVAL-GUTIERREZ Associate Justice

ADOLFO S. AZCUNA Associate Justice

CANCIO C. GARCIA Associate Justice

CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

Republic of the Philippines Supreme Court Manila

THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

G.R. No. 167560 Present: YNARES-SANTIAGO, J., Chairperson, AUSTRIA-MARTINEZ, CHICO-NAZARIO, NACHURA, and REYES, JJ.

- versus -

DOMINADOR MENGUITO, Promulgated: Respondent. September 17, 2008 x----------------------------------------------------------x

DECISION

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AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 31, 2005 Decision96[1] of the Court of Appeals (CA) which reversed and set aside the Court of Tax Appeals (CTA) April 2, 2002 Decision97[2] and October 10, 2002 Resolution98[3] ordering Dominador Menguito (respondent) to pay the Commissioner of Internal Revenue (petitioner) deficiency income and percentage taxes and delinquency interest. Based on the Joint Stipulation of Facts and Admissions99[4] of the parties, the CTA summarized the factual and procedural antecedents of the case, the relevant portions of which read: Petitioner Dominador Menguito [herein respondent] is a Filipino citizen, of legal age, married to Jeanne Menguito and is engaged in the restaurant and/or cafeteria business. For the years 1991, 1992 and 1993, its principal place of business was at Gloriamaris, CCP Complex, Pasay City and later transferred to Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy Aquino International Airport, Pasay City. During the same years, he also operated a branch at Club John Hay, Baguio City carrying the business name of Copper Kettle Cafeteria Specialist (Joint Stipulation of Facts and Admissions, p. 133, CTA records). xxxx Subsequently, BIR Baguio received information that Petitioner [herein respondent] has undeclared income from Texas Instruments and Club John Hay, prompting the BIR to conduct another investigation. Through a letter dated July 28, 1997, Spouses Dominador Menguito and Jeanne Menguito (Spouses Menguito) were informed by the Assessment Division of the said office that they have underdeclared sales totaling P48,721,555.96 (Exhibit 11, p. 83, BIR records). This was followed by a Preliminary Ten (10) Day Letter dated August 11, 1997, informing Petitioner [herein respondent] that in the investigation of his 1991, 1992 and 1993 income, business and withholding tax case, it was found out that there is still due from him the total sum of P34,193,041.55 as deficiency income and percentage tax. On September 2, 1997, the assessment notices subject of the instant petition were issued. These were protested by Ms. Jeanne Menguito, through a letter dated September 28, 1997 (Exhibit 14, p. 112, BIR Records), on the ground that the 40% deduction allowed on their computed gross revenue, is unrealistic. Ms. Jeanne Menguito requested for a period of thirty (30) days within which to coordinate with the BIR regarding the contested assessment. On October 10, 1997, BIR Baguio replied, informing the Spouses Menguito that the source of assessment was not through the disallowance of claimed expenses but on data received from Club John Hay and Texas Instruments Phils., Inc. Said letter gave the spouses ten (10) days to present evidence (Exhibit 15, p. 110, BIR Records).

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In an effort to clear an alleged confusion regarding Copper Kettle Cafeteria Specialist (CKCS) being a sole proprietorship owned by the Spouses, and Copper Kettle Catering Services, Inc. (CKCS, Inc.) being a corporation with whom Texas Instruments and Club John Hay entered into a contract, Petitioner [respondent] submitted to BIR Baguio a photocopy of the SEC Registration of Copper Kettle Catering Services, Inc. on March 23, 1999 (pp. 134-141, BIR Records). On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito, informing the latter that a reinvestigation or reconsideration cannot be given due course by the mere submission of an uncertified photocopy of the Certificate of Incorporation. Thus, it avers that the amendment issued is still valid and enforceable. On May 26, 1999, Petitioner [respondent] filed the present case, praying for the cancellation and withdrawal of the deficiency income tax and percentage tax assessments on account of prescription, whimsical factual findings, violation of procedural due process on the issuance of assessment notices, erroneous address of notices and multiple credit/ investigation by the Respondent [petitioner] of Petitioner's [respondents] books of accounts and other related records for the same tax year. Instead of filing an Answer, Respondent [herein petitioner] moved to dismiss the instant petition on July 1, 1999, on the ground of lack of jurisdiction. According to Respondent [petitioner], the assessment had long become final and executory when Petitioner [respondent] failed to comply with the letter dated October 10, 1997. Petitioner opposed said motion on July 21, 1999, claiming that the final decision on Petitioner's [respondents] protest is the April 12, 1999 letter of the Baguio Regional Office; therefore, the filing of the action within thirty (30) days from receipt of the said letter was seasonably filed. Moreover, Petitioner [respondent] asserted that granting that the April 12, 1999 letter in question could not be construed to mean as a denial or final decision of the protest, still Petitioner's [respondents] appeal was timely filed since Respondent [petitioner] issued a Warrant of Distraint and/or Levy against the Petitioner [respondent] on May 3, 1999, which warrant constituted a final decision of the Respondent [petitioner] on the protest of the taxpayer. On September 3, 1999, this Court denied Respondent's [petitioners] 'Motion to Dismiss' for lack of merit. Respondent [petitioner] filed his Answer on September 24, 1999, raising the following Special and Affirmative Defenses: xxxx 5. Investigation disclosed that for taxable years 1991, 1992 and 1993, petitioner [respondent] filed false or fraudulent income and percentage tax returns with intent to evade tax by under declaring his sales. 6. The alleged duplication of investigation of petitioner [respondent] by the BIR Regional Office in Baguio City and by the Revenue District Office in Pasay City is justified by the finding of fraud on the part of the petitioner [respondent], which is an exception to the provision in the Tax Code that the examination and inspection of books and records shall be made only once in a taxable year (Section 235, Tax Code). At any rate, petitioner [respondent], in a letter dated July 18, 1994, waived his right to the consolidation of said investigation. 7. The aforementioned falsity or fraud was discovered on August 5, 1997. The assessments were issued on September 2, 1997, or within ten (10) years from the discovery of such falsity or fraud (Section 223, Tax Code). Hence, the assessments have not prescribed.

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8. Petitioner's [respondents] allegation that the assessments were not properly addressed is rendered moot and academic by his acknowledgment in his protest letter dated September 28, 1997 that he received the assessments. 9. Respondent [petitioner] complied with the provisions of Revenue Regulations No. 12-85 by informing petitioner [respondent] of the findings of the investigation in letters dated July 28, 1997 and August 11, 1997 prior to the issuance of the assessments. 10. Petitioner [respondent] did not allege in his administrative protest that there was a duplication of investigation, that the assessments have prescribed, that they were not properly addressed, or that the provisions of Revenue Regulations No. 12-85 were not observed. Not having raised them in the administrative level, petitioner [respondent] cannot raise the same for the first time on appeal (Aguinaldo Industries Corp. vs. Commissioner of Internal Revenue, 112 SCRA 136). 11. The assessments were issued in accordance with law and regulations. 12. All presumptions are in favor of the correctness of tax assessments (CIR vs. Construction Resources of Asia, Inc., 145 SCRA 67), and the burden to prove otherwise is upon petitioner [respondent].100[5] (Emphasis supplied) On April 2, 2002, the CTA rendered a Decision, the dispositive portion of which reads: Accordingly, Petitioner [herein respondent] is ORDERED to PAY the Respondent [herein petitioner] the amount of P11,333,233.94 and P2,573,655.82 as deficiency income and percentage tax liabilities, respectively for taxable years 1991, 1992 and 1993 plus 20% delinquency interest from October 2, 1997 until full payment thereof. SO ORDERED.101[6] Respondent filed a motion for reconsideration but the CTA denied the same in its Resolution of October 10, 2002.102[7] Through a Petition for Review103[8] filed with the CA, respondent questioned the CTA Decision and Resolution mainly on the ground that Copper Kettle Catering Services, Inc. (CKCS, Inc.) was a separate and distinct entity from Copper Kettle Cafeteria Specialist (CKCS); the sales and revenues of CKCS, Inc. could not be ascribed to CKCS; neither may the taxes due from one, charged to the other; nor the notices to be served on the former, coursed through the latter.104[9] Respondent cited the Joint Stipulation in which petitioner

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acknowledged that its (respondents) business was called Copper Kettle Cafeteria Specialist, not Copper Kettle Catering Services, Inc.105[10] Based on the unrefuted106[11] CTA summary, the CA rendered the Decision assailed herein, the dispositive portion of which reads: WHEREFORE, the instant petition is GRANTED. Reversing the assailed Decision dated April 2, 2002 and Resolution dated October 10, 2002, the deficiency income tax and percentage income tax assessments against petitioner in the amounts of P11,333,233.94 and P2,573,655.82 for taxable years 1991, 1992 and 1993 plus the 20% delinquency interest thereon are annulled. SO ORDERED.107[12] Petitioner filed a motion for reconsideration but the CA denied the same in its October 10, 2002 Resolution.
108[13]

Hence, herein recourse to the Court for the reversal of the CA decision and resolution on the following grounds: I The Court of Appeals erred in reversing the decision of the Court of Tax Appeals and in holding that Copper Kettle Cafeteria Specialist owned by respondent and Copper Kettle Catering Services, Inc. owned and managed by respondent's wife are not one and the same. II The Court of Appeals erred in holding that respondent was denied due process for failure of petitioner to validly serve respondent with the post-reporting and pre-assessment notices as required by law. On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are one and the same corporation because [t]he contract between Texas Instruments and Copper Kettle was signed by petitioners [respondents] wife, Jeanne Menguito as proprietress.109[14] However, the CA reversed the CTA on these grounds: Respondents [herein petitioners] allegation that Copper Kettle Catering Services, Inc. and Copper Kettle Cafeteria Specialists are not distinct entities and that the under-declared sales/revenues of Copper Kettle Catering Services, Inc. pertain to Copper Kettle Cafeteria Specialist are belied by the evidence on record. In the Joint Stipulation of Facts submitted before

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the tax court, respondent [petitioner] admitted that petitioners [herein respondents] business name is Copper Kettle Cafeteria Specialist. Also, the Certification of Club John Hay and Letter dated July 9, 1997 of Texas Instruments both addressed to respondent indicate that these companies transacted with Copper Kettle Catering Services, Inc., owned and managed by JEANNE G. MENGUITO, NOT petitioner Dominador Menguito. The alleged under-declared sales income subject of the present assessments were shown to have been earned by Copper Kettle Catering Services, Inc. in its commercial transaction with Texas Instruments and Camp John Hay; NOT by petitioners dealing with these companies. In fact, there is nothing on record which shows that Texas Instruments and Camp John Hay conducted business relations with Copper Kettle Cafeteria Specialist, owned by herein petitioner Dominador Menguito. In the absence, therefore, of clear and convincing evidence showing that Copper Kettle Cafeteria Specialist and Copper Kettle Catering Services, Inc. are one and the same, respondent can NOT validly impute alleged underdeclared sales income earned by Copper Kettle Catering Services, Inc. as sales income of Copper Kettle Cafeteria Specialist.110[15] (Emphasis supplied) Respondent is adamant that the CA is correct. Many times in the past, the BIR had treated CKCS separately from CKCS, Inc.: from May 1994 to June 1995, the BIR sent audit teams to examine the books of account and other accounting records of CKCS, and based on said audits, respondent was held liable for deficiency taxes, all of which he had paid.111[16] Moreover, the certifications112[17] issued by Club John Hay and Texas Instruments identify the concessionaire operating therein as CKCS, Inc., owned and managed by his spouse Jeanne Menguito, and not CKCS.113[18] Petitioner impugns the findings of the CA, claiming that these are contradicted by evidence on record consisting of a reply to the September 2, 1997 assessment notice of BIR Baguio which Jeanne Menguito wrote on September 28, 1997, to wit: We are in receipt of the assessment notice you have sent us, dated September 2, 1997. Having taken hold of the same only now following our travel overseas, we were not able to respond immediately and manifest our protest. Also, with the impending termination of our businesses at 19th Tee, Club John Hay and at Texas Instruments, Loakan, Baguio City, we have already started the transfer of our records and books in Baguio City to Manila that we will need more time to review and sort the records that may have to be presented relative to the assessment x x x.114[19] (Emphasis supplied) Petitioner insists that said reply confirms that the assessment notice is directed against the businesses which she and her husband, respondent herein, own and operate at Club John Hay and Texas Instruments, and establishes that she is protesting said notice not just for herself but also for respondent.115[20]

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Moreover, petitioner argues that if it were true that CKCS, Inc. and CKCS are separate and distinct entities, respondent could have easily produced the articles of incorporation of CKCS, Inc.; instead, what respondent presented was merely a photocopy of the incorporation articles.116[21] Worse, petitioner adds, said document was not offered in evidence before the CTA, but was presented only before the CA.117[22] Petitioner further insists that CKCS, Inc. and CKCS are merely employing the fiction of their separate corporate existence to evade payment of proper taxes; that the CTA saw through their ploy and rightly disregarded their corporate individuality, treating them instead as one taxable entity with the same tax base and liability;118[23] and that the CA should have sustained the CTA.119[24] In effect, petitioner would have the Court resolve a purely factual issue120[25] of whether or not there is substantial evidence that CKCS, Inc. and CKCS are one and the same taxable entity. As a general rule, the Court does not venture into a trial of facts in proceedings under Rule 45 of the Rules of Courts, for its only function is to review errors of law.121[26] The Court declines to inquire into errors in the factual assessment of the CA, for the latters findings are conclusive, especially when these are synonymous to those of the CTA.122[27] But when the CA contradicts the factual findings of the CTA, the Court deems it necessary to determine whether the CA was justified in doing so, for one basic rule in taxation is that the factual findings of the CTA, when supported by substantial evidence, will not be disturbed on appeal unless it is shown that the CTA committed gross error in its appreciation of facts.123[28] The Court finds that the CA gravely erred when it ignored the substantial evidence on record and reversed the CTA. In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct, business conduit or alter ego of another corporation or when they practice

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fraud on our internal revenue laws,124[29] the fiction of their separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable transaction. The Court considers the presence of the following circumstances, to wit: when the owner of one directs and controls the operations of the other, and the payments effected or received by one are for the accounts due from or payable to the other;125[30] or when the properties or products of one are all sold to the other, which in turn immediately sells them to the public,126[31] as substantial evidence in support of the finding that the two are actually one juridical taxable personality. In the present case, overwhelming evidence supports the CTA in disregarding the separate identity of CKCS, Inc. from CKCS and in treating them as one taxable entity. First, in respondents Petition for Review before the CTA, he expressly admitted that he is engaged in restaurant and/or cafeteria business and that [i]n 1991, 1992 and 1993, he also operated a branch at Club John Hay, Baguio City with a business name of Copper Kettle Cafeteria Specialist.127[32] Respondent repeated such admission in the Joint Stipulation.128[33] And then in Exhibit 1129[34] for petitioner, a July 18, 1994 letter sent by Jeanne Menguito to BIR, Baguio City, she stated thus: in connection with the investigation of Copper Kettle Cafeteria Specialist which is located at 19th Tee Club John Hay, Baguio City under letter of authority nos. 0392897, 0392898, and 0392690 dated May 16, 1994, investigating my income, business, and withholding taxes for the years 1991, 1992, and 1993.130[35] (Emphasis supplied) Jeanne Menguito signed the letter as proprietor of Copper Kettle Cafeteria Specialist.131[36] Related to Exhibit 1 is petitioner's Exhibit 14, which is another letter dated September 28, 1997, in which Jeanne Menguito protested the September 2, 1997 assessment notices directed at Copper Kettle Cafeteria Specialist and referred to the latter as our business at 19th Tee Club John Hay and at Texas Instruments.132[37] Taken along with the Joint Stipulation, Exhibits A through C and the August 3, 1993

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Certification of Camp John Hay, Exhibits 1 and 14, confirm that respondent, together with his spouse Jeanne Menguito, own, operate and manage a branch of Copper Kettle Cafeteria Specialist, also called Copper Kettle Catering Services at Camp John Hay. Moreover, in Exhibits A to A-1,133[38] Exhibits B to B-1134[39] and Exhibits C to C-1135[40] which are lists of concessionaires that operated in Club John Hay in 1992, 1993 and 1991, respectively,136[41] it appears that there is no outlet with the name Copper Kettle Cafeteria Specialist as claimed by respondent. The name that appears in the lists is 19th TEE CAFETERIA (Copper Kettle, Inc.). However, in the light of the express admission of respondent that in 1991, 1992 and 1993, he operated a branch called Copper Kettle Cafeteria Specialist in Club John Hay, the entries in Exhibits A through C could only mean that said branch refers to 19th Tee Cafeteria (Copper Kettle, Inc.). There is no evidence presented by respondent that contradicts this conclusion. In addition, the August 9, 1993 Certification issued by Club John Hay that COPPER KETTLE CATERING SERVICES owned and managed by MS. JEANNE G. MENGUITO is a concessionaire in John Hay since July 1991 up to the present and is operating the outlet 19TH TEE CAFETERIA AND THE TEE BAR137[42] convincingly establishes that respondent's branch which he refers to as Copper Kettle Cafeteria Specialist at Club John Hay also appears in the latter's records as Copper Kettle Catering Services with an outlet called 19th Tee Cafeteria and The Tee Bar. Second, in Exhibit 8138[43] and Exhibit E,139[44] Texas Instruments identified the concessionaire operating its canteen as Copper Kettle Catering Services, Inc.140[45] and/or COPPER KETTLE CAFETERIA SPECIALIST SVCS.141[46] It being settled that respondent's Copper Kettle Cafeteria Specialist is also known as Copper Kettle Catering Services, and that respondent and Jeanne Menguito both own, manage and act as

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proprietors of the business, Exhibit 8 and Exhibit E further establish that, through said business, respondent also had taxable transactions with Texas Instruments. In view of the foregoing facts and circumstances, the Articles of Incorporation of CKCS, Inc. -- a certified true copy of which respondent attached only to his Reply filed with the CA142[47] -- cannot insulate it from scrutiny of its real identity in relation to CKCS. It is noted that said Articles of Incorporation of CKCS, Inc. was issued in 1989, but documentary evidence indicate that after said date, CKCS, Inc. has also assumed the name CKCS, and vice-versa. The most concrete indication of this practice is the 1991 Quarterly Percentage Tax Returns covering the business name/trade 19th Tee Camp John Hay. In said returns, the taxpayer is identified as Copper Kettle Cafeteria Specialist143[48] or CKCS, not CKCS, Inc. Yet, in several documents already cited, the purported owner of 19th Tee Bar at Club John Hay is CKCS, Inc. All these pieces of evidence buttress the finding of the CTA that in 1991, 1992 and 1993, respondent, together with his spouse Jeanne Menguito, owned and operated outlets in Club John Hay and Texas Instruments under the names Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering Services or Copper Kettle Catering Services, Inc.. Turning now to the second issue. In respondent's Petition for Review with the CTA, he questioned the validity of the Assessment Notices,144[49] all dated September 2, 1997, issued by BIR, Baguio City against him on the following grounds: 1. The assessment notices, based on income and percentage tax returns filed for 1991, 1992 and 1993, were issued beyond the three-year prescriptive period under Section 203 of the Tax Code;145[50] 2. The assessment notices were addressed to Copper Kettle Specialist, Club John Hay, Baguio City, despite notice to petitioner that respondent's principal place of business was at the CCP Complex, Pasay City.146[51] 3. The assessment notices were issued in violation of the requirement of Revenue Regulations No. 12-85, dated November 27, 1985, that the taxpayer be issued a post-reporting notice and preassessment notice before the preliminary findings of deficiency may ripen into a formal assessment;147[52] and 4. The assessment notices did not give respondent a 15-day period to reply to the findings of deficiency.148[53]

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The Court notes that nowhere in his Petition for Review did respondent deny that he received the September 2, 1997 assessment notices. Instead, during the trial, respondent's witness, Ma. Theresa Nalda (Nalda), testified that she informed the BIR, Baguio City that there was no Notice or letter, that we did not receive, perhaps, because they were not addressed to Mr. Menguito's head office.149[54] The CTA correctly upheld the validity of the assessment notices. Citing Section 223 of the Tax Code which provides that the prescriptive period for the issuance of assessment notices based on fraud is 10 years, the CTA ruled that the assessment notices issued against respondent on September 2, 1997 were timely because petitioner discovered the falsity in respondent's tax returns for 1991, 1992 and 1993 only on February 19, 1997.150[55] Moreover, in accordance with Section 2 of Revenue Regulation No. 12-85, which requires that assessment notices be sent to the address indicated in the taxpayer's return, unless the latter gives a notice of change of address, the assessment notices in the present case were sent by petitioner to Camp John Hay, for this was the address respondent indicated in his tax returns.151[56] As to whether said assessment notices were actually received, the CTA correctly held that since respondent did not testify that he did not receive said notices, it can be presumed that the same were actually sent to and received by the latter. The Court agrees with the CTA in considering as hearsay the testimony of Nalda that respondent did not receive the notices, because Nalda was not competent to testify on the matter, as she was employed by respondent only in June 1998, whereas the assessment notices were sent on September 2, 1997.152[57] Anent compliance with the requirements of Revenue Regulation No. 12-85, the CTA held: BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to Spouses Menguito, informing the latter of their supposed underdeclaration of sales totaling P48,721,555.96 and giving them 5 days to communicate any objection to the results of the investigation (Exhibit 11, p. 83, BIR Records). Records likewise reveal the issuance of a Preliminary Ten (10) Day Letter on August 11, 1997, informing Petitioner [respondent herein] that the sum of P34,193,041.55 is due from him as deficiency income and percentage tax (Exhibit 13, p. 173, BIR Records). Said letter gave the Petitioner [respondent herein] a period of ten (10) days to submit his objection to the proposed assessment, either personally or in writing, together with any evidence he may want to present. xxxx As to Petitioner's allegation that he was given only ten (10) days to reply to the findings of deficiency instead of fifteen (15) days granted to a taxpayer under Revenue Regulations No. 1285, this Court believes that when Respondent [petitioner herein] gave the Petitioner [respondent herein] on October 10, 1997 an additional period of ten (10) days to present documentary evidence or a total of twenty (20) days, there was compliance with Revenue Regulations No. 1285 and the latter was amply given opportunity to present his side x x x.153[58]

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The CTA further held that respondent was estopped from raising procedural issues against the assessment notices, because these were not cited in the September 28, 1997 letter-protest which his spouse Jeanne Menguito filed with petitioner.154[59] On appeal by respondent,155[60] the CA resolved the issue, thus: Moreover, if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. Here, respondent [petitioner herein] merely alleged that it forwarded the assessment notices to petitioner [respondent herein]. The respondent did not show any proof of mailing, registry receipt or acknowledgment receipt signed by the petitioner [respondent herein]. Since respondent [petitioner herein] has not adduced sufficient evidence that petitioner [respondent herein] had in fact received the pre-assessment notice and post-reporting notice required by law, it cannot be assumed that petitioner [respondent herein] had been served said notices.156[61] No other ground was cited by the CA for the reversal of the finding of the CTA on the issue. The CA is gravely mistaken. In their Petition for Review with the CTA, respondent expressly stated that [s]ometime in September 1997, petitioner [respondent herein] received various assessment notices, all dated 02 September 1997, issued by BIR-Baguio for alleged deficiency income and percentage taxes for taxable years ending 31 December 1991, 1992 and 1993 x x x.157[62] In their September 28, 1997 protest to the September 2, 1997 assessment notices, respondent, through his spouses Jeanne Menguito, acknowledged that [they] are in receipt of the assessment notice you have sent us, dated September 2, 1997 x x x.158[63] Respondent is therefore estopped from denying actual receipt of the September 2, 1997 assessment notices, notwithstanding the denial of his witness Nalda. As to the address indicated on the assessment notices, respondent cannot question the same for it is the said address which appears in its percentage tax returns.159[64] While respondent claims that he had earlier notified petitioner of a change in his business address, no evidence of such written notice was presented. Under Section 11 of Revenue Regulation No. 12-85, respondent's failure to give written notice of change of address

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bound him to whatever communications were sent to the address appearing in the tax returns for the period involved in the investigation.160[65] Thus, what remain in question now are: whether petitioner issued and mailed a post-reporting notice and a pre-assessment notice; and whether respondent actually received them. There is no doubt that petitioner failed to prove that it served on respondent a post-reporting notice and a pre-assessment notice. Exhibit 11161[66] of petitioner is a mere photocopy of a July 28, 1997 letter it sent to respondent, informing him of the initial outcome of the investigation into his sales, and the release of a preliminary assessment upon completion of the investigation, with notice for the latter to file any objection within five days from receipt of the letter. Exhibit 13162[67] of petitioner is also a mere photocopy of an August 11, 1997 Preliminary Ten (10) Day Letter to respondent, informing him that he had been found to be liable for deficiency income and percentage tax and inviting him to submit a written objection to the proposed assessment within 10 days from receipt of notice. But nowhere on the face of said documents can be found evidence that these were sent to and received by respondent. Nor is there separate evidence, such as a registry receipt of the notices or a certification from the Bureau of Posts, that petitioner actually mailed said notices. However, while the lack of a post-reporting notice and pre-assessment notice is a deviation from the requirements under Section 1163[68] and Section 2164[69] of Revenue Regulation No. 12-85, the same cannot detract from the fact that formal assessments were issued to and actually received by respondents in accordance with Section 228 of the National Internal Revenue Code which was in effect at the time of assessment. It should be emphasized that the stringent requirement that an assessment notice be satisfactorily proven to have been issued and released or, if receipt thereof is denied, that said assessment notice have been served on the taxpayer,165[70] applies only to formal assessments prescribed under Section 228 of the National Internal Revenue Code, but not to post-reporting notices or pre-assessment notices. The issuance of a valid formal assessment is a substantive prerequisite to tax collection,166[71] for it contains not only a computation of tax liabilities but also a demand for payment within a prescribed period, thereby signaling the time when

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penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies therefor. Due process requires that it must be served on and received by the taxpayer.167[72] A post-reporting notice and pre-assessment notice do not bear the gravity of a formal assessment notice. The post-reporting notice and pre-assessment notice merely hint at the initial findings of the BIR against a taxpayer and invites the latter to an informal conference or clarificatory meeting. Neither notice contains a declaration of the tax liability of the taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice on the taxpayer for as long as the latter is properly served a formal assessment notice. In the case of respondent, a formal assessment notice was received by him as acknowledged in his Petition for Review and Joint Stipulation; and, on the basis thereof, he filed a protest with the BIR, Baguio City and eventually a petition with the CTA. WHEREFORE, the petition is GRANTED. The March 31, 2005 Decision of the Court of Appeals is REVERSED and SET ASIDE and the April 2, 2002 Decision and October 10, 2002 Resolution of the Court of Tax Appeals are REINSTATED. SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

MINITA V. CHICO-NAZARIO Associate Justice

ANTONIO EDUARDO B. NACHURA Associate Justice

RUBEN T. REYES Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson, Third Division

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CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice