EN BANC

[G.R. No. 12287. August 7, 1918.]

VICENTE MADRIGAL and his wife, SUSANA PATERNO,
plaintiffs-appellants, vs. JAMES J. RAFFERTY, Collector of
Internal Revenue, and VENANCIO CONCEPCION,
Deputy Collector of Internal Revenue, defendants-
appellees.
MALCOLM, J p:
This appeal calls for consideration of the Income Tax Law, a
law of American origin, with reference to the Civil Code, a law of Spanish
origin.
STATEMENT OF THE CASE
Vicente Madrigal and Susana Paterno Were legally married
prior to January 1, 1914. The marriage was contracted under the
provisions of law concerning conjugal partnerships (sociedad de
gananciales) . On February 25, 1915, Vicente Madrigal filed a sworn
declaration on the prescribed form with the Collector of Internal
Revenue, showing, as his total net income for the year 1914, the sum of
P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in
fact the income of the conjugal partnership existing between himself
and his wife Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of October 3,
1913, the income declared by Vicente Madrigal should be divided into
two equal parts, one-half to be considered the income of Vicente
Madrigal and the other half the income of Susana Paterno. The general
question had in the meantime been submitted to the Attorney-General
of the Philippine Islands who in an opinion dated March 17, 1915, held
with the petitioner Madrigal. The revenue officers being still unsatisfied,
the correspondence together with this opinion was forwarded to
Washington for a decision by the United States Treasury Department. The
United States Commissioner of Internal Revenue reversed the opinion of
the Attorney-General, and thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal
had been decided adversely by the Collector of Internal Revenue,
action was begun by Vicente Madrigal and his wife Susana Paterno in
the Court of First Instance of the city of Manila against the Collector of
Internal Revenue and the Deputy Collector of Internal Revenue for the
recovery of the sum of P3,786.08, alleged to have been wrongfully and
illegally assessed and collected by the defendants from the plaintiff,
Vicente Madrigal, under the provisions of the Act of Congress known as
the Income Tax Law. The burden of the complaint was that if the income
tax for the year 1914 had been correctly and lawfully computed there
would have been due and payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts to a total of P5,842.18 instead
of P9,668.21, erroneously and unlawfully collected from the plaintiff
Vicente Madrigal, with the result that plaintiff Madrigal has paid ' as
income tax for the year 1914, P3,786.08, in excess of the sum lawfully due
and payable.
The answer of the defendants, together with an analysis of the
tax declaration, the pleadings, and the stipulation, sets forth the basis of
defendants' stand in the following way: The income of Vicente Madrigal
and his wife Susana Paterno for the year 1914 was made up of three
items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal
and shipping business; (2) P4,086.50, the profits made by Susana Paterno
in her embroidery business; (3) P16,687.80, the profits made by Vicente
Madrigal in a pawnshop company. The sum of these three items is
P383,181.97, the gross income of Vicente Madrigal and Susana Paterno
for the year 1914. General deductions were claimed and allowed in the
sum of P86,879.24. The resulting net income was P296,302.73. For the
purpose of assessing the normal tax of one per cent on the net income
there were allowed as specific deductions the following: (1) P16,687.80,
the tax upon which was to be paid at source, and (2) P8,000, the specific
exemption granted to Vicente Madrigal and Susana Paterno, husband
and wife. The remainder, P271,614.93 was the sum upon which the
normal tax of one per cent was assessed. The normal tax thus arrived at
was P2,716.15.
The dispute between the plaintiffs and the defendants
concerned the additional tax provided for in the Income Tax Law. The
trial court in an exhausted decision found in favor of defendants, without
costs.
ISSUES.
The contentions of plaintiffs and appellants, having to do solely
with the additional income tax, is that it should be divided into two equal
parts, because of the conjugal partnership existing between them. The
learned argument of counsel is mostly based upon the provisions of the
Civil Code establishing the sociedad de gananciales. The counter
contentions of appellees are that the taxes imposed by the Income Tax
Law are as the name implies taxes upon income and not upon capital
and property; that the fact that Madrigal was a married man, and his
marriage contracted under the provisions governing the conjugal
partnership, has no bearing on income considered as income, and that
the distinction must be drawn between the ordinary form of commercial
partnership and the conjugal partnership of spouses resulting from the
relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than
five answers have been given in the course of history. The final stage has
been the selection of income as the norm of taxation. (See Seligman,
"The Income Tax," Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect on the part of
legislators to put into statutory form this canon of taxation and of social
reform. The aim has been to mitigate the evils arising from inequalities of
wealth by a progressive scheme of taxation, which places the burden on
those best able to pay. To carry out this idea, public considerations have
demanded an exemption roughly equivalent to the minimum of
subsistence. With these exceptions, the income tax is supposed to reach
the earnings of the entire non governmental property of the country.
Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test.
The essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of time is
called capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called income.
Capital is wealth, while income is the service of wealth. (See Fisher, "The
Nature of Capital and Income.") The Supreme Court of Georgia
expresses the thought in the following figurative language: "The fact is
that property is a tree, income is the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60
Ga., 93.) A tax on income is not a tax on property. "Income," as here
used, can be defined as "profits or gains." (London County Council vs.
Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605;
49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax,
second edition [1915.], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U. S., 549; and
Towne vs. Eisner, decided by the United States Supreme Court, January 7,
1918.)

A regulation of the United States Treasury Department relative
to returns by the husband and wife not living apart, contains the
following:
"The husband, as the head and legal
representative of the household and general custodian
of its income, should make and render the return of the
aggregate income of himself and wife, and for the
purpose of levying the income tax it is assumed that he
can ascertain the total amount of said income. If a wife
has a separate estate managed by herself as her own
separate property, and receives an income of more
than $3,000, she may make return of her own income,
and if the husband has other net income, making the
aggregate of both incomes more than $4,000, the
wife's return should be attached to the return of her
husband, or his income should be included in her return,
in order that a deduction of $4,000 may be made from
the aggregate of both incomes. The tax in such case,
however, will be imposed only upon so much of the
aggregate income of both as shall exceed $4,000. If
either husband or wife separately has an income equal
to or in excess of $3,000, a return of annual net income
is required under the law, and such return must include
the income of both, and in such case the return must
be made even though the combined income of both
be less than $4,000. If the aggregate net income of
both exceeds $4,000, an annual return of their
combined incomes must be made in the manner
stated, although neither one separately has an income
of $3,000 per annum. They are jointly and separately
liable for such return and for the payment of the tax.
The single or married status of the person claiming the
specific exemption shall be determined as of the time
of claiming such exemption if such claim be made
within the year for which return is made, otherwise the
status at the close of the year."
With these general observations relative to the Income Tax Law
in force in the Philippine Islands, we turn for a moment to consider the
provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court, in speaking of the conjugal partnership,
decided that "prior to the liquidation, the interest of the wife, and in case
of her death, of her heirs, is an interest inchoate, a mere expectancy,
which constitutes neither a legal nor an equitable estate, and does not
ripen into title until there appears that there are assets in the community
as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose
[1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16
Off.Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate
right in the property of her husband Vicente Madrigal during the life of
the conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income after
such income has become capital. Susana Paterno has no absolute right
to one-half the income of the conjugal partnership. Not being seized of a
separate estate, Susana Paterno cannot make a separate return in order
to receive the benefit of the exemption which would arise by reason of
the additional tax. As she has no estate and income, actually and legally
vested in her and entirely distinct from her husband's property, the
income cannot properly be considered the separate income of the wife
for the purposes of the additional tax. Moreover, the Income Tax Law
does not look on the spouses as individual partners in an ordinary
partnership. The husband and wife are only entitled to the exemption of
P8,000, specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing with
the conjugal partnership and having no application to the Income Tax
Law. The aims and purposes of the Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by
the Attorney-General of the Philippine Islands and the United States
Treasury Department. The decision of the latter overruling the opinion of
the Attorney-General is as follows:
"TREASURY DEPARTMENT,
Washington.
"Income Tax.
"FRANK MCINTYRE,

"Chief, Bureau of Insular Affairs, War Department,
"Washington, D.C.

"SIR:This office is in receipt of your letter of June 22, 1915,
transmitting copy of correspondence 'from the Philippine
authorities relative to the method of submission of income tax
returns by married persons.'
"You advise that 'The Governor-General, in forwarding the
papers to the Bureau, advises that the Insular Auditor has been
authorized to suspend action on the warrants in question until
an authoritative decision on the points raised can be secured
from the Treasury Department.'
"From the correspondence it appears that Gregorio Araneta,
married and living with his wife, had an income of an amount
sufficient to require the imposition of the additional tax provided
by the statute; that the net income was properly computed and
then both income and deductions and the specific exemption
were divided in half and two returns made, one return for each
half in the names respectively of the husband and wife, so that
under the returns as filed there would be an escape from the
additional tax; that Araneta claims the returns are correct on
the ground that under the Philippine law his wife is entitled to
half of his earnings; that Araneta has dominion over the income
and under the Philippine law, the right to determine its use and
disposition; that in this case the wife has no 'separate estate'
within the contemplation of the Act of October 3, 1913, levying
an income tax.
"It appears further from the correspondence that upon the
foregoing explanation, tax was assessed against the entire net
income against Gregorio Araneta; that the tax was paid and an
application for refund made, and that the application for
refund was rejected, whereupon the matter was submitted to
the Attorney-General of the Islands who holds that the returns
were correctly rendered, and that the refund should be
allowed; and thereupon the question at issue is submitted
through the Governor-General of the Islands and Bureau of
Insular Affairs for the advisory opinion of this office.
"By paragraph M of the statute, its provisions are extended to
the Philippine Islands, to be administered as in the United States
but by the appropriate internal-revenue officers of the Philippine
Government. You are therefore advised that upon the facts as
stated, this office holds that for the Federal Income Tax (Act of
October 3, 1913), the entire net income in this case was taxable
to Gregorio Araneta, both for the normal and additional tax,
and that the application for refund was properly rejected.
"The separate estate of a married woman within the
contemplation of the Income Tax Law is that which belongs to
her solely and separate and apart from her husband, and over
which her husband has no right in equity. It may consist of lands
or chattels.
"The statute and the regulations promulgated in accordance
therewith provide that each person of lawful age (not excused
from so doing) having a net income of $3,000 or over for the
taxable year shall make a return showing the facts; that from
the net income so shown there shall be deducted $3,000 where
the person making the return is a single person, or married and
not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that
where the husband and wife both make returns (they living
together), the amount of deduction from the aggregate of their
several incomes shall not exceed $4,000.
"The only occasion for a wife making a return is where she has
income from a sole and separate estate in excess of $3,000, or
where the husband and wife neither separately have an
income of $3,000, but together they have an income in excess
of $4,000, in which latter event either the husband or wife may
make the return but not both. In all instances the income of
husband and wife whether from separate estates or not, is
taken as a whole for the purpose of the normal tax. Where the
wife has income from a separate estate and makes return
thereof, or where her income is separately shown in the return
made by her husband, while the incomes are added together
for the purpose of the normal tax they are taken separately for
the purpose of the additional tax. In this case, however, the wife
has no separate income within the contemplation of the
Income Tax Law.
"Respectfully,
"DAVID A. GATES,
"Acting Commissioner."

In connection with the decision above quoted, it is well to
recall a few basic ideas. The Income Tax Law was drafted by the
Congress of the United States and has been by the Congress extended
to the Philippine Islands. Being thus a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the
official who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight should
be given to the construction placed upon a revenue law, whose
meaning is doubtful, by the department charged with its execution. (U. S.
vs. Cerecedo Hermanos y Cia. [1907], 209 U. S., 338; In re Allen [1903], 2
Phil., 630; Government of the Philippine Islands vs. Municipality of
Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil.,
634.)
We conclude that the judgment should be as it is hereby
affirmed with costs against appellants. So ordered
Torres, Johnson, Carson, Street and Fisher, JJ.; concur.
||| (Madrigal v. Rafferty, G.R. No. 12287, August 07, 1918)


EN BANC
[G.R. No. 17518. October 30, 1922.]
FREDERICK C. FISHER, plaintiff-appellant,vs. WENCESLAO
TRINIDAD, Collector of Internal Revenue, defendant-
appellee.
Fisher & Dewitt and Antonio M. Opisso for appellant.
Acting Attorney-General Tuason for appellee.
JOHNSON, J p:
The only question presented by this appeal is: Are the "stock
dividends" in the present case "income" and taxable as such under the
provisions of section 25 of Act No. 2833? While the appellant presents
other important questions, under the view which we have taken of the
facts and the law applicable to the present case, we deem it
unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The
facts are therefore admitted. They are simple and may be stated as
follows:
That during the year 1919 the Philippine American Drug
Company was a corporation duly organized and existing under the laws
of the Philippine Islands, doing business in the city of Manila; that the
appellant was a stockholder in said corporation; that said corporation, as
a result of the business for that year, declared a "stock dividend;" that the
proportionate share of said stock dividend of the appellant was P24,800;
that the stock dividend for that amount was issued to the appellant; that
thereafter, in the month of March, 1920, the appellant, upon demand of
the appellee, paid, under protest, and involuntarily, unto the appellee
the sum of P889.91 as income tax on said stock dividend. For the
recovery o that sum (P889.91) the present action was instituted. The
defendant demurred to the petition upon the ground that it did not state
facts sufficient to constitute cause of action. The demurrer was sustained
and the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some
decisions of the Supreme Court of the United States as well as the
decisions of the supreme courts of some of the states of the Union, in
which the question before us, based upon similar statutes, was discussed.
Among the most important decisions may be mentioned the following:
Towne vs. Eisner, 245 U. S., 418; Doyle vs. Mitchell Bros. Co., 247 U. S., 179;
Eisner vs. Macomber, 252 U. S., 189; Dekoven vs. Alsop, 205 Ill., 309; 63 L. R.
A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an
"income tax" upon "stock dividends" and in each case it was held that
"stock dividends" were capital and not an "income" and therefore not
subject to the "income tax law.
The appellee admits the doctrine established in the case of
Eisner vs. Macomber (252 U.S., 189), that a "stock dividend" is not
"income" but argues that said Act No. 2833, in imposing the tax on the
stock dividend, does not violate the provisions of the Jones Law. The
appellee further argues that the statute of the United States providing for
tax upon stock dividends is different from the statute of the Philippine
Islands, and therefore the decision of the Supreme Court of the United
States should not be followed in interpreting the statute in force here.
For the purpose of ascertaining the difference in the said
statutes (United States and Philippine Islands), providing for an income
tax in the United States as well as that in the Philippine Islands, the two
statutes are here quoted for the purpose of determining the difference, if
any, in the language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its
title 1 provides for the collection an "income tax." Section 2 of said Act
attempts to define what is an income. The definition follows:
"That the term 'dividends' as used in this title
shall be held to mean any distribution made or ordered
to be made by a corporation, . . . out of its earning or
profits out of its earnings or profits accrued since March
first, nineteen hundred and thirteen, and payable to its
shareholders whether in cash or in stock of the
corporation, . . . which stock dividend shall be
considered income, to the amount of its cash value."
Act No. 2833 of the Philippine Legislature is an Act establishing
"an income tax." Section 25 of said Act attempts to define the
application of the income tax. The definition follows:
"The term 'dividends' as used in this law shall
be held to mean any distribution made or ordered to
be made by a corporation, . . . out of its earnings or
profits accrued since March first, nineteen hundred and
thirteen, and payable to its shareholders, whether in
cash or in stock of the corporation, . . . Stock dividend
shall be considered income, to the amount of the
earnings or profits distributed."
It will be noted from a reading of the provisions of the two laws
above quoted that the writer of the law of the Philippine Islands must
have had before him the statute of the United States. No important
argument can be based upon the slight difference in the wording of the
two sections.
It is further argued by the appellee that there are no
constitutional limitations upon the power of the Philippine Legislature
such as exist in he United States, and, in support of that contention, he
cites a number of decisions. There is no question that he Philippine
Legislature may provide for the payment of an income tax, but it cannot,
under the guise of an income tax, collect a tax on property which is not
an "income." The Philippine Legislature cannot impose a tax upon
"property" under a law which provides for a tax upon "income" only. The
Philippine Legislature has no power to provide a tax upon "automobiles"
only, and under that law collect a tax upon a carreton or bull cart.
Constitutional limitations upon the power of the Legislature are no
stronger than statutory limitations, that is to say, a statute expressly
adopted for one purpose cannot, with our amendment, be applied to
another purpose which is entirely distinct and different. A statute
providing for an income tax cannot be construed to cover property
which is not, in fact, income. The Legislature cannot, by a statutory
declaration, change the real nature of a tax which it imposes. A law
which imposes an importation tax on rice only cannot be construed to
impose an importation tax on corn.
It is true that the statute in question provides for an income tax
and contains a further provision that "stock dividends" shall be
considered income and are therefore subject to income tax provided for
in said law. If "stock dividends" are not "income" then the law permits a
tax upon something not within the purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an
"income" in order that we may be able to determine whether "stock
dividends" are "income" in the sense that word is used in the statute.
Perhaps it would be more logical to determine first what are "stock
dividends" in order to "income." Generally speaking, stock dividends
represent undistributed increase in the capital of corporations of firms,
joint stock companies, etc., for a particular period. They are used to show
the increased interest or proportional share in the capital of each
stockholder. In other words, the inventory of the property of the
corporation, etc., for a particular period shows an increase in its capital,
so that the stock theretofore issued does not show the real value of the
stockholder's interest, and additional stock is issued showing the increase
in the actual capital, or property, or asset of the corporation, etc.

To illustrate: A and B form a corporation with an authorized
capital of P10,000 for the purpose of opening and conducting a drug
store, with assets of the value of P2,000, and each contributes P1,000.
Their entire assets are invested in drugs and put upon the shelves in their
place of business. They commence business without a cent in the
treasury. Every dollar contributed is invested. Shares of stock to the
amount of P1,000 are issued to each of the incorporators, which
represent the actual investment and entire assets of the corporation.
business for the first year is good. Merchandise is sold, and purchased, to
meet the demands of the growing trade. At the end of the first year an
inventory of the assets of the corporation is made, and it is then
ascertained that the assets or capital of the corporation on hand
amount to P4,000, with no debts, and still not a cent in the treasury. All of
the receipts during the year have been reinvested in the business.
Neither of the stockholders have withdrawn a penny from the business
during the year. Every peso received for the sale of merchandise was
immediately used in the purchase of new stock new supplies. At the
close of the year there is not a centavo in the treasury, with which either
A or B could buy a cup of coffee or a pair of shoes for his family. At the
beginning of the year the assets were P2,000 and at the end of the year
they were P4,000, and neither of the stockholders have received a
centavo from the business during the year. At the close of the year, when
it is discovered that the assets are P4,000 and not P2,000, instead of
selling the extra merchandise on hand and thereby reducing the
business to its original capital, they agree among themselves to increase
the capital issued and for that purpose issue additional stock in the form
of "stock dividends" or additional stack of P1,000, each which represents
the actual increase of the year each stockholder held one half interest in
the capital. At the close of the year, and after the issue of the said stock
dividends, they each still have one-half interest in the business. The
capital of the corporation increased during the year, but has either of
them received an income? It is not denied, for the purposed of ordinary
taxation, that the taxable property of the corporation at the beginning
of the year was P2,000, that at the close of the year it was P4,000, and
that the tax rolls should be changed in accordance with the changed
conditions in the business. In other words, the ordinary tax should be
increased by P2,000.
Another illustration: C and D organized a corporation for
agricultural purposes with an authorized capital stock of P20,000 each
contributing P5,000. With that capital they purchased a farm and, with it,
one hundred head of cattle. Every peso contributed is invested. There is
no money in the treasury. Much time and labor was expended during
the year by the stockholders on the farm in the way of improvements.
Neither received a centavo during the year from the farm or the cattle.
At the beginning of the year the assets of the corporation, including the
farm and the cattle, were P10,000, and at the close of the year an
inventory of the property of the corporation is made, and it is then found
that they have the same farm with its improvements and two hundred
head of cattle by natural increase. At the end of the year it is also
discovered that, by reason of business changes, the farm and the cattle
both have increased in value, and that the value of the corporate
property is now P20,000 instead of P10,000 as it was at the beginning of
the year. The incorporators instead of reducing the property to its original
capital, by selling off a part of it, issue to themselves "stock dividends" to
represent the proportional value or interest of each of the stockholders in
the increased capital at the close of the year. There is still not a centavo
in the treasury and Neither has withdrawn a peso from the business
during the year. No part of the farm or cattle has been sold and not a
single peso was received out of the rents or profits of the capital of the
corporation by the stockholders.
Another illustration: A, and individual farmer, buys a farm with
one hundred head of cattle for the sum of P10,000. At the end of the first
year, by reason of business conditions and the increase of the value of
both the real estate and personal property, it is discovered that the value
of the farm and the cattle is P20,000. A, during the year, has received
nothing from the farm or the cattle. His books at the beginning of the
year show that he had property of the value of P10,000. His books at the
close of the year show that he has property of the value of P20,000. A is
not a corporation. The assets of his business are not shown therefore by
certificates of stock. His books, however, show that the value of his
property has increased during the year by P10,000. Can the P10,000,
under any theory of business or law, be regarded as an "income" upon
which the farmer can be required to pay an income tax? Is there any
difference in law in the condition of A in this illustration and the condition
of A and B in the immediately preceding illustration? Can the increase of
the Value of the property in either case be regarded as an "income" and
be subjected to the payment of the income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to
the case before us and, in view of that fact, let us ascertain how
lexicographers and the courts have defined an "income." The New
Standard Dictionary, edition of 1915, defines an income as "the amount
of money coming to a person or corporation within a specified time
whether as payment for services, interest, or profit from investment."
Webster's International Dictionary defines an income as "the receipts,
salary; especially, the annual receipts of a private person or a
corporation from property." Bouvier, in his law dictionary, says that an
"income" in the federal constitution and income tax act, is used in its
common or ordinary meaning and not in its technical or economic
sense. (146 Nortwestern Reporter, 812,) Mr. Black in his law dictionary,
says: "An income is the return in money from one's business, labor, or
capital invested; gains, profit, or private revenue." "An income tax is a tax
on the yearly profits arising from property, professions, trades, and
offices."
The Supreme Court of the United States, in the case of Gray vs.
Darlington (82 U. S., 63), said in speaking of income that mere advance in
value in no sense constitutes the "income" specified in the revenue law as
"income" of the owner for the year in which the sale of the property was
made. Such advance constitutes and can be treated merely as an
increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun,
105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme
Court of the United States and now Secretary of State of the United
States, in his argument before the Supreme Court of the United States in
the case of Towne vs. Eisner, supra, defined an "income" in an income
tax law, unless it is otherwise specified, to mean cash or its equivalent. It
does not mean chooses in action or unrealizedincrements in the value of
the property, and cities in support of that definition, the definition given
by the Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes,
speaking for the court, said: "Notwithstanding the thoughtful discussion
that the case received below, we cannot doubt that the dividend was
capital as well for the purposes of the Income Tax Law. . . . "A stock
dividend really takes nothing from the property of the corporation, and
adds nothing to the interests of the shareholder. Its property is not
diminished and their interests are not increased. . . . The proportional
interest of each shareholder remains the same. . . . ' In short, the
corporation is no poorer and the stockholder is no richer than they were
before." (Gibbons vs. Mahon, 136 U. S., 549, 559, 560; Logan Country vs. U.
S., 169 U. S., 255, 261.)
In the case of Doyle vs. Mitchell Bros. Co. (247 U. S., 179), Mr.
Justice Pitney, speaking for the court, said that the act employs the term
"income" in its natural and obvious sense, as importing something distinct
from principal or capital and conveying the idea of gain or increase
arising from corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U. S.,
189), again speaking for the court, said: "An income may be defined as
the gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale or
conversion of capital assets."
For bookkeeping purposes, when stock dividends are
declared, the corporation or company acknowledges a liability, in form,
to the stockholders, equivalent to the aggregate par value of their stock,
evidenced by a "capital stock account." If profits have been made by
the corporation during a particular period and not divided, they create
additional bookkeeping liabilities under the head of "profit and loss,"
"undivided profits," "surplus account," etc., or the like. None of these,
however, gives to the stockholders as a body, much less to any one of
them, either a claim against the going concern or corporation, for any
particular sum of money, or a right to any particular portion of the asset,
or any share unless or until the directors conclude that dividends shall be
made and a part of the company's assets segregated from the common
fund for that purpose. The dividend normally is payable in money and
when so paid, then only does the stockholder realize a profit or gain,
which becomes his separate property, and thus derive an income from
the capital that he has invested. Until that is done the increased assets
belong to the corporation and not to the individual stockholders.
When a corporation or company issues "stock dividends" it
shows that the company's accumulated profits have been capitalized,
instead of distributed to the stockholder or retained as surplus available
for distribution, in money or in kind, should opportunity offer. Far from
being a realization of profits of the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock
has been transferred from surplus to assets, and no longer is available for
actual distribution. The essential and controlling fact is that the
stockholder has received nothing our of the company's assets for his
separate use and benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and accumulations
resulting from employment of his money and that of the other
stockholders in the business of the company, still remains the property of
the company, and subject to business risks which may result in wiping out
the entire investment. Having regard to the very truth of the matter, to
substance and not to form, the stockholder by virtue of the stock
dividend has in fact received nothing that answers the definition of an
"income." (Eisner vs. Macomber, 252 U. S., 189, 209, 211.)

The stockholder who receives a stock dividend has received
nothing but a representation of this increased interest in the capital of
the corporation. There has been no separation or segregation of his
interest. All the property or capital of the corporation still belongs to the
corporation. There has been no separation of the interest of the
stockholder from the general capital of the corporation. The stockholder,
by virtue of the stock dividend, has no separate or individual control over
the interest represented thereby, further than he had before the stock
dividend was issued. He cannot use it for the reason that it is still the
property of the corporation and not the property of the individual holder
of the stock dividend. A certificate of stock represented by the stock
dividend is simply a statement of his proportional interest or participation
in the capital of the corporation. For bookkeeping purposes, a
corporation, by issuing stockholders, evidenced by a capital stock
account. The receipt of a stock dividend in no way increases the money
received by the stockholder nor his cash account at the close of the
year. It simply shows that there has been an increase in the amount of
the capital of the corporation during the particular period, which may
be due to an increased business or to a natural increase of the value of
the capital due to business, economic, or another reason. We believe
that the Legislature, when it provided for an "income tax," intended to
tax only the "income" of corporations, firms, or individuals, as that term is
generally used in its common acceptation; that is, that the income
means money received, common to a person or corporation for services,
interest, or profit from investments. We do not believe that the Legislature
intended that a mere increase in the value of the capital or assets of a
corporation, firm, or individual, should be taxed as "income." Such
property can be reached under the ordinary form of taxation.
Mr. Justice Pitney, in the case of Eisner vs. Macomber supra,
said in discussing the difference between "capital" and "income": "That
the fundamental relation of 'capital' to 'income' has been much
discussed by economists, the former being likened to the tree or the
land, the latter to the fruit or the crop; the former depicted as a reservoir
supplied from springs; the latter as the outlet stream, to be measured by
its flow during a period of time." It may be argued that a stockholder
might sell the stock dividend which he had acquired. If he does, then he
has received in fact, an income and such income, like any other profit
which he realizes from the business, is an income and he may be taxed
thereon.
There is a clear distinction between an extraordinary cash
dividend, no matter when earned, and stock dividends declared, as in
the present case. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation at once parts irrevocably
with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder. The latter receives,
not an actual dividend, but certificate of stock which simply evidences
his interest in the entire capital, including such as by investment of
accumulated profits has been added to the original capital. They are
not income to him, but represent additions to the source of his income,
namely, his invested capital. (De Koven vs. Alsop, Ill., 309; 63 L. R. A., 587.)
Such a person is in the same position, so far as his income is concerned,
as the owner of a young domestic animal, one year old at the beginning
of the year, which is worth P50 and, which, at the end of the year, and
by reason of its growth, is worth P100. The value of his property has
increased, but has he had an income during the year? It is true that he
had taxable property at the beginning of the year of the value of P50,
and the same taxable property at another period, of the value of P100,
but he has had no income in the common acceptation of that word. The
increase in the value of the property should taken account of on the tax
duplicate for the purpose of ordinary taxation, but not as income for he
has had none.
The question whether stock dividends are income, or capital,
or assets has frequently come before the courts in another form in
cases of inheritance. A is a stockholder in a large corporation. He dies
leaving a will, by the terms of which he gives to B during his lifetime the
"income" from said stock, with a further provision that C shall, at B's death,
become the owner of his share in the corporation. During B's life the
corporation issues a stock dividend. Does the stock dividend belong to B
as an income, or does it finally belong to C as a part of his share in the
capital or assets of the corporation, which had been left to him as a
remainder by A? While there has been some difference of opinion on
that question, we believe that a great weight of authorities hold that the
stock dividend is capital or assets belonging to C and not an income
belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it
was held that stock dividends in such cases were regarded as capital
and not as income. (Gibbons vs. Mahon, 136 U. S., 549.)
In the case Gibbons vs. Mahon, supra, Mr. Justice Gray said:
"The distinction between the title of a corporation, and the interest of its
members or stockholder in the property of the corporation, is familiar and
well settled. The ownership of that property is in the corporation, and not
in the holders of shares of its stock. The interest of each stockholders
consist in the right to a proportionate part of the profits whenever
dividends are declared by the corporation, during its existence, under its
charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts."
(Minot vs. Paine, 99 Mass., 101; Greff vs. Equitable Life Assurance Society,
160 N. Y., 19.)
In the case of DeKoven vs. Alsop (205 Ill., 309; 63 L. R. A., 587)
Mr. Justice Wilkin said: "A dividend is defined as 'a corporate profit set
aside , declared, and ordered by the directors to be paid to the
stockholders on demand or at a fixed time. Until the dividend is declared,
these corporate profits belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness.'"
There is a clear distinction between an extraordinary cash
dividend, no matter when earned, and stock dividends declared. The
one is a disbursement to the stockholders of accumulated earning, and
the corporation at once parts irrevocably with all interest therein. The
other involves no disbursement by the corporation. It parts with nothing
to the stockholders. The latter receives, not an actual dividend, but
certificates of stock which evidence in a new proportion his interest in the
entire capital. When a cash dividend is declared and paid to the stock
holders, such cash dividend is declared and paid to the stockholder,
such cash becomes the absolute property of the stockholder and
cannot be reached by the creditors of the corporation in the absence of
fraud. A stock dividend, however, still being the property of the
corporation, and not of the stockholder, it may be reached by an
execution against the corporation, and sold as a part of the property of
the corporation. In such a case, if all of the property of the corporation is
sold, then the stockholder certainly could not be charged with having
received an income by virtue of the issuance of the stock dividend. Until
the dividend is declared and paid, the corporate profits still belong to
the corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividends, whether
large or small, are regarded as "income" and all stock dividends, as
capital or assets. (Cook on Corporations, Chapter 32, secs. 534, 536;
Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4;5 Am. and
Eng. Encycl. of Law, 2d ed., p. 738.)
If the ownership of the property represented by a stock
dividend is still in the corporation and not in the holder of such stock,
then it is difficult to understand how it can be regarded as income to the
stockholder and not as a part of the capital or assets of the corporation.
(Gibbons vs. Mahon, supra.) The stockholder has received nothing but a
representation of an interest in the property of the corporation and, as a
matter of fact, he may never receive anything, depending upon the final
outcome of the business of the corporation. The entire assets of the
corporation may be consumed by mismanagement, or eaten up by
debts and obligations, in which case the holder of the stock dividends
will never have received an income from his investment in the
corporation. A corporation may be solvent and prosperous today and
issue stock dividends in representation of its increased assets, and
tomorrow be absolutely insolvent by reason of changes in business
conditions, and in such a case the stockholder would have received
nothing from his investment. In such a case, if the holder of the stock
dividend is required to pay an income tax on the same, the result would
be that he has paid a tax upon an income which he never received.
Such a conclusion is absolutely contradictory to the idea of an income.
An income subject to taxation under the law must be and actual income
and not a promised or prospective income.
The appellee argues that there is nothing in section 25 of Act
No. 2833 which contravenes the provisions of the Jones Law. That may
be admitted. He further argues that the Act of Congress (U. S. Revenue
Act of 1918) expressly authorized the Philippine Legislature to provide for
an income tax. That fact may also be admitted. But a careful reading of
that Act will show that, while it permitted a tax upon income, the same
provided that income shall include gains, profits, and income derived
from salaries, wages, or compensation for personal services, as well as
from interest, rent, dividends, securities, etc. The appellee emphasizes the
"income from dividends." Of course, income received as dividends is
taxable as an income, but an income from dividends" is a very different
thing from a receipt of a "stock dividend." One is an actual receipt of
profits; the other is receipt of a representation of the increased value of
the assets of a corporation.

In all of the foregoing arguments we have not overlooked the
decisions of a few of the courts in different parts of the world, which have
reached a different conclusion from the one which we have arrived at in
the present case. Inasmuch, however, as appeals may be taken from this
court to the Supreme Court of the United States, we feel bound to follow
the same doctrine announced by that court.
Having reached the conclusion, supported by the great weight
of authority, that "stock dividends" are not "income," the same cannot be
taxed under that provision of Act No. 2833 which provides for a tax upon
income. Under the guise of an income tax, property which is not an
income cannot be taxed. When the assets of a corporation have
increased so as to justify the issuance of a stock dividend, the increase of
the assets should be taken account of by the Government in the
ordinary tax duplicates for the purposes of assessment and collection of
an additional tax. For all of the foregoing reasons, we are of the opinion,
and so decide, that the judgment of the lower court should be revoked,
and without any finding as to costs, it is so ordered.
SECOND DIVISION
[G.R. No. 48532. August 31, 1992.]
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D.
HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER
LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES,
petitioners,vs. THE HONORABLE COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL REVENUE,
respondents.
[G.R. No. 48533. August 31, 1992.]
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY
L. DIMAYUGA, JAIME E. DY-LIACO, MELQUIADES J.
GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D.
HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER
LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP
and JAIME A. SOQUES, petitioners, vs. THE HONORABLE
COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
NOCON, J p:
Petitioners pray that this Court reverse the Decision of the public respondent
Court of Tax Appeals, promulgated September 26, 1977 1 denying petitioners'
claim for tax refunds, and order the Commissioner of Internal Revenue to
refund to them their income taxes which they claim to have been erroneously
or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
prLL
Petitioners are Filipino citizens and employees of Procter
and Gamble, Philippine Manufacturing Corporation,
with offices at Sarmiento Building Ayala Avenue,
Makati, Rizal. Said corporation is a subsidiary of Procter
& Gamble, a foreign corporation based in Cincinnati,
Ohio, U.S.A. During the years 1970 and 1971 petitioners
were assigned, for certain periods, to other subsidiaries
of Procter & Gamble, outside of the Philippines, during
which petitioners were paid U.S. dollars as
compensation for services in their foreign assignments.
(Paragraphs III, Petitions for Review, C.T.A. Cases Nos.
2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in
C.T.A. Case No. 2511 filed their income tax returns for
the year 1970, they computed the tax due by applying
the dollar-to-peso conversion on the basis of the
floating rate ordained under B.I.R. Ruling No. 70-027
dated May 14, 1970, as follows:
From January 1 to February 20, 1970
at the conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31,
1970 at the conversion rate of P6.25 to U S.
$1.00
Petitioners in C.T.A Case No. 2594 likewise used the
above conversion rate in converting their dollar income
for 1971 to Philippine peso. However, on February 8,
1973 and October 8, 1973, petitioners in said cases filed
with the office of the respondent Commissioner,
amended income tax returns for the above-mentioned
years, this time using the par value of the peso as
prescribed in Section 48 of Republic Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as
the basis for converting their respective dollar income
into Philippine pesos for purposes of computing and
paying the corresponding income tax due from them.
The aforesaid computation as shown in the amended
income tax returns resulted in the alleged
overpayments, refund and/or tax credit. Accordingly,
claims for refund of said over-payments were filed with
respondent Commissioner. Without awaiting the
resolution of the Commissioner of Internal Revenue on
their claims, petitioners filed their petitions for review in
the above-mentioned cases.
Respondent Commissioner filed his Answer to
petitioners' petition for review in C.T.A. Case No. 2511
on July 31, 1973, while his Answer in C.T.A. Case No.
2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that
these two cases involve common question of law and
facts, the respondent Court of Tax Appeals heard the
cases jointly. In its decision dated September 26, 1977,
the respondent Court of Tax Appeals held that the
proper conversion rate for the purpose of reporting and
paying the Philippine income tax on the dollar earnings
of petitioners are the rates prescribed under Revenue
Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of
petitioners in the above-entitled cases was denied and
the petitions for review dismissed, with costs against
petitioners. Hence, this petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
LibLex
1.That petitioners' dollar earnings are receipts derived from foreign exchange
transactions.
2.That the proper rate of conversion of petitioners' dollar earnings for tax
purposes is the prevailing free market rate of exchange and not the par value
of the peso; and
3.That the use of the par value of the peso to convert petitioners' dollar
earnings for tax purposes into Philippine pesos is "unrealistic" and, therefore,
the prevailing free market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes
petitioners' claims as follows:
At the outset, it is submitted that the subject matter of
these two cases are Philippine income tax for the
calendar years 1970 (CTA Case No. 2511) and 1971
(CTA Case No. 2594) and, therefore, should be
governed by the provisions of the National Internal
Revenue Code and its implementing rules and
regulations, and not by the provisions of Central Bank
Circular No. 42 dated May 21, 1953, as contended by
petitioners.
Section 21 of the National Internal Revenue Code,
before its amendment by Presidential Decrees Nos. 69
and 323 which took effect on January 1, 1973 and
January 1, 1974, respectively, imposed a tax upon the
taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether
residing here or abroad.
Petitioners are citizens of the Philippines temporarily
residing abroad by virtue of their employment. Thus, in
their income tax returns for the period involved herein,
they gave their legal residence/address as c/o Procter
& Gamble PMC, Ayala Ave., Makati, Rizal (Annexes 'A'
to 'A-8', and Annexes 'C' to 'C-8', Petition for Review,
CTA Cases Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their
dollar earnings should be converted into Philippine
pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue
Memorandum Circular No. 7-71 dated February 11,
1971 for 1970 income and Revenue Memorandum
Circular No. 41-71 dated December 21, 1971 for 1971
income, which reiterated BIR Ruling No. 70-027 dated
May 4, 1970, to wit:

'For internal revenue tax purposes,
the free market rate of conversion (Revenue
Circulars Nos. 7-71 and 41-71) should be
applied in order to determine the true and
correct value in Philippine pesos of the
income of petitioners.' 3
After a careful examination of the records, the laws involved and the
jurisprudence on the matter, We are inclined to agree with respondents Court
of Tax Appeals and Commissioner of Internal Revenue and thus vote to deny
the petition.
This is basically an income tax case. For the proper resolution of these cases
income may be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest
or profit from investment. Unless otherwise specified, it means cash or its
equivalent. 4 Income can also be thought of as a flow of the fruits of one's
labor. 5
Petitioners are correct as to their claim that their dollar earnings are not
receipts derived from foreign exchange transactions. For a foreign exchange
transaction is simply that a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another."6 When
petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in
said currency. There was no conversion, therefore, from one currency to
another. llcd
Public respondent Court of Tax Appeals did err when it concluded that the
dollar incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular
No. 42. 7
The issue now is, what exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income tax purposes.
Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual
inward remittances, and, therefore, they are not included in the coverage of
Central Bank Circular No. 289 which provides for the specific instances when
the par value of the peso shall not be the conversion rate used. They
conclude that their earnings should be converted for income tax purposes
using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts
for export products, receipts of sale of foreign exchange or foreign borrowings
and investments but not income tax. He also claims that he had to use the
prevailing free market rate of exchange in these cases because of the need
to ascertain the true and correct amount of income in Philippine peso of
dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 8a shows that the subject
matters involved therein are export products, invisibles, receipts of foreign
exchange, foreign exchange payments, new foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are
in error by concluding that since C.B. Circular No. 289 does not apply to them,
the par value of the peso should be the guiding rate used for income tax
purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which
came to them within a specified period of time of two years as payment for
their services.
Section 21 of the National Internal Revenue Code, amended up to August 4,
1969, states as follows:
Sec. 21.Rates of tax on citizens or residents. A tax is
hereby imposed upon the taxable net income received
during each taxable year from all sources by every
individual, whether a citizen of the Philippines residing
therein or abroad or an alien residing in the Philippines,
determined in accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National
Internal Revenue Code, Section 338 thereof empowers the Secretary of
Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-
71 11 were issued to prescribe a uniform rate of exchange from US dollars to
Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and
1971, respectively. Said revenue circulars were a valid exercise of the authority
given to the Secretary of Finance by the Legislature which enacted the
Internal Revenue Code. And these are presumed to be a valid interpretation
of said code until revoked by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of
their salaries and wages in US dollars into the Philippines, they are exempt from
the coverage of such circulars. Petitioners forget that they are citizens of the
Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not
brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under
the uniform rate of exchange prescribed under the aforestated Revenue
Memorandum Circulars, there is no reason for respondent Commissioner to
refund any taxes to petitioner as said Revenue Memorandum Circulars, being
of long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are
the lifeblood of the government" and one of the duties of a Filipino citizen is to
pay his income tax. prLL
WHEREFORE, the petitions are denied for lack of merit. The dismissal by the
respondent Court of Tax Appeals of petitioners' claims for tax refunds for the
income tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners.
SO ORDERED.


EN BANC
[G.R. Nos. L-65773-74. April 30, 1987.]
COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT
OF TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British
Airways.
D E C I S I O N
MELENCIO-HERRERA, J p:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on Certiorari
of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373
and 2561, dated 26 January 1983, which set aside petitioner's assessment of
deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration. cdphil
BOAC is a 100% British Government-owned corporation organized and existing
under the laws of the United Kingdom. It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association
(IATA). As such, it operates air transportation service and sells transportation
tickets over the routes of the other airline members. During the periods
covered by the disputed assessments, it is admitted that BOAC had no
landing rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the Philippines
by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by
the CAB. Consequently, it did not carry passengers and/or cargo to or from
the Philippines, although during the period covered by the assessments, it
maintained a general sales agent in the Philippines Warner Barnes and
Company, Ltd., and later Qantas Airways which was responsible for selling
BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency
income taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of
P858,307.79, which claim was denied by the CIR on 16 February 1972. But
before said denial, BOAC had already filed a petition for review with the Tax
Court on 27 January 1972, assailing the assessment and praying for the refund
of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes,
interests, and penalty for the fiscal years 1968/1969 to 1970-1971 in the
aggregate amount of P549,327.43, and the additional amounts of P1,000.00
and P1,800.00 as compromise penalties for violation of Section 46 (requiring
the filing of corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972, however,
the CIR not only denied the BOAC request for refund in the First Case but also
re-issued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code. BOAC's request for reconsideration
was denied by the CIR on 24 August 1973. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision
reversing the CIR. The Tax Court held that the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company, Ltd., and
later by Qantas Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of carriage of
passengers or freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that
the place where services are rendered determines the source. Thus, in the
dispositive portion of its Decision, the Tax Court ordered petitioner to credit
BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years
1968-69 to 1970-71.
Hence, this Petition for Review on Certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues,
thus:
"1.Whether or not the revenue derived by private
respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources,
and, accordingly, taxable.
"2.Whether or not during the fiscal years in question
BOAC is a resident foreign corporation doing business in
the Philippines or has an office or place of business in
the Philippines.
"3.In the alternative that private respondent may not be
considered a resident foreign corporation but a non-
resident foreign corporation, then it is liable to Philippine
income tax at the rate of thirty-five per cent (35%) of its
gross income received from all sources within the
Philippines."
Under Section 20 of the 1977 Tax Code:
"(h)the term 'resident foreign corporation' applies to a
foreign corporation engaged in trade or business within
the Philippines or having an office or place of business
therein.
"(i)The term 'non-resident foreign corporation' applies to
a foreign corporation not engaged in trade or business
within the Philippines and not having any office or
place of business therein." LLpr
It is our considered opinion that BOAC is a resident foreign corporation. There
is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization. 2 "In order that a foreign
corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character.' 3
BOAC, during the periods covered by the subject-assessments, maintained a
general sales agent in the Philippines. That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4
Those activities were in exercise of the functions which are normally incident
to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC
was "engaged in" business in the Philippines through a local agent during the
period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding
taxable year from all sources within the Philippines. 5
"Sec. 24.Rates of tax on corporations. . . .
"(b)Tax on foreign corporations. . . .
"(2)Resident corporations. A corporation organized,
authorized, or existing under the laws of any foreign
country, except a foreign life insurance company,
engaged in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this section
upon the total net income received in the preceding
taxable year from all sources within the Philippines.
(Emphasis ours)
Next, we address ourselves to the issue of whether or not the revenue from
sales of tickets by BOAC in the Philippines constitutes income from Philippine
sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"'Gross income' includes gains, profits, and income
derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form
paid, or from profession, vocations, trades, business,
commerce, sales, or dealings in property, whether real
or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents,
dividends, securities, or the transactions of any business
carried on for gain or profit or gains, profits, and income
derived from any source whatever" (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of
transport documents. "The words 'income from any source whatever' disclose
a legislative policy to include all income not expressly exempted within the
class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific
time . . .; it means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law, "income"
refers to the flow of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years
1968-69 to 1970-71 amounted to P10,428,368.00. 7
Did such "flow of wealth" come from "sources within the Philippines"?
The source of an income is the property, activity or service that produced the
income. 8 For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments
for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a
common carrier, it constitutes the contract between the ticket-holder and the
carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fare and the corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth thereon. The ordinary ticket
issued to members of the travelling public in general embraces within its terms
all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income
from sources within the Philippines, namely: (1) interest, (2) dividends, (3)
service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language, does not
intend the enumeration to be exclusive. It merely directs that the types of
income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an all-
inclusive enumeration, and that no other kind of income may be so
considered. 10
BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the
services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income
tax laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the situs of income taxation.
Admittedly, BOAC was an off-line international airline at the time pertinent to
this case. The test of taxability is the "source"; and the source of an income is
that activity . . . which produced the income. 11 Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a business activity regularly pursued within the
Philippines. And even if the BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign cities", 12 it cannot alter the fact
that income from the sale of tickets was derived from the Philippines. The word
"source" conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply
only to the fiscal years covered by the questioned deficiency income tax
assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For,
pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972,
international carriers are now taxed as follows:
". . . Provided, however, That international carriers shall
pay a tax of 2-1/2 per cent on their gross Philippine
billings." (Sec. 24[b] [2], Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a
statutory definition of the term "gross Philippine billings," thus:
". . . 'Gross Philippine billings' includes gross revenue
realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of
passage documents sold therein, whether for
passenger, excess baggage or mail, provided the
cargo or mail originates from the Philippines. . . ."
The foregoing provision ensures that international airlines are taxed on their
income from Philippine sources. The 2-1/2% tax on gross Philippine billings is an
income tax. If it had been intended as an excise or percentage tax it would
have been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of
merit by this Court of the appeal in JAL vs. Commissioner of Internal Revenue
(G.R. No. L-30041) on February 3, 1969, is res judicata to the present case. The
ruling by the Tax Court in that case was to the effect that the mere sale of
tickets, unaccompanied by the physical act of carriage of transportation,
does not render the taxpayer therein subject to the common carrier's tax. As
elucidated by the Tax Court, however, the common carrier's tax is an excise
tax, being a tax on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by
the State only when the acts, privileges or businesses are done or performed
within the jurisdiction of the Philippines. The subject matter of the case under
consideration is income tax, a direct tax on the income of persons and other
entities "of whatever kind and in whatever form derived from any source."
Since the two cases treat of a different subject matter, the decision in one
cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby
SET ASIDE. Private respondent, the British Overseas Airways Corporation
(BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency
income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years
in accordance with the Tax Code. The BOAC claim for refund in the amount
of P858,307.79 is hereby denied. Without costs. SO ORDERED.
EN BANC
[G.R. No. 163653. July 19, 2011.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
FILINVEST DEVELOPMENT CORPORATION, respondent.
[G.R. No. 167689. July 19, 2011.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
FILINVEST DEVELOPMENT CORPORATION, respondent.
DECISION
PEREZ, J p:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45
of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of
Appeals (CA) in the following cases: (a) Decision dated 16 December 2003 of
the then Special Fifth Division in CA-G.R. SP No. 72992; 1 and, (b) Decision
dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP No.
74510. 2EcDATH
The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang,
Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding
company which also owned 67.42% of the outstanding shares of Filinvest
Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of
Exchange with FLI whereby the former both transferred in favor of the latter
parcels of land appraised at P4,306,777,000.00. In exchange for said parcels
which were intended to facilitate development of medium-rise residential and
commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC
and FAI. 3 As a result of the exchange, FLI's ownership structure was changed
to the extent reflected in the following tabular prcis, viz.:
StockholderNumber and Percentage of Number of Number and
Percentage of
Shares Held Prior to theAdditional Shares Held After the
ExchangeShares Issued Exchange
FDC2,537,358,00067.42%42,217,0002,579,575,00061.03%
FAI00420,877,000420,877,0009.96%
OTHERS1,226,177,00032.58%01,226,177,00029.01%

3,763,535,000100%463,094,3014,226,629,000(100%)
==================================
On 13 January 1997, FLI requested a ruling from the Bureau of Internal
Revenue (BIR) to the effect that no gain or loss should be recognized in the
aforesaid transfer of real properties. Acting on the request, the BIR issued
Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is
among those contemplated under Section 34 (c) (2) of the old National
Internal Revenue Code (NIRC) 4 which provides that "(n)o gain or loss shall be
recognized if property is transferred to a corporation by a person in exchange
for a stock in such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four (4) persons, gains
control of said corporation." 5 With the BIR's reiteration of the foregoing ruling
upon the 10 February 1997 request for clarification filed by FLI, 6 the latter,
together with FDC and FAI, complied with all the requirements imposed in the
ruling. 7
On various dates during the years 1996 and 1997, in the meantime, FDC also
extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar
Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI). 8 Duly evidenced
by instructional letters as well as cash and journal vouchers, said cash
advances amounted to P2,557,213,942.60 in 1996 9 and P3,360,889,677.48 in
1997. 10 On 15 November 1996, FDC also entered into a Shareholders'
Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-
based joint venture company called Filinvest Asia Corporation (FAC), tasked
to develop and manage FDC's 50% ownership of its PBCom Office Tower
Project (the Project). With their equity participation in FAC respectively
pegged at 60% and 40% in the Shareholders' Agreement, FDC subscribed to
P500.7 million worth of shares in said joint venture company to RHPL's
subscription worth P433.8 million. Having paid its subscription by executing a
Deed of Assignment transferring to FAC a portion of its rights and interest in the
Project worth P500.7 million, FDC eventually reported a net loss of
P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996. 11
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to
pay deficiency income and documentary stamp taxes, plus interests and
compromise penalties, 12 covered by the following Assessment Notices, viz.:
(a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes
in the sum of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-
00020-2000 for deficiency documentary stamp taxes in the sum of
P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for
deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d)
Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary
stamp taxes in the sum of P5,796,699.40 for 1997. 13 The foregoing deficiency
taxes were assessed on the taxable gain supposedly realized by FDC from the
Deed of Exchange it executed with FAI and FLI, on the dilution resulting from
the Shareholders' Agreement FDC executed with RHPL as well as the "arm's-
length" interest rate and documentary stamp taxes imposable on the
advances FDC extended to its affiliates. 14
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the
year 1997. 15 Covered by Assessment Notice No. SP-INC-97-0027-2000, 16 said
deficiency tax was also assessed on the taxable gain purportedly realized by
FAI from the Deed of Exchange it executed with FDC and FLI. 17 On 26
January 2000 or within the reglementary period of thirty (30) days from notice
of the assessment, both FDC and FAI filed their respective requests for
reconsideration/protest, on the ground that the deficiency income and
documentary stamp taxes assessed by the BIR were bereft of factual and
legal basis. 18 Having submitted the relevant supporting documents pursuant
to the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI
filed on 11 September 2000 a letter requesting an early resolution of their
request for reconsideration/protest on the ground that the 180 days
prescribed for the resolution thereof under Section 228 of the NIRC was going
to expire on 20 September 2000. 19cCHETI
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to
resolve their request for reconsideration/protest within the aforesaid period,
FDC and FAI filed on 17 October 2000 a petition for review with the Court of
Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before
said court as CTA Case No. 6182, the petition alleged, among other matters,
that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should
have been assessed from the subject Deed of Exchange since FDC and FAI
collectively gained further control of FLI as a consequence of the exchange;
that correlative to the CIR's lack of authority to impute theoretical interests on
the cash advances FDC extended in favor of its affiliates, the rule is settled
that interests cannot be demanded in the absence of a stipulation to the
effect; that not being promissory notes or certificates of obligations, the
instructional letters as well as the cash and journal vouchers evidencing said
cash advances were not subject to documentary stamp taxes; and, that no
income tax may be imposed on the prospective gain from the supposed
appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC
both prayed that the subject assessments for deficiency income and
documentary stamp taxes for the years 1996 and 1997 be cancelled and
annulled. 20
On 4 December 2000, the CIR filed its answer, claiming that the transfer of
property in question should not be considered tax free since, with the resultant
diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances
FDC extended to its affiliates were interest free despite the interest bearing
loans it obtained from banking institutions, the CIR invoked Section 43 of the
old NIRC which, as implemented by Revenue Regulations No. 2, Section 179
(b) and (c), gave him "the power to allocate, distribute or apportion income
or deductions between or among such organizations, trades or business in
order to prevent evasion of taxes." The CIR justified the imposition of
documentary stamp taxes on the instructional letters as well as cash and
journal vouchers for said cash advances on the strength of Section 180 of the
NIRC and Revenue Regulations No. 9-94 which provide that loan transactions
are subject to said tax irrespective of whether or not they are evidenced by a
formal agreement or by mere office memo. The CIR also argued that FDC
realized taxable gain arising from the dilution of its shares in FAC as a result of
its Shareholders' Agreement with RHPL. 21
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents
and Issues 22 which was admitted in the 16 February 2001 resolution issued by
the CTA. With the further admission of the Formal Offer of Documentary
Evidence subsequently filed by FDC and FAI 23 and the conclusion of the
testimony of Susana Macabelda anent the cash advances FDC extended in
favor of its affiliates, 24 the CTA went on to render the Decision dated 10
September 2002 which, with the exception of the deficiency income tax on
the interest income FDC supposedly realized from the advances it extended
in favor of its affiliates, cancelled the rest of deficiency income and
documentary stamp taxes assessed against FDC and FAI for the years 1996
and 1997, 25 thus:
WHEREFORE, in view of all the foregoing, the court finds
the instant petition partly meritorious. Accordingly,
Assessment Notice No. SP-INC-96-00018-2000 imposing
deficiency income tax on FDC for taxable year 1996,
Assessment Notice No. SP-DST-96-00020-2000 and SP-
DST-97-00021-2000 imposing deficiency documentary
stamp tax on FDC for taxable years 1996 and 1997,
respectively and Assessment Notice No. SP-INC-97-0027-
2000 imposing deficiency income tax on FAI for the
taxable year 1997 are hereby CANCELLED and SET
ASIDE. However, [FDC] is hereby ORDERED to PAY the
amount of P5,691,972.03 as deficiency income tax for
taxable year 1997. In addition, petitioner is also
ORDERED to PAY 20% delinquency interest computed
from February 16, 2000 until full payment thereof
pursuant to Section 249 (c) (3) of the Tax Code. 26
Finding that the collective increase of the equity participation of FDC and FAI
in FLI rendered the gain derived from the exchange tax-free, the CTA also
ruled that the increase in the value of FDC's shares in FAC did not result in
economic advantage in the absence of actual sale or conversion thereof.
While likewise finding that the documents evidencing the cash advances FDC
extended to its affiliates cannot be considered as loan agreements that are
subject to documentary stamp tax, the CTA enunciated, however, that the
CIR was justified in assessing undeclared interests on the same cash advances
pursuant to his authority under Section 43 of the NIRC in order to forestall tax
evasion. For persuasive effect, the CTA referred to the equivalent provision in
the Internal Revenue Code of the United States (IRC-US), i.e., Sec. 482, as
implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of
Federal Income Taxation. 27cCaATD
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the
petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to
Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that
the cash advances it extended to its affiliates were interest-free in the
absence of the express stipulation on interest required under Article 1956 of
the Civil Code, FDC questioned the imposition of an arm's-length interest rate
thereon on the ground, among others, that the CIR's authority under Section
43 of the NIRC: (a) does not include the power to impute imaginary interest on
said transactions; (b) is directed only against controlled taxpayers and not
against mother or holding corporations; and, (c) can only be invoked in cases
of understatement of taxable net income or evident tax evasion. 28
Upholding FDC's position, the CA's then Special Fifth Division rendered the
herein assailed decision dated 16 December 2003, 29 the decretal portion of
which states:
WHEREFORE, premises considered, the instant petition is
hereby GRANTED. The assailed Decision dated
September 10, 2002 rendered by the Court of Tax
Appeals in CTA Case No. 6182 directing petitioner
Filinvest Development Corporation to pay the amount
of P5,691,972.03 representing deficiency income tax on
allegedly undeclared interest income for the taxable
year 1997, plus 20% delinquency interest computed
from February 16, 2000 until full payment thereof is
REVERSED and SET ASIDE and, a new one entered
annulling Assessment Notice No. SP-INC-97-00019-2000
imposing deficiency income tax on petitioner for
taxable year 1997. No pronouncement as to costs. 30
With the denial of its partial motion for reconsideration of the same 11
December 2002 resolution issued by the CTA, 31 the CIR also filed the petition
for review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR
argued that the CTA reversibly erred in cancelling the assessment notices: (a)
for deficiency income taxes on the exchange of property between FDC, FAI
and FLI; (b) for deficiency documentary stamp taxes on the documents
evidencing FDC's cash advances to its affiliates; and (c) for deficiency
income tax on the gain FDC purportedly realized from the increase of the
value of its shareholdings in FAC. 32 The foregoing petition was, however,
denied due course and dismissed for lack of merit in the herein assailed
decision dated 26 January 2005 33 rendered by the CA's then Fourteenth
Division, upon the following findings and conclusions, to wit:
1.As affirmed in the 3 February 1997 BIR Ruling No. S-34-
046-97, the 29 November 1996 Deed of
Exchange resulted in the combined control
by FDC and FAI of more than 51% of the
outstanding shares of FLI, hence, no taxable
gain can be recognized from the transaction
under Section 34 (c) (2) of the old NIRC;
2.The instructional letters as well as the cash and journal
vouchers evidencing the advances FDC
extended to its affiliates are not subject to
documentary stamp taxes pursuant to BIR
Ruling No. 116-98, dated 30 July 1998, since
they do not partake the nature of loan
agreements;
3.Although BIR Ruling No. 116-98 had been
subsequently modified by BIR Ruling No. 108-
99, dated 15 July 1999, to the effect that
documentary stamp taxes are imposable on
inter-office memos evidencing cash
advances similar to those extended by FDC,
said latter ruling cannot be given retroactive
application if to do so would be prejudicial to
the taxpayer;
4.FDC's alleged gain from the increase of its
shareholdings in FAC as a consequence of
the Shareholders' Agreement it executed with
RHPL cannot be considered taxable income
since, until actually converted thru sale or
disposition of said shares, they merely
represent unrealized increase in capital. 34
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the
CIR's petitions for review on certiorari assailing the 16 December 2003 decision
in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No.
74510 were consolidated pursuant to the 1 March 2006 resolution issued by
this Court's Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following
ground:
THE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE COURT OF TAX APPEALS AND IN
HOLDING THAT THE ADVANCES EXTENDED BY
RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO
INCOME TAX. 35CTHaSD
In G.R. No. 167689, on the other hand, petitioner proffers the following issues
for resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE
OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST
DEVELOPMENT CORPORATION (FDC), FILINVEST
ALABANG, INCORPORATED (FAI) AND FILINVEST LAND
INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR
THE NON-RECOGNITION OF TAXABLE GAIN UNDER
SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL
REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF
THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO
ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER
SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
INCREASE IN THE VALUE OF FDC'S SHAREHOLDINGS IN
FAC IS NOT TAXABLE.36
The Court's Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIR's petition
in G.R. No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA's
finding that theoretical interests can be imputed on the advances FDC
extended to its affiliates in 1996 and 1997 considering that, for said purpose,
FDC resorted to interest-bearing fund borrowings from commercial banks.
Since considerable interest expenses were deducted by FDC when said funds
were borrowed, the CIR theorizes that interest income should likewise be
declared when the same funds were sourced for the advances FDC
extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to
Section 179 (b) of Revenue Regulation No. 2, the CIR maintains that it is vested
with the power to allocate, distribute or apportion income or deductions
between or among controlled organizations, trades or businesses even in the
absence of fraud, since said power is intended "to prevent evasion of taxes or
clearly to reflect the income of any such organizations, trades or businesses."
In addition, the CIR asseverates that the CA should have accorded weight
and respect to the findings of the CTA which, as the specialized court
dedicated to the study and consideration of tax matters, can take judicial
notice of US income tax laws and regulations. 37
Admittedly, Section 43 of the 1993 NIRC 38 provides that, "(i)n any case of two
or more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if he determines that
such distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization,
trade or business." In amplification of the equivalent provision 39 under
Commonwealth Act No. 466, 40 Sec. 179 (b) of Revenue Regulations No. 2
states as follows:
Determination of the taxable net income of controlled
taxpayer. (A) DEFINITIONS. When used in this section

(1)The term "organization" includes any kind, whether it
be a sole proprietorship, a partnership, a trust, an
estate, or a corporation or association, irrespective of
the place where organized, where operated, or where
its trade or business is conducted, and regardless of
whether domestic or foreign, whether exempt or
taxable, or whether affiliated or not.
(2)The terms "trade" or "business" include any trade or
business activity of any kind, regardless of whether or
where organized, whether owned individually or
otherwise, and regardless of the place where carried
on.
(3)The term "controlled" includes any kind of control,
direct or indirect, whether legally enforceable, and
however exercisable or exercised. It is the reality of the
control which is decisive, not its form or mode of
exercise. A presumption of control arises if income or
deductions have been arbitrarily shifted.
(4)The term "controlled taxpayer" means any one of
two or more organizations, trades, or businesses owned
or controlled directly or indirectly by the same interests.
(5)The term "group" and "group of controlled taxpayers"
means the organizations, trades or businesses owned or
controlled by the same interests. DTEScI
(6)The term "true net income" means, in the case of a
controlled taxpayer, the net income (or as the case
may be, any item or element affecting net income)
which would have resulted to the controlled taxpayer,
had it in the conduct of its affairs (or, as the case may
be, any item or element affecting net income) which
would have resulted to the controlled taxpayer, had it
in the conduct of its affairs (or, as the case may be, in
the particular contract, transaction, arrangement or
other act) dealt with the other members or members of
the group at arm's length. It does not mean the
income, the deductions, or the item or element of
either, resulting to the controlled taxpayer by reason of
the particular contract, transaction, or arrangement,
the controlled taxpayer, or the interest controlling it,
chose to make (even though such contract,
transaction, or arrangement be legally binding upon
the parties thereto).
(B)SCOPE AND PURPOSE. The purpose of Section 44 of
the Tax Code is to place a controlled taxpayer on a tax
parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer,
the true net income from the property and business of a
controlled taxpayer. The interests controlling a group of
controlled taxpayer are assumed to have complete
power to cause each controlled taxpayer so to
conduct its affairs that its transactions and accounting
records truly reflect the net income from the property
and business of each of the controlled taxpayers. If,
however, this has not been done and the taxable net
income are thereby understated, the statute
contemplates that the Commissioner of Internal
Revenue shall intervene, and, by making such
distributions, apportionments, or allocations as he may
deem necessary of gross income or deductions, or of
any item or element affecting net income, between or
among the controlled taxpayers constituting the group,
shall determine the true net income of each controlled
taxpayer. The standard to be applied in every case is
that of an uncontrolled taxpayer. Section 44 grants no
right to a controlled taxpayer to apply its provisions at
will, nor does it grant any right to compel the
Commissioner of Internal Revenue to apply its
provisions.
(C)APPLICATION Transactions between controlled
taxpayer and another will be subjected to special
scrutiny to ascertain whether the common control is
being used to reduce, avoid or escape taxes. In
determining the true net income of a controlled
taxpayer, the Commissioner of Internal Revenue is not
restricted to the case of improper accounting, to the
case of a fraudulent, colorable, or sham transaction, or
to the case of a device designed to reduce or avoid
tax by shifting or distorting income or deductions. The
authority to determine true net income extends to any
case in which either by inadvertence or design the
taxable net income in whole or in part, of a controlled
taxpayer, is other than it would have been had the
taxpayer in the conduct of his affairs been an
uncontrolled taxpayer dealing at arm's length with
another uncontrolled taxpayer. 41
As may be gleaned from the definitions of the terms "controlled" and
"controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing
provision, it would appear that FDC and its affiliates come within the purview
of Section 43 of the 1993 NIRC. Aside from owning significant portions of the
shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended
substantial sums of money as cash advances to its said affiliates for the
purpose of providing them financial assistance for their operational and
capital expenditures seemingly indicate that the situation sought to be
addressed by the subject provision exists. From the tenor of paragraph (c) of
Section 179 of Revenue Regulations No. 2, it may also be seen that the CIR's
power to distribute, apportion or allocate gross income or deductions
between or among controlled taxpayers may be likewise exercised whether
or not fraud inheres in the transaction/s under scrutiny. For as long as the
controlled taxpayer's taxable income is not reflective of that which it would
have realized had it been dealing at arm's length with an uncontrolled
taxpayer, the CIR can make the necessary rectifications in order to prevent
evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's
powers of distribution, apportionment or allocation of gross income and
deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue
Regulations No. 2 does not include the power to impute "theoretical interests"
to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993
NIRC, 42 after all, the term "gross income" is understood to mean all income
from whatever source derived, including, but not limited to the following
items: compensation for services, including fees, commissions, and similar
items; gross income derived from business; gains derived from dealings in
property;" interest; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and partner's distributive share of the gross income of general
professional partnership. 43 While it has been held that the phrase "from
whatever source derived" indicates a legislative policy to include all income
not expressly exempted within the class of taxable income under our laws, the
term "income" has been variously interpreted to mean "cash received or its
equivalent", "the amount of money coming to a person within a specific time"
or "something distinct from principal or capital." 44 Otherwise stated, there
must be proof of the actual or, at the very least, probable receipt or
realization by the controlled taxpayer of the item of gross income sought to
be distributed, apportioned or allocated by the CIR. DAcaIE
Our circumspect perusal of the record yielded no evidence of actual or
possible showing that the advances FDC extended to its affiliates had resulted
to the interests subsequently assessed by the CIR. For all its harping upon the
supposed fact that FDC had resorted to borrowings from commercial banks,
the CIR had adduced no concrete proof that said funds were, indeed, the
source of the advances the former provided its affiliates. While admitting that
FDC obtained interest-bearing loans from commercial banks, 45 Susan
Macabelda FDC's Funds Management Department Manager who was the
sole witness presented before the CTA clarified that the subject advances
were sourced from the corporation's rights offering in 1995 as well as the sale
of its investment in Bonifacio Land in 1997. 46 More significantly, said witness
testified that said advances: (a) were extended to give FLI, FAI, DSCC and FCI
financial assistance for their operational and capital expenditures; and, (b)
were all temporarily in nature since they were repaid within the duration of
one week to three months and were evidenced by mere journal entries, cash
vouchers and instructional letters." 47
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross
income, there would still be no factual basis for the imputation of theoretical
interests on the subject advances and assess deficiency income taxes
thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the
Civil Code of the Philippines, no interest shall be due unless it has been
expressly stipulated in writing. Considering that taxes, being burdens, are not
to be presumed beyond what the applicable statute expressly and clearly
declares, 48 the rule is likewise settled that tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. 49
Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. 50 While it is
true that taxes are the lifeblood of the government, it has been held that their
assessment and collection should be in accordance with law as any
arbitrariness will negate the very reason for government itself. 51
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in
exchange for the shares of stock of FLI. With respect to the Deed of Exchange
executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows:
Sec. 34.Determination of amount of and recognition of
gain or loss.
xxx xxx xxx
(c)Exception . . .
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange
for shares of stock in such corporation of which as a
result of such exchange said person, alone or together
with others, not exceeding four persons, gains control of
said corporation; Provided, That stocks issued for
services shall not be considered as issued in return of
property.
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the
parties, 52 the requisites for the non-recognition of gain or loss under the
foregoing provision are as follows: (a) the transferee is a corporation; (b) the
transferee exchanges its shares of stock for property/ies of the transferor; (c)
the transfer is made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the transferor,
alone or together with others, not exceeding four, gains control of the
transferee. 53 Acting on the 13 January 1997 request filed by FLI, the BIR had,
in fact, acknowledged the concurrence of the foregoing requisites in the
Deed of Exchange the former executed with FDC and FAI by issuing BIR Ruling
No. S-34-046-97. 54 With the BIR's reiteration of said ruling upon the request for
clarification filed by FLI, 55 there is also no dispute that said transferee and
transferors subsequently complied with the requirements provided for the non-
recognition of gain or loss from the exchange of property for tax, as provided
under Section 34 (c) (2) of the 1993 NIRC. 56
Then as now, the CIR argues that taxable gain should be recognized for the
exchange considering that FDC's controlling interest in FLI was actually
decreased as a result thereof. For said purpose, the CIR calls attention to the
fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's
3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000
additional FLI shares as a consequence of the exchange and with only
42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares,
said corporation's controlling interest was supposedly reduced to 61%.03 when
reckoned from the transferee's aggregate 4,226,629,000 outstanding shares.
Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on
the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the
exchange purportedly resulted in its control of only 9.96% of said transferee
corporation's 4,226,629,000 outstanding shares. On the principle that the
transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of
the 1993 NIRC, the CIR asseverates that taxable gain in the sum of
P263,386,921.00 should be recognized on the part of FDC and in the sum of
P3,088,711,367.00 on the part of FAI. 57DEHaAS
The paucity of merit in the CIR's position is, however, evident from the
categorical language of Section 34 (c) (2) of the 1993 NIRC which provides
that gain or loss will not be recognized in case the exchange of property for
stocks results in the control of the transferee by the transferor, alone or with
other transferors not exceeding four persons. Rather than isolating the same as
proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's
4,226,629,000 outstanding shares should, therefore, be appreciated in
combination with the 420,877,000 new shares issued to FAI which represents
9.96% control of said transferee corporation. Together FDC's 2,579,575,000
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to
3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term
"control" is clearly defined as "ownership of stocks in a corporation possessing
at least fifty-one percent of the total voting power of classes of stocks entitled
to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of
property for stocks between FDC FAI and FLI clearly qualify as a tax-free
transaction under paragraph 34 (c) (2) of the same provision.
Against the clear tenor of Section 34 (c) (2) of the 1993 NIRC, the CIR cites
then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta
who, in their book Tax Law and Jurisprudence, opined that said provision
could be inapplicable if control is already vested in the exchangor prior to
exchange. 58 Aside from the fact that that the 10 September 2002 Decision in
CTA Case No. 6182 upholding the tax-exempt status of the exchange
between FDC, FAI and FLI was penned by no less than Justice Acosta himself,
59 FDC and FAI significantly point out that said authors have acknowledged
that the position taken by the BIR is to the effect that "the law would apply
even when the exchangor already has control of the corporation at the time
of the exchange." 60 This was confirmed when, apprised in FLI's request for
clarification about the change of percentage of ownership of its outstanding
capital stock, the BIR opined as follows:
Please be informed that regardless of the foregoing,
the transferors, Filinvest Development Corp. and Filinvest
Alabang, Inc. still gained control of Filinvest Land, Inc.
The term 'control' shall mean ownership of stocks in a
corporation by possessing at least 51% of the total
voting power of all classes of stocks entitled to vote.
Control is determined by the amount of stocks
received, i.e., total subscribed, whether for property or
for services by the transferor or transferors. In
determining the 51% stock ownership, only those
persons who transferred property for stocks in the same
transaction may be counted up to the maximum of five
(BIR Ruling No. 547-93 dated December 29, 1993.) 61
At any rate, it also appears that the supposed reduction of FDC's shares in FLI
posited by the CIR is more apparent than real. As the uncontested owner of
80% of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally
controls the same percentage of the 420,877,000 shares issued to its said co-
transferor which, by itself, represents 7.968% of the outstanding shares of FLI.
Considered alongside FDC's 61.03% control of FLI as a consequence of the 29
November 1996 Deed of Transfer, said 7.968% add up to an aggregate of
68.998% of said transferee corporation's outstanding shares of stock which is
evidently still greater than the 67.42% FDC initially held prior to the exchange.
This much was admitted by the parties in the 14 February 2001 Stipulation of
Facts, Documents and Issues they submitted to the CTA. 62 Inasmuch as the
combined ownership of FDC and FAI of FLI's outstanding capital stock adds
up to a total of 70.99%, it stands to reason that neither of said transferors can
be held liable for deficiency income taxes the CIR assessed on the supposed
gain which resulted from the subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements
and promissory notes are concerned, Section 180 of the NIRC provides
follows:
Sec. 180.Stamp tax on all loan agreements, promissory
notes, bills of exchange, drafts, instruments and
securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest
and others not payable on sight or demand. On all
loan agreements signed abroad wherein the object of
the contract is located or used in the Philippines; bill of
exchange (between points within the Philippines),
drafts, instruments and securities issued by the
Government or any of its instrumentalities or certificates
of deposits drawing interest, or orders for the payment
of any sum of money otherwise than at sight or on
demand, or on all promissory notes, whether negotiable
or non-negotiable, except bank notes issued for
circulation, and on each renewal of any such note,
there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each two hundred pesos, or
fractional part thereof, of the face value of any such
agreement, bill of exchange, draft, certificate of
deposit or note: Provided, That only one documentary
stamp tax shall be imposed on either loan agreement,
or promissory notes issued to secure such loan,
whichever will yield a higher tax: Provided however,
That loan agreements or promissory notes the
aggregate of which does not exceed Two hundred fifty
thousand pesos (P250,000.00) executed by an
individual for his purchase on installment for his personal
use or that of his family and not for business, resale,
barter or hire of a house, lot, motor vehicle, appliance
or furniture shall be exempt from the payment of
documentary stamp tax provided under this Section.
When read in conjunction with Section 173 of the 1993 NIRC, 63 the foregoing
provision concededly applies to "(a)ll loan agreements, whether made or
signed in the Philippines, or abroad when the obligation or right arises from
Philippine sources or the property or object of the contract is located or used
in the Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue
Regulations No. 9-94 provide as follows: aSACED
Section 3.Definition of Terms. For purposes of these
Regulations, the following term shall mean:
(b)'Loan agreement' refers to a contract in writing
where one of the parties delivers to another money or
other consumable thing, upon the condition that the
same amount of the same kind and quality shall be
paid. The term shall include credit facilities, which may
be evidenced by credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and
"Mortgage" under Section 195, both of the Tax Code, as
amended, generally refer to distinct and separate
instruments. A loan agreement shall be taxed under
Section 180, while a deed of mortgage shall be taxed
under Section 195."
"Section 6.Stamp on all Loan Agreements. All loan
agreements whether made or signed in the Philippines,
or abroad when the obligation or right arises from
Philippine sources or the property or object of the
contract is located in the Philippines shall be subject to
the documentary stamp tax of thirty centavos (P0.30)
on each two hundred pesos, or fractional part thereof,
of the face value of any such agreements, pursuant to
Section 180 in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory
notes have been executed to cover credit facilities, the
documentary stamp tax shall be based on the amount
of drawings or availment of the facilities, which may be
evidenced by credit/debit memo, advice or drawings
by any form of check or withdrawal slip, under Section
180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997 qualified as loan
agreements upon which documentary stamp taxes may be imposed. In
keeping with the caveat attendant to every BIR Ruling to the effect that it is
valid only if the facts claimed by the taxpayer are correct, we find that the
CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which,
strictly speaking, could be invoked only by ASB Development Corporation, the
taxpayer who sought the same. In said ruling, the CIR opined that documents
like those evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo
covering the advances granted by an affiliate
company is subject to documentary stamp tax, it is
informed that nothing in Regulations No. 26
(Documentary Stamp Tax Regulations) and Revenue
Regulations No. 9-94 states that the same is subject to
documentary stamp tax. Such being the case, said
inter-office memo evidencing the lendings or
borrowings which is neither a form of promissory note
nor a certificate of indebtedness issued by the
corporation-affiliate or a certificate of obligation, which
are, more or less, categorized as 'securities', is not
subject to documentary stamp tax imposed under
Section 180, 174 and 175 of the Tax Code of 1997,
respectively. Rather, the inter-office memo is being
prepared for accounting purposes only in order to
avoid the co-mingling of funds of the corporate
affiliates.
In its appeal before the CA, the CIR argued that the foregoing ruling was later
modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-
office memos evidencing lendings or borrowings extended by a corporation
to its affiliates are akin to promissory notes, hence, subject to documentary
stamp taxes. 64 In brushing aside the foregoing argument, however, the CA
applied Section 246 of the 1993 NIRC 65 from which proceeds the settled
principle that rulings, circulars, rules and regulations promulgated by the BIR
have no retroactive application if to so apply them would be prejudicial to
the taxpayers. 66 Admittedly, this rule does not apply: (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or (c) where the taxpayer
acted in bad faith. 67 Not being the taxpayer who, in the first instance, sought
a ruling from the CIR, however, FDC cannot invoke the foregoing principle on
non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA
and the CA erred in invalidating the assessments issued by the CIR for the
deficiency documentary stamp taxes due on the instructional letters as well as
the journal and cash vouchers evidencing the advances FDC extended to its
affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the
CIR correctly assessed the sum of P6,400,693.62 for documentary stamp tax,
P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total of
P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp
tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total
of P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249
(a) and (b) of the NIRC which authorizes the assessment of the same "at the
rate of twenty percent (20%), or such higher rate as may be prescribed by
regulations", from the date prescribed for the payment of the unpaid amount
of tax until full payment. 68 The imposition of the compromise penalty is, in
turn, warranted under Sec. 250 69 of the NIRC which prescribes the imposition
thereof "in case of each failure to file an information or return, statement or list,
or keep any record or supply any information required" on the date
prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA
and the CA for invalidating the Assessment Notice issued by the CIR for the
deficiency income taxes FDC is supposed to have incurred as a consequence
of the dilution of its shares in FAC. Anent FDC's Shareholders' Agreement with
RHPL, the record shows that the parties were in agreement about the
following factual antecedents narrated in the 14 February 2001 Stipulation of
Facts, Documents and Issues they submitted before the CTA, 70viz.:
"1.11.On November 15, 1996, FDC entered into a
Shareholders' Agreement ('SA') with Reco Herrera Pte.
Ltd. ('RHPL') for the formation of a joint venture
company named Filinvest Asia Corporation ('FAC')
which is based in Singapore (pars. 1.01 and 6.11,
Petition, pars. 1 and 7, Answer).
1.12.FAC, the joint venture company formed by FDC
and RHPL, is tasked to develop and manage the 50%
ownership interest of FDC in its PBCom Office Tower
Project ('Project') with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
1.13.Pursuant to the SA between FDC and RHPL, the
equity participation of FDC and RHPL in FAC was 60%
and 40% respectively.
1.14.In accordance with the terms of the SA, FDC
subscribed to P500.7 million worth of shares of stock
representing a 60% equity participation in FAC. In turn,
RHPL subscribed to P433.8 million worth of shares of
stock of FAC representing a 40% equity participation in
FAC.
1.15.In payment of its subscription in FAC, FDC
executed a Deed of Assignment transferring to FAC a
portion of FDC's right and interests in the Project to the
extent of P500.7 million.
1.16.FDC reported a net loss of P190,695,061.00 in its
Annual Income Tax Return for the taxable year 1996." 71
Alongside the principle that tax revenues are not intended to be liberally
construed, 72 the rule is settled that the findings and conclusions of the CTA
are accorded great respect and are generally upheld by this Court, unless
there is a clear showing of a reversible error or an improvident exercise of
authority. 73 Absent showing of such error here, we find no strong and cogent
reasons to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the supposed dilution
and/or increase in the value of FDC's shareholdings in FAC which the CIR, at
any rate, failed to establish. Bearing in mind the meaning of "gross income" as
above discussed, it cannot be gainsaid, even then, that a mere increase or
appreciation in the value of said shares cannot be considered income for
taxation purposes. Since "a mere advance in the value of the property of a
person or corporation in no sense constitute the 'income' specified in the
revenue law," it has been held in the early case of Fisher vs. Trinidad,74 that it
"constitutes and can be treated merely as an increase of capital." Hence, the
CIR has no factual and legal basis in assessing income tax on the increase in
the value of FDC's shareholdings in FAC until the same is actually sold at a
profit. CIDTcH
WHEREFORE, premises considered, the CIR's petition for review on certiorari in
G.R. No. 163653 is DENIED for lack of merit and the CA's 16 December 2003
Decision in G.R. No. 72992 is AFFIRMED in toto. The CIR's petition in G.R. No.
167689 is PARTIALLY GRANTED and the CA's 26 January 2005 Decision in CA-
G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-
00021-2000 issued for deficiency documentary stamp taxes due on the
instructional letters as well as journal and cash vouchers evidencing the
advances FDC extended to its affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-
00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on
(a) the "arms-length" interest from said advances; (b) the gain from FDC's
Deed of Exchange with FAI and FLI; and (c) income from the dilution resulting
from FDC's Shareholders' Agreement with RHPL is, however, upheld.
SO ORDERED.
||| (Commr. v. Filinvest Development Corp., G.R. No. 163653, 167689, July 19,
2011)


FIRST DIVISION
[G.R. No. 153793. August 29, 2006.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
JULIANE BAIER-NICKEL, as represented by Marina Q.
Guzman (Attorney-in-fact), respondent.
D E C I S I O N
YNARES-SANTIAGO, J p:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January
18, 2002 Decision 1 of the Court of Appeals in CA-G.R. SP No. 59794, which
granted the tax refund of respondent Juliane Baier-Nickel and reversed the
June 28, 2000 Decision 2 of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5633. Petitioner also assails the May 8, 2002 Resolution 3 of the Court of
Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German
citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in
"[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring,
holding, importing and exporting, selling and disposing embroidered textile
products." 4 Through JUBANITEX's General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent as
commission agent. It was agreed that respondent will receive 10% sales
commission on all sales actually concluded and collected through her efforts.
5
In 1995, respondent received the amount of P1,707,772.64, representing her
sales commission income from which JUBANITEX withheld the corresponding
10% withholding tax amounting to P170,777.26, and remitted the same to the
Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her
1995 income tax return reporting a taxable income of P1,707,772.64 and a tax
due of P170,777.26. 6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended that her sales commission
income is not taxable in the Philippines because the same was a
compensation for her services rendered in Germany and therefore
considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for refund. 7 On
June 28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales
agent thereof. The income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation.
cDCSET
On petition with the Court of Appeals, the latter reversed the Decision of the
CTA, holding that respondent received the commissions as sales agent of
JUBANITEX and not as President thereof. And since the "source" of income
means the activity or service that produce the income, the sales commission
received by respondent is not taxable in the Philippines because it arose from
the marketing activities performed by respondent in Germany. The dispositive
portion of the appellate court's Decision, reads:
WHEREFORE, premises considered, the assailed decision
of the Court of Tax Appeals dated June 28, 2000 is
hereby REVERSED and SET ASIDE and the respondent
court is hereby directed to grant petitioner a tax refund
in the amount of Php 170,777.26.
SO ORDERED. 8
Petitioner filed a motion for reconsideration but was denied. 9 Hence, the
instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the
Philippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since
respondent is the President of JUBANITEX, any remuneration she received from
said corporation should be construed as payment of her overall managerial
services to the company and should not be interpreted as a compensation
for a distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of
nonresident aliens like her is subject to tax only if the source of the income is
within the Philippines. Source, according to respondent is the situs of the
activity which produced the income. And since the source of her income
were her marketing activities in Germany, the income she derived from said
activities is not subject to Philippine income taxation.
The issue here is whether respondent's sales commission income is taxable in
the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25.Tax on Nonresident Alien Individual.
(A)Nonresident Alien Engaged in Trade or Business
Within the Philippines.
(1)In General. A nonresident alien individual
engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on
taxable income received from all sources within the
Philippines. A nonresident alien individual who shall
come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines,'
Section 22(G) of this Code notwithstanding.
xxx xxx xxx
(B)Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. There shall be levied,
collected and paid for each taxable year upon the
entire income received from all sources within the
Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines . . . a
tax equal to twenty-five percent (25%) of such income.
. . .
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether
or not engaged in trade or business, are subject to Philippine income taxation
on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the income's
"source." In construing the meaning of "source" in Section 25 of the NIRC, resort
must be had on the origin of the provision. ScTaEA
The first Philippine income tax law enacted by the Philippine Legislature was
Act No. 2833, 10 which took effect on January 1, 1920. 11 Under Section 1
thereof, nonresident aliens are likewise subject to tax on income "from all
sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed,
collected, and paid annually upon the entire net
income received in the preceding calendar year from
all sources by every individual, a citizen or resident of
the Philippine Islands, a tax of two per centum upon
such income; and a like tax shall be levied, assessed,
collected, and paid annually upon the entire net
income received in the preceding calendar year from
all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on
bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of
1916 as amended by U.S. Revenue Law of 1917. 12 Being a law of American
origin, the authoritative decisions of the official charged with enforcing it in
the U.S. have peculiar persuasive force in the Philippines. 13
The Internal Revenue Code of the U.S. enumerates specific types of income to
be treated as from sources within the U.S. and specifies when similar types of
income are to be treated as from sources outside the U.S. 14 Under the said
Code, compensation for labor and personal services performed in the U.S., is
generally treated as income from U.S. sources; while compensation for said
services performed outside the U.S., is treated as income from sources outside
the U.S. 15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42.. . .
(A)Gross Income From Sources Within the Philippines. . . .
xxx xxx xxx
(3)Services. Compensation for labor or personal
services performed in the Philippines;
xxx xxx xxx
(C)Gross Income From Sources Without the Philippines. .
. .
xxx xxx xxx
(3)Compensation for labor or personal services
performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue
Code of the U.S., are instructive:
The Supreme Court has said, in a definition much
quoted but often debated, that income may be
derived from three possible sources only: (1) capital
and/or (2) labor; and/or (3) the sale of capital assets.
While the three elements of this attempt at definition
need not be accepted as all-inclusive, they serve as
useful guides in any inquiry into whether a particular
item is from "sources within the United States" and
suggest an investigation into the nature and location of
the activities or property which produce the income.
If the income is from labor the place where the labor is
done should be decisive; if it is done in this country, the
income should be from "sources within the United
States." If the income is from capital, the place where
the capital is employed should be decisive; if it is
employed in this country, the income should be from
"sources within the United States." If the income is from
the sale of capital assets, the place where the sale is
made should be likewise decisive.
Much confusion will be avoided by regarding the term
"source" in this fundamental light. It is not a place, it is
an activity or property. As such, it has a situs or location,
and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and
foreign corporations. HSTAcI

The intention of Congress in the 1916 and subsequent
statutes was to discard the 1909 and 1913 basis of
taxing nonresident aliens and foreign corporations and
to make the test of taxability the "source," or situs of the
activities or property which produce the income. The
result is that, on the one hand, nonresident aliens and
nonresident foreign corporations are prevented from
deriving income from the United States free from tax,
and, on the other hand, there is no undue imposition of
a tax when the activities do not take place in, and the
property producing income is not employed in, this
country. Thus, if income is to be taxed, the recipient
thereof must be resident within the jurisdiction, or the
property or activities out of which the income issues or is
derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in
this country.
The underlying theory is that the consideration for
taxation is protection of life and property and that the
income rightly to be levied upon to defray the burdens
of the United States Government is that income which is
created by activities and property protected by this
Government or obtained by persons enjoying that
protection. 16
The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered. 17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the
Court addressed the issue on the applicable source rule relating to
reinsurance premiums paid by a local insurance company to a foreign
insurance company in respect of risks located in the Philippines. It was held
therein that the undertaking of the foreign insurance company to indemnify
the local insurance company is the activity that produced the income. Since
the activity took place in the Philippines, the income derived therefrom is
taxable in our jurisdiction. Citing Mertens, The Law of Federal Income Taxation,
the Court emphasized that the technical meaning of source of income is the
property, activity or service that produced the same. Thus:
The source of an income is the property, activity or
service that produced the income. The reinsurance
premiums remitted to appellants by virtue of the
reinsurance contracts, accordingly, had for their source
the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the
activity that produced the reinsurance premiums, and
the same took place in the Philippines. . . . the reinsured,
the liabilities insured and the risk originally underwritten
by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were
all situated in the Philippines. . . . 19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation
(BOAC), 20 the issue was whether BOAC, a foreign airline company which
does not maintain any flight to and from the Philippines is liable for Philippine
income taxation in respect of sales of air tickets in the Philippines, through a
general sales agent relating to the carriage of passengers and cargo
between two points both outside the Philippines. Ruling in the affirmative, the
Court applied the case of Alexander Howden & Co., Ltd. v. Collector of
Internal Revenue, and reiterated the rule that the source of income is that
"activity" which produced the income. It was held that the "sale of tickets" in
the Philippines is the "activity" that produced the income and therefore BOAC
should pay income tax in the Philippines because it undertook an income
producing activity in the country. aHADTC
Both the petitioner and respondent cited the case of Commissioner of Internal
Revenue v. British Overseas Airways Corporation in support of their arguments,
but the correct interpretation of the said case favors the theory of respondent
that it is the situs of the activity that determines whether such income is
taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of
Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The
divergence in opinion centered on whether the sale of tickets in the
Philippines is to be construed as the "activity" that produced the income, as
viewed by the majority, or merely the physical source of the income, as
ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority,
through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale
of tickets as a business activity that gave rise to the income of BOAC.
Petitioner cannot therefore invoke said case to support its view that source of
income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated that source
of income is not the business activity of BOAC but the place where the person
or entity disbursing the income is located or where BOAC physically received
the same. But such was not the import of the ruling of the Court. It even
explained in detail the business activity undertaken by BOAC in the Philippines
to pinpoint the taxable activity and to justify its conclusion that BOAC is
subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject
assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each
trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip;
and (4) consequently allocating to the various airline
companies on the basis of their participation in the
services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution
No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to,
and are in progressive pursuit of, the purpose and
object of its organization as an international air carrier.
In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of
sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in
the Philippines through a local agent during the period
covered by the assessments. . . . 21
xxx xxx xxx
The source of an income is the property, activity or
service that produced the income. For the source of
income to be considered as coming from the
Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that produces
the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine
currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth
should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper.
When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the ticket
to pay the fare and the corresponding obligation of the
carrier to transport the passenger upon the terms and
conditions set forth thereon. The ordinary ticket issued
to members of the traveling public in general embraces
within its terms all the elements to constitute it a valid
contract, binding upon the parties entering into the
relationship. 22
The Court reiterates the rule that "source of income" relates to the property,
activity or service that produced the income. With respect to rendition of
labor or personal service, as in the instant case, it is the place where the labor
or service was performed that determines the source of the income. There is
therefore no merit in petitioner's interpretation which equates source of
income in labor or personal service with the residence of the payor or the
place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine income
taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to prove
that the services she rendered were performed in Germany. Though not
raised as an issue, the Court is clothed with authority to address the same
because the resolution thereof will settle the vital question posed in this
controversy. 23
The settled rule is that tax refunds are in the nature of tax exemptions and are
to be construed strictissimi juris against the taxpayer. 24 To those therefore,
who claim a refund rest the burden of proving that the transaction subjected
to tax is actually exempt from taxation. aDHCAE
In the instant case, the appointment letter of respondent as agent of
JUBANITEX stipulated that the activity or the service which would entitle her to
10% commission income, are "sales actually concluded and collected
through [her] efforts." 25 What she presented as evidence to prove that she
performed income producing activities abroad, were copies of documents
she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or
designs and fabrics to be used in the finished products as well as samples of
sales orders purportedly relayed to her by clients. However, these documents
do not show whether the instructions or orders faxed ripened into concluded
or collected sales in Germany. At the very least, these pieces of evidence
show that while respondent was in Germany, she sent instructions/orders to
JUBANITEX. As to whether these instructions/orders gave rise to consummated
sales and whether these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish reasonable connection
between the orders/instructions faxed and the reported monthly sales
purported to have transpired in Germany.

The paucity of respondent's evidence was even noted by Atty. Minerva
Pacheco, petitioner's counsel at the hearing before the Court of Tax Appeals.
She pointed out that respondent presented no contracts or orders signed by
the customers in Germany to prove the sale transactions therein. 26 Likewise,
in her Comment to the Formal Offer of respondent's evidence, she objected
to the admission of the faxed documents bearing instruction/orders marked
as Exhibits "R," 27 "V," "W", and "X," 28 for being self serving. 29 The concern
raised by petitioner's counsel as to the absence of substantial evidence that
would constitute proof that the sale transactions for which respondent was
paid commission actually transpired outside the Philippines, is relevant
because respondent stayed in the Philippines for 89 days in 1995. Except for
the months of July and September 1995, respondent was in the Philippines in
the months of March, May, June, and August 1995, 30 the same months when
she earned commission income for services allegedly performed abroad.
Furthermore, respondent presented no evidence to prove that JUBANITEX
does not sell embroidered products in the Philippines and that her
appointment as commission agent is exclusively for Germany and other
European markets.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable
mind might accept as adequate to support the conclusion 31 that it was in
Germany where she performed the income producing service which gave
rise to the reported monthly sales in the months of March and May to
September of 1995. She thus failed to discharge the burden of proving that
her income was from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund should be
denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel, 32 a
previous case for refund of income withheld from respondent's remunerations
for services rendered abroad, the Court in a Minute Resolution dated
February 17, 2003, 33 sustained the ruling of the Court of Appeals that
respondent is entitled to refund the sum withheld from her sales commission
income for the year 1994. This ruling has no bearing in the instant controversy
because the subject matter thereof is the income of respondent for the year
1994 while, the instant case deals with her income in 1995. Otherwise, stated,
res judicata has no application here. Its elements are: (1) there must be a final
judgment or order; (2) the court that rendered the judgment must have
jurisdiction over the subject matter and the parties; (3) it must be a judgment
on the merits; (4) there must be between the two cases identity of parties, of
subject matter, and of causes of action. 34 The instant case, however, did not
satisfy the fourth requisite because there is no identity as to the subject matter
of the previous and present case of respondent which deals with income
earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and
May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are
REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax
Appeals in C.T.A. Case No. 5633, which denied respondent's claim for refund
of income tax paid for the year 1995 is REINSTATED. IAEcCa
SO ORDERED.
||

FIRST DIVISION
[G.R. No. 137377. December 18, 2001.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
MARUBENI CORPORATION, respondent.
PUNO, J p:
In this petition for review, the Commissioner of Internal Revenue assails the
decision dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No.
42518 which affirmed the decision dated July 29, 1996 of the Court of Tax
Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of
Internal Revenue to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor's taxes from Marubeni Corporation after
finding the latter to have properly availed of the tax amnesty under Executive
Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and
existing under the laws of Japan. It is engaged in general import and export
trading, financing and the construction business. It is duly registered to
engage in such business in the Philippines and maintains a branch office in
Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue
issued a letter of authority to examine the books of accounts of the Manila
branch office of respondent corporation for the fiscal year ending March
1985. In the course of the examination, petitioner found respondent to have
undeclared income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the National
Development Company (NDC) in connection with the construction and
installation of a wharf/port complex at the Leyte Industrial Development
Estate in the municipality of Isabel, province of Leyte. The other contract was
with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial
Development Estate.
On March 1, 1986, petitioner's revenue examiners recommended an
assessment for deficiency income, branch profit remittance, contractor's and
commercial broker's taxes. Respondent questioned this assessment in a letter
dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August
15, 1986 from petitioner assessing respondent several deficiency taxes. The
assessed deficiency internal revenue taxes, inclusive of surcharge and interest,
were as follows: HAIDcE
I.DEFICIENCY INCOME TAX
FY ended March 31, 1985
Undeclared gross income (Philphos
and NDC construction projects)P967,269,811.14
Less: Cost and expenses (50%)483,634,905.57

Net undeclared income483,634,905.57
Income tax due thereon169,272,217.00
Add:50% surcharge84,636,108.50
20% int. p.a.fr. 7-15-85
to 8-15-8636,675,646.90

TOTAL AMOUNT DUEP290,583,972.40

============
II.DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Undeclared gross income from
Philphos and NDC construction projectsP483,634,905.57
Less: Income tax thereon169,272,217.00

Amount subject to Tax314,362,688.57

Tax due thereon47,154,403.00
Add:50% surcharge23,577,201.50
20% int. p.a. fr. 4-26-85
to 8-15-8612,305,360.66

TOTAL AMOUNT DUEP83,036,965.16
============
III.DEFICIENCY CONTRACTOR'S TAX
FY ended March 31, 1985
Undeclared gross receipts/gross income from
Philphos and NDC construction projectsP967,269,811.14

Contractor's tax due thereon (4%)38,690,792.00
Add:50% surcharge for non-declaration19,345,396.00
20% surcharge for late payment9,672,698.00

Sub-total67,708,886.00
Add:20% int. p.a. fr. 4-21-85
to 8-15-8617,854,739.46

TOTAL AMOUNT DUEP85,563,625.46
============
IV.DEFICIENCY COMMERCIAL BROKER'S TAX
FY ended March 31, 1985
Undeclared share from commission income
(denominated as "subsidy from Home
Office")P24,683,114.50

Tax due thereon1,628,569.00
Add:50% surcharge for non-declaration814,284.50
20% surcharge for late payment407,142.25

Sub-total2,849,995.75
Add:20% int. p.a. fr. 4-21-85
to 8-15-86751,539.98

TOTAL AMOUNT DUEP3,600,535.68
============
The 50% surcharge was imposed for your client's failure
to report for tax purposes the aforesaid taxable
revenues while the 25% surcharge was imposed
because of your client's failure to pay on time the
above deficiency percentage taxes.
xxx xxx xxx." 1
Petitioner found that the NDC and Philphos contracts were made on a
"turn-key" basis and that the gross income from the two projects
amounted to P967,269,811.14. Each contract was for a piece of work
and since the projects called for the construction and installation of
facilities in the Philippines, the entire income therefrom constituted
income from Philippine sources, hence, subject to internal revenue taxes.
The assessment letter further stated that the same was petitioner's final
decision and that if respondent disagreed with it, respondent may file an
appeal with the Court of Tax Appeals within thirty (30) days from receipt
of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the
Court of Tax Appeals. The first petition, CTA Case No. 4109, questioned the
deficiency income, branch profit remittance and contractor's tax assessments
in petitioner's assessment letter. The second, CTA Case No. 4110, questioned
the deficiency commercial broker's assessment in the same letter. SAcCIH
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time
amnesty covering unpaid income taxes for the years 1981 to 1985 was issued.
Under this E.O., a taxpayer who wished to avail of the income tax amnesty
should, on or before October 31, 1986: (a) file a sworn statement declaring his
net worth as of December 31, 1985; (b) file a certified true copy of his
statement declaring his net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of
said net worth subject to verification by the BIR; and (c) file a return and pay a
tax equivalent to ten per cent (10%) of the increase in net worth from
December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty
return dated October 30, 1986 and attached thereto its sworn statement of
assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986. The
return was received by the BIR on November 3, 1986 and respondent paid the
amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31,
1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was
expanded by Executive Order (E.O.) No. 64. In addition to the income tax
amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3
included estate and donor's taxes under Title III and the tax on business under
Chapter II, Title V of the National Internal Revenue Code, also covering the
years 1981 to 1985. E.O. No. 64 further provided that the immunities and
privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and
the period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed their
amnesty return under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an amended
return and paying an additional 5% on the increase in net worth to cover
business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by
E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return
under the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to
the BIR equivalent to five percent (5%) of the increase of its net worth
between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax
Appeals rendered a decision in CTA Case No. 4109. The tax court found that
respondent had properly availed of the tax amnesty under E.O. Nos. 41 and
64 and declared the deficiency taxes subject of said case as deemed
cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal
Revenue is hereby ORDERED to DESIST from collecting
the 1985 deficiency taxes it had assessed against
petitioner and the same are deemed considered [sic]
CANCELLED and WITHDRAWN by reason of the proper
availment by petitioner of the amnesty under Executive
Order No. 41, as amended." 4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No.
42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed
the decision of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1)Whether or not the Court of Appeals erred in
affirming the Decision of the Court of Tax Appeals
which ruled that herein respondent's deficiency tax
liabilities were extinguished upon respondent's
availment of tax amnesty under Executive Orders Nos.
41 and 64.
(2)Whether or not respondent is liable to pay the
income, branch profit remittance, and contractor's
taxes assessed by petitioner." 5
The main controversy in this case lies in the interpretation of the exception to
the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of
taxes involved herein income tax, branch profit remittance tax and
contractor's tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in
Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the
amnesty granted thereunder, viz:
"Sec. 4.Exceptions. The following taxpayers may not
avail themselves of the amnesty herein granted:
a)Those falling under the provisions of Executive Order
Nos. 1, 2 and 14;
b)Those with income tax cases already filed in Court as
of the effectivity hereof;
c)Those with criminal cases involving violations of the
income tax law already filed in court as of the
effectivity hereof;
d)Those that have withholding tax liabilities under the
National Internal Revenue Code, as
amended, insofar as the said liabilities are
concerned;
e)Those with tax cases pending investigation by the
Bureau of Internal Revenue as of the
effectivity hereof as a result of information
furnished under Section 316 of the National
Internal Revenue Code, as amended;
f)Those with pending cases involving unexplained or
unlawfully acquired wealth before the
Sandiganbayan;
g)Those liable under Title Seven, Chapter Three (Frauds,
Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds
and Property) of the Revised Penal Code, as
amended."
Petitioner argues that at the time respondent filed for income tax
amnesty on October 30, 1986, CTA Case No. 4109 had already been filed
and was pending; before the Court of Tax Appeals. Respondent
therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear
and unambiguous. It excepts from income tax amnesty those taxpayers "with
income tax cases already filed in court as of the effectivity hereof." The point
of reference is the date of effectivity of E.O. No. 41. The filing of income tax
cases in court must have been made before and as of the date of effectivity
of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b)
there must have been no income tax cases filed in court against him when
E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income
tax amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the
1985 deficiency income, branch profit remittance and contractor's tax
assessments was filed by respondent with the Court of Tax Appeals on
September 26, 1986. When E.O. No. 41 became effective on August 22, 1986,
CTA Case No. 4109 had not yet been filed in court. Respondent corporation
did not fall under the said exception in Section 4 (b), hence, respondent was
not disqualified from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax
assessment. A branch profit remittance tax is defined and imposed in Section
24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue Code. 6 In the
tax code, this tax falls under Title II on Income Tax. It is a tax on income.
Respondent therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and
respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64
expanded the coverage of E.O. No. 41 by including estate and donor's taxes
and tax on business. Estate and donor's taxes fall under Title III of the Tax Code
while business taxes fall under Chapter II, Title V of the same. The contractor's
tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined
and imposed under the title on business taxes, and is therefore a tax on
business. 7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate and donor's
taxes. Instead, Section 8 of E.O. No. 64 provided that:
"Section 8.The provisions of Executive Orders Nos. 41
and 54 which are not contrary to or inconsistent with
this amendatory Executive Order shall remain in full
force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not
contrary to or inconsistent with the amendatory act were reenacted in E.O.
No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage
also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this
provision excepts from tax amnesty coverage a taxpayer who has "income
tax cases already filed in court as of the effectivity hereof." As to what
Executive Order the exception refers to, respondent argues that because of
the words "income" and "hereof," they refer to Executive Order No. 41. 8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be
construed to refer to E.O. No. 41 and its date of effectivity. The general rule is
that an amendatory act operates prospectively. 9While an amendment is
generally construed as becoming a part of the original act as if it had always
been contained therein, 10 it may not be given a retroactive effect unless it is
so provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired. 11
There is nothing in E.O. No. 64 that provides that it should retroact to the date
of effectivity of E.O. No. 41, the original issuance. Neither is it necessarily
implied from E.O. No. 64 that it or any of its provisions should apply
retroactively. Executive Order No. 64 is a substantive amendment of E.O. No.
41. It does not merely change provisions in E.O. No. 41. It supplements the
original act by adding other taxes not covered in the first. 12 It has been held
that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to
subject to tax past transactions not subject to tax under the original act. 13 In
an amendatory act, every case of doubt must be resolved against its
retroactive effect. 14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a
general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law. 15It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who
wish to relent a chance to start with a clean slate. 16A tax amnesty, much like
a tax exemption, is never favored nor presumed in law. 17If granted, the terms
of the amnesty, like that of a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority. 18For the right of
taxation is inherent in government. The State cannot strip itself of the most
essential power of taxation by doubtful words. He who claims an exemption
(or an amnesty) from the common burden must justify his claim by the clearest
grant of organic or state law. It cannot be allowed to exist upon a vague
implication. If a doubt arises as to the intent of the legislature, that doubt must
be resolved in favor of the state. 19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No.
64 should therefore be construed strictly against the taxpayer. The term
"income tax cases" should be read as to refer to estate and donor's taxes and
taxes on business while the word "hereof," to E.O. No. 64. Since Executive
Order No. 64 took effect on November 17, 1986, consequently, insofar as the
taxes in E.O. No. 64 are concerned, the date of effectivity referred to in
Section 4 (b) of E.O. No. 41 should be November 17, 1986. HEISca
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No.
64 took effect on November 17, 1986, CTA Case No. 4109 was already filed
and pending in court. By the time respondent filed its supplementary tax
amnesty return on December 15, 1986, respondent already fell under the
exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from
availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the
amnesty under the two Executive Orders, it is still not liable for the deficiency
contractor's tax because the income from the projects came from the
"Offshore Portion" of the contracts. The two contracts were divided into two
parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were manufactured
and completed in Japan, not in the Philippines, and are therefore not subject
to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the
background of the two contracts, examine their pertinent provisions and
implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as
the corporate investment arm of the Philippine Government, established the
Philphos to engage in the large-scale manufacture of phosphatic fertilizer for
the local and foreign markets. 20The Philphos plant complex which was
envisioned to be the largest phosphatic fertilizer operation in Asia, and among
the largest in the world, covered an area of 180 hectares within the 435-
hectare Leyte Industrial Development Estate in the municipality of Isabel,
province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install
a modern, reliable, efficient and integrated wharf/port complex at the Leyte
Industrial Development Estate. The wharf/port complex was intended to be
one of the major facilities for the industrial plants at the Leyte Industrial
Development Estate. It was to be specifically adapted to the site for the
handling of phosphate rock, bagged or bulk fertilizer products, liquid materials
and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar), 21 and other industrial plants within the Estate.
The bidding was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and
respondent entered into an agreement entitled "Turn-Key Contract for Leyte
Industrial Estate Port Development Project Between National Development
Company and Marubeni Corporation." 22The Port Development Project
would consist of a wharf, berths, causeways, mechanical and liquids
unloading and loading systems, fuel oil depot, utilities systems, storage and
service buildings, offsite facilities, harbor service vessels, navigational aid
system, fire-fighting system, area lighting, mobile equipment, spare parts and
other related facilities. 23The scope of the works under the contract covered
turn-key supply, which included grants of licenses and the transfer of
technology and know-how, 24and:
". . . the design and engineering, supply and delivery,
construction, erection and installation, supervision,
direction and control of testing and commissioning of
the Wharf-Port Complex as set forth in Annex I of this
Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the
whole of the Wharf/Port Complex through the Owner,
with the design and construction of other facilities
around the site. The scope of works shall also include
any activity, work and supply necessary for, incidental
to or appropriate under present international industrial
port practice, for the timely and successful
implementation of the object of this Contract, whether
or not expressly referred to in the abovementioned
Annex I." 25
The contract price for the wharf/port complex was 12,790,389,000.00 and
P44,327,940.00. In the contract, the price in Japanese currency was broken
down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen
Portion II, while the price in Philippine currency was referred to as the
Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in
two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni
from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of
Finance of Japan extended by the Japanese government as assistance to
foreign governments to promote economic development. 26 The OECF
extended to the Philippine Government a loan of 7,560,000,000.00 for the
Leyte Industrial Estate Port Development Project and authorized the NDC to
implement the same. 27 The other type of financing is an indirect type where
the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of
Japan to advance payment to its sub-contractors. 28
Under the financing schemes, the Japanese Yen Portions I and II and the
Philippine Pesos Portion were further broken down and subdivided according
to the materials, equipment and services rendered on the project. The price
breakdown and the corresponding materials, equipment and services were
contained in a list attached as Annex III to the contract. 29

A few months after execution of the NDC contract, Philphos opened for
public bidding a project to construct and install two ammonia storage tanks in
Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that
participated in and won the bidding. Thus, on May 2, 1982, Philphos and
respondent corporation entered into an agreement entitled "Turn-Key
Contract for Ammonia Storage Complex Between Philippine Phosphate
Fertilizer Corporation and Marubeni Corporation." 30The object of the
contract was to establish and place in operating condition a modern,
reliable, efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia 31and for the
delivery of ammonia to an integrated fertilizer plant adjacent to the storage
complex and to vessels at the dock. 32The storage complex was to consist of
ammonia storage tanks, refrigeration system, ship unloading system, transfer
pumps, ammonia heating system, fire-fighting system, area lighting, spare
parts, and other related facilities. 33 The scope of the works required for the
completion of the ammonia storage complex covered the supply, including
grants of licenses and transfer of technology and know-how, 34and:
". . . the design and engineering, supply and delivery,
construction, erection and installation, supervision,
direction and control of testing and commissioning of
the Ammonia Storage Complex as set forth in Annex I of
this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the
whole of the Ammonia Storage Complex through the
Owner with the design and construction of other
facilities at and around the Site. The scope of works
shall also include any activity, work and supply
necessary for, incidental to or appropriate under
present international industrial practice, for the timely
and successful implementation of the object of this
Contract, whether or not expressly referred to in the
abovementioned Annex I." 35
The contract price for the project was 3,255,751,000.00 and P17,406,000.00.
Like the NDC contract, the price was divided into three portions. The price in
Japanese currency was broken down into the Japanese Yen Portion I and
Japanese Yen Portion II while the price in Philippine currency was classified as
the Philippine Pesos Portion. Both Japanese Yen Portions I and II were
financed by supplier's credit from the Export-Import Bank of Japan. The price
stated in the three portions were further broken down into the corresponding
materials, equipment and services required for the project and their individual
prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III. 36
The division of the price into Japanese Yen Portions I and II and the Philippine
Pesos Portion under the two contracts corresponds to the two parts into which
the contracts were classified the Foreign Offshore Portion and the Philippine
Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to
the Foreign Offshore Portion. 37Japanese Yen Portion II and the Philippine
Pesos Portion correspond to the Philippine Onshore Portion. 38
Under the Philippine Onshore Portion, respondent does not deny its liability for
the contractor's tax on the income from the two projects. In fact respondent
claims, which petitioner has not denied, that the income it derived from the
Onshore Portion of the two projects had been declared for tax purposes and
the taxes thereon already paid to the Philippine government. 39 It is with
regard to the gross receipts from the Foreign Offshore Portion of the two
contracts that the liabilities involved in the assessments subject of this case
arose. Petitioner argues that since the two agreements are turn-key, 40 they
call for the supply of both materials and services to the client, they are
contracts for a piece of work and are indivisible. The situs of the two projects is
in the Philippines, and the materials provided and services rendered were all
done and completed within the territorial jurisdiction of the Philippines. 41
Accordingly, respondent's entire receipts from the contracts, including its
receipts from the Offshore Portion, constitute income from Philippine sources.
The total gross receipts covering both labor and materials should be
subjected to contractor's tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co. 42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as
follows:
"Sec. 205.Contractors, proprietors or operators of
dockyards, and others. A contractor's tax of four
percent of the gross receipts is hereby imposed on
proprietors or operators of the following business
establishments and/or persons engaged in the business
of selling or rendering the following services for a fee or
compensation:
(a)General engineering, general building and
specialty contractors, as defined in
Republic Act No. 4566;
xxx xxx xxx
(q)Other independent contractors. The term
"independent contractors" includes
persons (juridical or natural) not
enumerated above (but not
including individuals subject to the
occupation tax under the Local Tax
Code) whose activity consists
essentially of the sale of all kinds of
services for a fee regardless of
whether or not the performance of
the service calls for the exercise or
use of the physical or mental
faculties of such contractors or their
employees. It does not include
regional or area headquarters
established in the Philippines by
multinational corporations,
including their alien executives, and
which headquarters do not earn or
derive income from the Philippines
and which act as supervisory,
communications and coordinating
centers for their affiliates,
subsidiaries or branches in the Asia-
Pacific Region.
xxx xxx xxx." 43
Under the afore-quoted provision, an independent contractor is a person
whose activity consists essentially of the sale of all kinds of services for a fee,
regardless of whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such contractors or their
employees. The word "contractor" refers to a person who, in the pursuit of
independent business, undertakes to do a specific job or piece of work for
other persons, using his own means and methods without submitting himself to
control as to the petty details. 44
A contractor's tax is a tax imposed upon the privilege of engaging in business.
45It is generally in the nature of an excise tax on the exercise of a privilege of
selling services or labor rather than a sale on products; 46 and is directly
collectible from the person exercising the privilege. 47Being an excise tax, it
can be levied by the taxing authority only when the acts, privileges or business
are done or performed within the jurisdiction of said authority. 48Like property
taxes, it cannot be imposed on an occupation or privilege outside the taxing
district. 49
In the case at bar, it is undisputed that respondent was an independent
contractor under the terms of the two subject contracts. Respondent,
however, argues that the work therein were not all performed in the
Philippines because some of them were completed in Japan in accordance
with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials
and equipment to be made and the works and services to be performed by
respondent are indeed classified into two. The first part, entitled "Breakdown
of Japanese Yen Portion I" provides: CSEHcT
"Japanese Yen Portion I of the Contract Price has been
subdivided according to discrete portions of materials
and equipment which will be shipped to Leyte as units
and lots. This subdivision of price is to be used by owner
to verify invoice for Progress Payments under Article
19.2.1 of the Contract. The agreed subdivision of
Japanese Yen Portion I is as follows:
xxx xxx xxx." 50
The subdivision of Japanese Yen Portion I covers materials and
equipment while Japanese Yen Portion II and the Philippine Pesos Portion
enumerate other materials and equipment and the construction and
installation work on the project. In other words, the supplies for the
project are listed under Portion I while labor and other supplies are listed
under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then
General Manager of the Industrial Plant Section II of the Industrial Plant
Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and
equipment listed under Japanese Yen Portion I in Annex III were
manufactured in Japan. 51The machines and equipment were
designed, engineered and fabricated by Japanese firms sub-contracted
by Marubeni from the list of sub-contractors in the technical appendices
to each contract. 52 Marubeni sub-contracted a majority of the
equipment and supplies to Kawasaki Steel Corporation which did the
design, fabrication, engineering and manufacture thereof; 53 Yashima &
Co. Ltd. which manufactured the mobile equipment; Bridgestone which
provided the rubber fenders of the mobile equipment; 54and B.S. Japan
for the supply of radio equipment. 55The engineering and design works
made by Kawasaki Steel Corporation included the lay-out of the plant
facility and calculation of the design in accordance with the
specifications given by respondent. 56 All sub-contractors and
manufacturers are Japanese corporations and are based in Japan and
all engineering and design works were performed in that country. 57

The materials and equipment under Portion I of the NDC Port Project is
primarily composed of two (2) sets of ship unloader and loader; several boats
and mobile equipment. 58The ship unloader unloads bags or bulk products
from the ship to the port while the ship loader loads products from the port to
the ship. The unloader and loader are big steel structures on top of each is a
large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the
specifications of the project. After manufacture, they were rolled on to a
barge and transported to Isabel, Leyte. 59Upon reaching Isabel, the unloader
and loader were rolled off the barge and pulled to the pier to the spot where
they were installed. 60Their installation simply consisted of bolting them onto
the pier. 61
Like the ship unloader and loader, the three tugboats and a line boat were
completely manufactured in Japan. The boats sailed to Isabel on their own
power. The mobile equipment, consisting of three to four sets of tractors,
cranes and dozers, trailers and forklifts, were also manufactured and
completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self-
propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do. 62
In addition to the foregoing, there are other items listed in Japanese Yen
Portion I in Annex III to the NDC contract. These other items consist of supplies
and materials for five (5) berths, two (2) roads, a causeway, a warehouse, a
transit shed, an administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams and other
steel structures, navigational and communication as well as electrical
equipment. 63
In connection with the Philphos contract, the major pieces of equipment
supplied by respondent were the ammonia storage tanks and refrigeration
units. 64The steel plates for the tank were manufactured and cut in Japan
according to drawings and specifications and then shipped to Isabel. Once
there, respondent's employees put the steel plates together to form the
storage tank. As to the refrigeration units, they were completed and
assembled in Japan and thereafter shipped to Isabel. The units were simply
installed there. 65Annex III to the Philphos contract lists down under the
Japanese Yen Portion I the materials for the ammonia storage tank, incidental
equipment, piping facilities, electrical and instrumental apparatus, foundation
material and spare parts.
All the materials and equipment transported to the Philippines were inspected
and tested in Japan prior to shipment in accordance with the terms of the
contracts. 66The inspection was made by representatives of respondent
corporation, of NDC and Philphos. NDC, in fact, contracted the services of a
private consultancy firm to verify the correctness of the tests on the machines
and equipment 67 while Philphos sent a representative to Japan to inspect
the storage equipment. 68
The sub-contractors of the materials and equipment under Japanese Yen
Portion I were all paid by respondent in Japan. In his deposition upon oral
examination, Kenjiro Yamakawa, formerly the Assistant General Manager and
Manager of the Steel Plant Marketing Department, Engineering &
Construction Division, Kawasaki Steel Corporation, testified that the
equipment and supplies for the two projects provided by Kawasaki under
Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such
payments were duly issued by Kawasaki in Japanese and English. 69Yashima
& Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. 70
Between Marubeni and the two Philippine corporations, payments for all
materials and equipment under Japanese Yen Portion I were made to
Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine
National Bank, established letters of credit in favor of respondent through the
Bank of Tokyo. The letters of credit were financed by letters of commitment
issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon
respondent's submission of pertinent documents, released the amount in the
letters of credit in favor of respondent and credited the amount therein to
respondent's account within the same bank. 71
Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of
testing and commissioning, coordination. . . " 72of the two projects involved
two taxing jurisdictions. These acts occurred in two countries Japan and the
Philippines. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in Japan. The two
sets of ship unloader and loader, the boats and mobile equipment for the
NDC project and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished products when
shipped to the Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures, electrical and
instrumental apparatus, these were not finished products when shipped to the
Philippines. They, however, were likewise fabricated and manufactured by the
sub-contractors in Japan. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered
outside the taxing jurisdiction of the Philippines and are therefore not subject
to contractor's tax. cHEATI
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co73is not in point. In that case, the Court
found that Engineering Equipment, although an independent contractor, was
not engaged in the manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed centralized air-
conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system.
It imported some items for the system it designed and installed. 74 The issues in
that case dealt with services performed within the local taxing jurisdiction.
There was no foreign element involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues
raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518
is affirmed.
SO ORDERED.
||| (Commr. v. Marubeni Corp., G.R. No. 137377, December 18, 2001)



FIRST DIVISION
[G.R. No. L-24248. July 31, 1974.]
ANTONIO TUASON, JR., petitioner, vs. JOSE B. LINGAD,
as Commissioner of Internal Revenue, respondent.
Araneta, Mendoza & Papa for petitioner.
Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R.
Rosete and Special Attorney Antonio H . Garces for respondent.
D E C I S I O N
CASTRO,J p:
In this petition for review of the decision of the Court of Tax Appeals in CTA
Case 1398, the petitioner Antonio Tuason, Jr. (hereinafter referred to as the
petitioner) assails the Tax Court's conclusion that the gains he realized from
the sale of residential lots (inherited from his mother) were ordinary gains and
not gains from the sale of capital assets under section 34(1) of the National
Internal Revenue Code. cd
The essential facts are not in dispute.
In 1948 the petitioner inherited from his mother several tracts of land, among
which were two contiguous parcels situated on Pureza and Sta. Mesa streets
in Manila, with an area of 318 and 67,684 square meters, respectively.
When the petitioner's mother was yet alive she had these two parcels
subdivided into twenty-nine lots. Twenty-eight were allocated to their then
occupants who had lease contracts with the petitioner's predecessor at
various times from 1900 to 1903, which contracts expired on December 31,
1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000
square meters, more or less, was not leased to any person. It needed filling
because of its very low elevation, and was planted to kangkong and other
crops.
After the petitioner took possession of the mentioned parcels in 1950, he
instructed his attorney-in-fact, J. Antonio Araneta, to sell them.
There was no difficulty encountered in selling the 28 small lots as their
respective occupants bought them on a 10-year installment basis. Lot 29
could not however be sold immediately due to its low elevation.
Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then
subdivided into small lots and paved with macadam roads. The small lots
were then sold over the years on a uniform 10-year annual amortization basis.
J. Antonio Araneta, the petitioner's attorney-in-fact, did not employ any
broker nor did he put up advertisements in the matter of the sale thereof.
In 1953 and 1954 the petitioner reported his income from the sale of the small
lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On
May 17, 1957 the Collector of Internal Revenue upheld the petitioner's
treatment of his gains from the said sale of small lots, against a contrary ruling
of a revenue examiner.
In his 1957 tax return the petitioner as before treated his income from the sale
of the small lots (P119,072.18) as capital gains and included only 1/2 thereof
as taxable income. In this return, the petitioner deducted the real estate
dealer's tax he paid for 1957. It was explained, however, that the payment of
the dealer's tax was on account of rentals received from the mentioned 28
lots and other properties of the petitioner. On the basis of the 1957 opinion of
the Collector of Internal Revenue, the revenue examiner approved the
petitioner's treatment of his income from the sale of the lots in question. In a
memorandum dated July 16, 1962 to the Commissioner of Internal Revenue,
the chief of the BIR Assessment Department advanced the same opinion,
which was concurred in by the Commissioner of Internal Revenue.
On January 9, 1963, however, the Commissioner reversed himself and
considered the petitioner's profits from the sales of the mentioned lots as
ordinary gains. On January 28, 1963 the petitioner received a letter from the
Bureau of Internal Revenue advising him to pay deficiency income tax for
1957, as follows:
Net income per orig. investigationP211,095.36
Add:
56% of realized profit on sale
of lots which was deducted in the
income tax return and allowed in
the original report of examination59,539.09

Net income per final investigationP270,824.70
Less:
Personal exemption1,800.00
Amount subject to tax 269,024.70

Tax due thereonP98,551.00
Less: Amount already assessed72,199.00

BalanceP26,352.00
Add:
1/2% monthly interest from
6-20-59 to 6-29-624,742.36

TOTAL AMOUNT DUE AND
COLLECTIBLEP31,095.36
=======
The petitioner's motion for reconsideration of the foregoing deficiency
assessment was denied, and so he went up to the Court of Tax Appeals,
which however rejected his posture in a decision dated January 16,1965, and
ordered him, in addition, to pay a 5% surcharge and 1% monthly interest
"pursuant to Sec. 51(e) of the Revenue Code."
Hence, the present petition.
The petitioner assails the correctness of the opinion below that as he was
engaged in the business of leasing the lots he inherited from his mother as well
other real properties, his subsequent sales of the mentioned lots cannot be
recognized as sales of capital assets but of "real property used in trade or
business of the taxpayer." The petitioner argues that (1) he is not the one who
leased the lots in question; (2) the lots were residential, not commercial lots;
and (3) the leases on the 28 small lob were to last until 1953, before which
date he was powerless to eject the lessees therefrom.
The basic issue thus raised is whether the properties in question which the
petitioner had inherited and subsequently sold in small lots to other persons
should be regarded as capital assets.
1.The National Internal Revenue Code (C.A. 466, as
amended) defines the term "capital assets" as follows:
"(1)Capital assets. The term 'capital assets means
property held by the taxpayer (whether or not
connected with his trade or business), but does not
include stock in trade of the taxpayer or other property
of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade
or business, or property, used in the trade or business, of
a character which is subject to the allowance for
depreciation provided in subsection (f) of section thirty;
or real property used in the trade or business of the
taxpayer."
As thus defined by law, the term "capital assets" includes all the properties of a
taxpayer whether or not connected with his trade or business, except: (1)
stock in trade or other property included in the taxpayer's inventory; (2)
property primarily for sale to customers in the ordinary course of his trade or
business; (3) property used in the trade or business of the taxpayer and subject
to depreciation allowance; and (4) real property used in trade or business. 1 If
the taxpayer sells or exchanges any of the properties above-enumerated, any
gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or
loss from the sale or exchange of all other properties of the taxpayer is a
capital gain or a capital loss. 2
Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer
(other than a corporation) from the sale or exchange of capital assets held for
more than twelve months, only 50% of the net capital gain shall be taken into
account in computing the net income.
The Tax Code's provision on so-called long-term capital gains constitutes a
statute of partial exemption. In view of the familiar and settled rule that tax
exemptions are construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority, 3 the field of application of the term "capital
assets" is necessarily narrow, while its exclusions must be interpreted broadly. 4
Consequently, it is the taxpayer's burden to bring himself clearly and squarely
within the terms of a tax-exempting statutory provision, otherwise, all fair
doubts will be resolved against him. 5 It bears emphasis nonetheless that in the
determination of whether a piece of property is a capital asset or an ordinary
asset, a careful examination and weighing of all circumstances revealed in
each case must be made. 6
In the case at bar, after a thoroughgoing study of all the circumstances
relevant to the resolution of the issue raised, this Court is of the view, and so
holds, that the petitioner's thesis is bereft of merit.
When the petitioner obtained by inheritance the parcels in question,
transferred to him was not merely the duty to respect the terms of any
contract thereon, but as well the correlative right to receive and enjoy the
fruits of the business and property which the decedent had established and
maintained. 7 Moreover, the record discloses that the petitioner owned other
real properties which he was putting out for rent, from which he periodically
derived a substantial income, and for which he had to pay the real estate
dealer's tax (which he used to deduct from his gross income). 8 In fact, as far
back as 1957 the petitioner was receiving rental payments from the
mentioned 28 small lots, even if the leases executed by his deceased mother
thereon expired in 1953. Under the circumstances, the petitioner's sales of the
several lots forming part of his rental business cannot be characterized as
other than sales of non-capital assets.
The sales concluded on installment basis of the subdivided lots comprising Lot
29 do not deserve a different characterization for tax purposes. The following
circumstances in combination show unequivocally that the petitioner was, at
the time material to this case, engaged in the real estate business: (1) the
parcels of land involved have in totality a substantially large area, nearly
seven (7) hectares, big enough to be transformed into a subdivision, and in
the case at bar, the said properties are located in the heart of Metropolitan
Manila; (2) they were subdivided into small lots and then sold on installment
basis (this manner of selling residential lots is one of the basic earmarks of a
real estate business); (3) comparatively valuable improvements were
introduced in the subdivided lots for the unmistakable purpose of not simply
liquidating the estate but of making the lots more saleable to the general
public; (4) the employment of J. Antonio Araneta, the petitioner's attorney-in-
fact, for the purpose of developing, managing, administering and selling the
lots in question indicates the existence of owner-realty broker relationship; (5)
the sales were made with frequency and continuity, and from these the
petitioner consequently received substantial income periodically; (6) the
annual sales volume of the petitioner from the said lots was considerable, e.g.,
P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the
petitioner, by his own tax returns, was not a person who can be indubitably
adjudged as a stranger to the real estate business. Under the circumstances,
this Court finds no error in the holding below that the income of the petitioner
from the sales of the lots in question should be considered as ordinary income.

2.This Court notes, however, that in ordering the petitioner to pay the
deficiency income tax, the Tax Court also required him to pay a 5% surcharge
plus 1% monthly interest. In our opinion this additional requirement should be
eliminated because the petitioner relied in good faith upon opinions rendered
by no less than the highest officials of the Bureau of Internal Revenue,
including the Commissioner himself. The following ruling in Connell Bros. Co.
(Phil.) vs. Collector of Internal Revenue 9 applies with reason to the case at
bar: cdt
"We do not think Section 183(a) of the National Internal
Revenue Code is applicable. The same imposes the
penalty of 25% when the percentage tax is not paid on
time, and contemplates a case where the liability for
the tax is undisputed or indisputable. In the present
case the taxes were paid, the delay being with
reference to the deficiency, owing to a controversy as
to the proper interpretation if Circulars Nos. 431 and 440
of the office of respondent-appellee. The controversy
was generated in good faith, since that office itself
appears to have formerly taken the view that the
inclusion of the words 'tax included' on invoices issued
by the taxpayer was sufficient compliance with the
requirements of said circulars." 10
ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except
the portion thereof that imposes 5% surcharge and 1% monthly interest, which
is hereby set aside. No costs. cdt
Makalintal, C . J ., Makasiar, Esguerra and Muoz Palma, JJ ., concur.
||| (Tuason, Jr. v. Lingad, G.R. No. L-24248, July 31, 1974)


[G.R. No. L-21108. November 29, 1966.]
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs.
LEONOR DE LA RAMA, ET AL., respondents-appellees.
ZALDIVAR, J.:
This is an appeal from the decision of the Court of First Instance of Manila,
dated December 23, 1961, in its Civil Case No. 46494, dismissing the complaint
of the Republic of the Philippines against the heirs of the late Esteban de la
Rama for the collection of P56,032.50 as deficiency income tax, inclusive of
50% surcharge, for the year 1950.
The estate of the late Esteban de la Rama was the subject of Special
Proceedings No. 401 of the Court of First Instance of Iloilo. The executor-
administrator, Eliseo Hervas, filed on March 12, 1951, income tax returns of the
estate corresponding to the taxable year 1950, declaring a net income of
P22,796.59, on the basis of which the amount of P3,919.00 was assessed and
was paid by the estate as income tax. The Bureau of Internal Revenue later
claimed that it had found out that there had been received by the estate in
1950 from the De la Rama Steamship Company, Inc. cash dividends
amounting to P86,800.00 which amount was not declared in the income tax
return of the estate for the year 1950. The Bureau of Internal Revenue then, on
March 7, 1956, made an assessment as deficiency income tax against the
estate in the sum of P56,032.50, of which amount P37,355.00 was the
deficiency and P18,677.60 was the 50% surcharge.
The Collector of Internal Revenue wrote a letter, dated February 29, 1956, to
Mrs. Lourdes de la Rama-Osmea informing her of the deficiency income tax
and asking payment thereof. On March 13, 1956 the latter's counsel wrote to
the Collector acknowledging receipt of the assessment, but contended that
Lourdes de la Rama-Osmea had no authority to represent the estate, and
that the assessment should be sent to Leonor de la Rama who was pointed to
by said counsel as the administratrix of the estate of her late father. On the
basis of this information the Deputy Collector of Internal Revenue, on
November 22, 1956, sent a letter to Leonor de la Rama as administratrix of the
estate, asking payment. The tax, as assessed, not having been paid, the
deputy Commissioner of Internal Revenue, on September 7, 1959, wrote
another letter to Mrs. Lourdes de la Rama-Osmea demanding, through her,
upon the heirs, the payment of the deficiency income tax within the period of
thirty days from receipt thereof. The counsel of Lourdes de la Rama-Osmea,
in a letter dated September 25, 1959, insisted that the letter should be sent to
Leonor de la Rama. The Deputy Commissioner of Internal Revenue wrote to
Leonor de la Rama another letter, dated February 11, 1960, demanding,
through her as administratrix, upon the heirs of Esteban de la Rama, the
payment of the sum of P56,032.50, as deficiency income tax including the 50%
surcharge, to the City Treasurer of Pasay City within thirty days from receipt
thereof.
The deficiency income tax not having been paid, the Republic of the
Philippines filed on March 6, 1961 with the Court of First Instance of Manila a
complaint against the heirs of Esteban de la Rama, seeking to collect from
each heir his/her proportionate share in the income tax liability of the estate.
An amended complaint dated August 31, 1961, was admitted by the court.
The defendants-appellees, Lourdes de la Rama-Osmea, Leonor de la Rama,
Estefania de la Rama-Pirovano, Dolores de la Rama-Lopez, Charles Miller, and
Aniceta de la Rama-Sian, thru counsel, filed their respective answers, the gist
of their allegations and/or defenses being (1) that no cash dividends of
P86,800.00 had been paid to the estate; (2) that the administration of the
estate had been extended by the probate court precisely for the purpose of
collecting said dividends; (3) that Leonor de la Rama had never been
administratrix of the estate; (4) that the executor of the estate, Eliseo Hervas,
had never been given notice of the assessment, and consequently the
assessment had never become final; and (5) that the collection of the
alleged deficiency income tax had prescribed. Fausto F. Gonzales, Jr., one of
the defendants, not having filed an answer, was declared in default.
From the evidence introduced at the trial, both oral and documentary, the
lower court found that the dividends of P86,800.00 declared by the De la
Rama Steamship Co. in favor of the late Esteban de la Rama was applied to
the obligation of the estate to the company declaring the dividends; that
Leonor de la Rama was not the administratrix of the estate, but it was the late
Eliseo Hervas who was the executor-administrator; that the administration of
the estate was extended for the purpose of recovering for the estate said
dividends from the De la Rama Steamship Co., Inc.; and that the question of
whether the deceased Esteban de la Rama was a debtor to the entity known
as the Hijos de I. de la Rama, which was also indebted to the De la Rama
Steamship Co., Inc., was not a settled one.
After trial, the lower court rendered its decision, dated December 23, 1961,
dismissing the complaint. The Republic of the Philippines appealed from said
decision to the Court of Appeals, but the appeal was later certified to this
Court because only questions of law are involved.
Plaintiff-appellant contends that the trial court erred (1) in holding that there
was no basis for the assessment upon the ground that it was not proved that
the income in question was received by the estate of Esteban de la Rama or
by his heirs; (2) in not holding that the income was constructively received by
the estate of the late Esteban de la Rama; (3) in not holding that the heirs and
legatees of the late Esteban de la Rama were liable for the payment of the
deficiency income tax; (4) in not holding that the assessment involved in the
case had long become final; (5) in not holding that the service of the notice
of assessment on Lourdes de la Rama-Osmea and Leonor de la Rama was
proper and valid; and (6) in not holding that said court had no jurisdiction to
take cognizance of appellees' defense that the assessment in question was
erroneous.
Plaintiff-appellant argues that the deficiency income tax in this case was
assessed in the sum of P86,800.00 representing cash dividends declared in
1950 by the De la Rama Steamship Co., Inc. in favor of the late Esteban de la
Rama and was applied as payment of the latter's account with the former.
The application of payment appears in the books of said creditor company as
follows:
"Against accounts receivable due
from Esteban de la Rama P25,255.24
Against the account due from
Hijos de I. de la Rama. Inc., of
which Don Esteban de la Rama
was the principal owner P61,544.76

Total P86,800.00"
The plaintiff-appellant maintains that this crediting of accounts in the books of
the company constituted a constructive receipt by the estate or the heirs of
Esteban de la Rama of the dividends, and this dividend was an income of the
estate and was, therefore, taxable.

It is not disputed that the dividends in question were not actually paid either
to the estate, or to the heirs, of the late Esteban de la Rama. The question to
be resolved is whether or not the said application of the dividends to the
personal accounts of the deceased Esteban de la Rama constituted
constructive payment to, and hence, constructively received by, the estate
or the heirs. If the debts to which the dividends were applied really existed,
and were legally demandable and chargeable against the deceased, there
was constructive receipt of the dividends; if there were no such debts, then
there was no constructive receipt.
The first debt, as above indicated, had been contested by the executor-
administrator of the estate. It does not even appear that the De la Rama
Steamship Co., Inc. had ever filed a claim against the estate in connection
with that indebtedness. The existence and the validity of the debt is, therefore,
in dispute, and there was no proof adduced to show the existence and
validity of the debt.
The second debt to which the dividends were partly applied were accounts
"due from Hijos de I. de la Rama, Inc." The alleged debtor here was an entity
separate and distinct from the deceased. If that was so, its debts could not be
charged against the deceased, even if the deceased was the principal
owner thereof, in the absence of proof of substitution of debtor. There is no
evidence in the instant case that the late Esteban de la Rama substituted the
"Hijos de I. de la Rama" as debtor to the De la Rama Steamship Co., Inc.; nor
was there evidence that the estate of the late Esteban de la Rama owned
the "Hijos de I. de la Rama, Inc.," this fact being, as found by the lower court,
not a settled question because the same was denied by the administrator.
Under the National Internal Revenue Code, income tax is assessed on income
that has been received, Thus, Section 21 of the Code requires that the income
must be received by an individual before a tax can be levied thereon.
"SEC. 21 Rates of tax on citizens or residents. There shall be levied,
collected, and paid annually upon the entire net* income received
in the preceding taxable year from all sources by every individual,
a* or citizen or resident of the Philippines, . . ."
Section 56 also requires receipt of income by an estate before an income tax
can be assessed thereon. It provides:
"Sec. 56. Imposition of tax (a) application of tax. The
taxes imposed by this Title upon individuals shall apply
to the income of estates or of any kind of property held
in trust including
xxx xxx xxx
(3) Income received by estate of deceased persons
during the period of administration or settlement of the
estate; . . ."
Hence, if income has not been received, no income tax can be assessed
thereon. Inasmuch as the income was not received either by the estate, or by
the heirs, neither the estate nor the heirs can be liable for the payment of
income tax therefor.
The trial court, therefore, did not err when it held in its decision that:
"After a study of the proofs, the Court is constrained to sustain the
position of the defendants on the fundamental issue that there
could have been no correct and real basis for the assessment or
that there is no proof that the income in question had been
received; it was not actually delivered unto the Estate since it was
retained by the De la Rama Steamship Co., Inc.; which applied said
dividends to certain accounts receivable due from the deceased
allegedly, Exh. A-1; now if truly there had been such indebtedness
owing from the deceased unto said De La Rama Steamship Co.,
Inc., the Court will agree with plaintiff that the offsetting of the
dividends against such indebtedness amounted to constructive
delivery; but there has not been presented any proof to that effect,
i.e., that there was such an indebtedness due from deceased; on
the contrary what the evidence shows is that the former
administrator of the Estate had challenged the validity of said
indebtedness, Exh. D, motion of 4 June, 1951; this being the case,
there is no clear showing that income in the form of said dividends
had really been received, which is the verb used in Section 21 of
the Internal Revenue Code, by the Estate whether actually or
constructively; and the income tax being collected by the
Government on income received, the Government's position is here
without a clear basis; the position becomes worse when it be
considered that it is not even the Estate that is being sued but the
heirs themselves, who admittedly had not received any of said
dividends themselves; the fiction of transfer of ownership by
succession from the death of the decedent will have to give way to
actual fact that the dividends have not been adjudicated at all to
the heirs up to now at least so far as the evidence shows. This being
the conclusion of the Court, there will be no need to discuss the
question of whether the action has or has not prescribed."
The factual findings of the trial court, as stated in the above-quoted portion of
the decision, is decisive in the determination of the legal issues in this case.
Appellant cites the case of Herbert vs. Commissioner of Internal Revenue 81 F
(2d) 912 as authority that the crediting of dividends against accounts
constitutes payment and constructive receipt of the dividends. The citation of
authority misses the point in issue. In that case the existence of the
indebtedness of Leon S. Herbert to the corporation that declared the
dividends and against which indebtedness the dividends were applied, was
never put in issue, and was admitted. In the instant case, the existence of the
obligations has been disputed and, as the trial court found, has not been
proved. It having been shown in the instant case that there was no basis for
the assessment of the income tax, the assessment itself and the sending of
notices regarding the assessment would neither have basis, and so the
assessment and the notices produced no legal effect that would warrant the
collection of the tax.
The appellant also contends that the assessment had become final, because
the decision of the Collector of Internal Revenue was sent in a letter dated
February 11, 1960 and addressed to the heirs of the late Esteban de la Rama,
through Leonor de la Rama as administratrix of the estate, and was not
disputed or contested by way of appeal within thirty days from receipt thereof
to the Court of Tax Appeals. This contention is untenable. The lower court
found that Leonor de la Rama was not the administratrix of the estate of
Esteban de la Rama. The alleged deficiency income tax for 1950 was
chargeable against the estate of the deceased Esteban de la Rama. On
December 5, 1955, when the letter of notice for the assessment of the
deficiency income tax was first sent to Leonor de la Rama (See Annex "A" of
Answer of defendant Lourdes de la Rama-Osmea, pp. 16-17, Record on
Appeal), the administration proceedings, in Special Proceedings No. 401 of
the Court of First Instance of Iloilo, were still open with respect to the
controverted matter regarding the cash dividends upon which the deficiency
assessment was levied. This is clear from the order dated June 21, 1951 (Exhibit
"E") of the Court of First Instance of Iloilo which in part provides:
"El albacea-administrador hace constar, sin embargo, que quedan
por cobrar ciertos dividendos declarados y devengados por las
acciones del finado Esteban de la Rama en The De la Rama
Steamship Co., Inc., que los funcionarios de dicha corporation . . .
no han pagado aun . . . y que por tales motivos habria necesidad
de prolongar la administracion, solamente para que esta continue
atendiendo, con autorizacion, a tales menesteres.
xxx xxx xxx
"Se ordena el cierra de la Administrasion; pero se provee, sin
embargo, la extension de le misma, solamente para el proposito de
iniciar y proseguir hasta su terminacion una accion contra The De la
Rama Steamship Co., Inc. para el cobro de dividendos declarados
por dicha corporacion en Diciembre 31, 1950 sobre las 869
acciones del finado Esteban de la Rama en la misma . . .
"Y finalmente, queda relevado al Administrador Sr. Eliseo Hervas de
toda responsibilidad en relacion con su administracion, excepto en
lo que respecta al cobro de dividendos . . ."
The estate was still under the administration of Eliseo Hervas as regards the
collection of said dividends. The administrator was the representative of the
estate, whose duty it was to pay and discharge all debts and charges on the
estate and to perform all orders of the court by him to be performed (Rule 71,
Section 1), and to pay the taxes and assessments due to the Government or
any branch or subdivision thereof (Section 7, Rule 89, Old Rules of Court). The
tax must be collected from the estate of the deceased, and it is the
administrator who is under obligation to pay such claim (Estate of Claude E.
Haygood, Collector of Internal Revenue vs. Haygood, 65 Phil., 520). The notice
of assessment, therefore, should have been sent to the administrator. In this
case, notice was first sent to Lourdes de la Rama-Osmea on February 29,
1956, and later to Leonor de la Rama on November 27, 1956, neither of whom
had authority to represent the estate. As the lower court said in its decision:
"Leonor de la Rama was not the administratrix of the estate of the late
Esteban de la Rama and as such the demand unto her, Exh. Def. 8, p. 112,
was not a correct demand before November 27, 1956, because the real
administrator was the late Eliseo Hervas;.." (p. 45, Record on Appeal) The
notice was not sent to the taxpayer for the purpose of giving effect to the
assessment, and said notice could not produce any effect. In the case of
Bautista and Corrales Tan vs. Collector of Internal Revenue, L-12259, May 27,
1959, this Court had occasion to state that "the assessment is deemed made
when the notice to this effect is released, mailed or sent to the taxpayer for
the purpose of giving effect to said assessment." It appearing that the person
liable for the payment of the tax did not receive the assessment, the
assessment could not become final and executory (R. A. 1125, Section 11).

Plaintiff-appellant also contends that the lower court could not take
cognizance of the defense that the assessment was erroneous, this being a
matter that is within the exclusive jurisdiction of the Court of Tax Appeals. This
contention has no merit. According to Republic Act 1125, the Court of Tax
Appeals has exclusive jurisdiction to review by appeal decisions of the
Collector of Internal Revenue in cases involving disputed assessments, and the
disputed assessment must be appealed by the person adversely affected by
the decision within thirty days after the receipt of the decision. In the instant
case, the person adversely affected should have been the administrator of
the estate, and the notice of the assessment should have been sent to him.
The administrator had not received the notice of assessment, and he could
not appeal the assessment to the Court of Tax Appeals within 30 days from
notice. Hence the assessment did not fall within the exclusive jurisdiction of the
Court of Tax Appeals.
IN VIEW OF THE FOREGOING, the decision appealed from should be, as it is
hereby, affirmed, without costs.
||| (Republic v. De la Rama, G.R. No. L-21108, November 29, 1966)
FIRST DIVISION
[G.R. No. 188497. April 25, 2012.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
PILIPINAS SHELL PETROLEUM CORPORATION, respondent.
DECISION
VILLARAMA, JR., J p:
Petitioner Commissioner of Internal Revenue appeals the Decision 1 dated
March 25, 2009 and Resolution 2 dated June 24, 2009 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 415. The CTA dismissed the petition for
review filed by petitioner assailing the CTA First Division's Decision 3 dated April
25, 2008 and Resolution 4 dated July 10, 2008 which ordered petitioner to
refund the excise taxes paid by respondent Pilipinas Shell Petroleum
Corporation on petroleum products it sold to international carriers.
The facts are not disputed. SaICcT
Respondent is engaged in the business of processing, treating and refining
petroleum for the purpose of producing marketable products and the
subsequent sale thereof. 5
On July 18, 2002, respondent filed with the Large Taxpayers Audit &
Investigation Division II of the Bureau of Internal Revenue (BIR) a formal claim
for refund or tax credit in the total amount of P28,064,925.15, representing
excise taxes it allegedly paid on sales and deliveries of gas and fuel oils to
various international carriers during the period October to December 2001.
Subsequently, on October 21, 2002, a similar claim for refund or tax credit was
filed by respondent with the BIR covering the period January to March 2002 in
the amount of P41,614,827.99. Again, on July 3, 2003, respondent filed another
formal claim for refund or tax credit in the amount of P30,652,890.55 covering
deliveries from April to June 2002. 6
Since no action was taken by the petitioner on its claims, respondent filed
petitions for review before the CTA on September 19, 2003 and December 23,
2003, docketed as CTA Case Nos. 6775 and 6839, respectively.
In its decision on the consolidated cases, the CTA's First Division ruled that
respondent is entitled to the refund of excise taxes in the reduced amount of
P95,014,283.00. The CTA First Division relied on a previous ruling rendered by
the CTA En Banc in the case of "Pilipinas Shell Petroleum Corporation v.
Commissioner of Internal Revenue"7 where the CTA also granted respondent's
claim for refund on the basis of excise tax exemption for petroleum products
sold to international carriers of foreign registry for their use or consumption
outside the Philippines. Petitioner's motion for reconsideration was denied by
the CTA First Division.
Petitioner elevated the case to the CTA En Banc which upheld the ruling of
the First Division. The CTA pointed out the specific exemption mentioned
under Section 135 of the National Internal Revenue Code of 1997 (NIRC) of
petroleum products sold to international carriers such as respondent's clients.
It said that this Court's ruling in Maceda v. Macaraig, Jr.8 is inapplicable
because said case only put to rest the issue of whether or not the National
Power Corporation (NPC) is subject to tax considering that NPC is a tax-
exempt entity mentioned in Sec. 135 (c) of the NIRC (1997), whereas the
present case involves the tax exemption of the sale of petroleum under Sec.
135 (a) of the same Code. Further, the CTA said that the ruling in Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue9 likewise finds no
application because the party asking for the refund in said case was the
seller-producer based on the exemption granted under the law to the tax-
exempt buyers, NPC and Voice of America (VOA), whereas in this case it is
the article or product which is exempt from tax and not the international
carrier.
Petitioner filed a motion for reconsideration which the CTA likewise denied.
Hence, this petition anchored on the following grounds:
I
SECTION 148 OF THE NATIONAL INTERNAL REVENUE
CODE EXPRESSLY SUBJECTS THE PETROLEUM PRODUCTS
TO AN EXCISE TAX BEFORE THEY ARE REMOVED FROM
THE PLACE OF PRODUCTION. DTAHEC
II
THE ONLY SPECIFIC PROVISION OF THE LAW WHICH
GRANTS TAX CREDIT OR TAX REFUND OF THE EXCISE
TAXES PAID REFERS TO THOSE CASES WHERE GOODS
LOCALLY PRODUCED OR MANUFACTURED ARE
ACTUALLY EXPORTED WHICH IS NOT SO IN THIS CASE.
III
THE PRINCIPLES LAID DOWN IN MACEDA VS.
MACARAIG, JR. AND PHILIPPINE ACETYLENE CO. VS. CIR
ARE APPLICABLE TO THIS CASE. 10
The Solicitor General argues that the obvious intent of the law is to grant
excise tax exemption to international carriers and exempt entities as buyers of
petroleum products and not to the manufacturers or producers of said goods.
Since the excise taxes are collected from manufacturers or producers before
removal of the domestic products from the place of production, respondent
paid the subject excise taxes as manufacturer or producer of the petroleum
products pursuant to Sec. 148 of the NIRC. Thus, regardless of who the
buyer/purchaser is, the excise tax on petroleum products attached to the said
goods before their sale or delivery to international carriers, as in fact
respondent averred that it paid the excise tax on its petroleum products when
it "withdrew petroleum products from its place of production for eventual sale
and delivery to various international carriers as well as to other customers." 11
Sec. 135 (a) and (c) granting exemption from the payment of excise tax on
petroleum products can only be interpreted to mean that the respondent
cannot pass on to international carriers and exempt agencies the excise taxes
it paid as a manufacturer or producer.
As to whether respondent has the right to file a claim for refund or tax credit
for the excise taxes it paid for the petroleum products sold to international
carriers, the Solicitor General contends that Sec. 130 (D) is explicit on the
circumstances under which a taxpayer may claim for a refund of excise taxes
paid on manufactured products, which express enumeration did not include
those excise taxes paid on petroleum products which were eventually sold to
international carriers (expressio unius est exclusio alterius). Further, the Solicitor
General asserts that contrary to the conclusion made by the CTA, the
principles laid down by this Court in Maceda v. Macaraig, Jr.12 and Philippine
Acetylene Co. v. Commissioner of Internal Revenue13 are applicable to this
case. Respondent must shoulder the excise taxes it previously paid on
petroleum products which it later sold to international carriers because it
cannot pass on the tax burden to the said international carriers which have
been granted exemption under Sec. 135 (a) of the NIRC. Considering that
respondent failed to prove an express grant of a right to a tax refund, such
claim cannot be implied; hence, it must be denied.
On the other hand, respondent maintains that since petroleum products sold
to qualified international carriers are exempt from excise tax, no taxes should
be imposed on the article, to which goods the tax attaches, whether in the
hands of the said international carriers or the petroleum manufacturer or
producer. As these excise taxes have been erroneously paid taxes, they can
be recovered under Sec. 229 of the NIRC. Respondent contends that contrary
to petitioner's assertion, Sections 204 and 229 authorizes respondent to
maintain a suit or proceeding to recover such erroneously paid taxes on the
petroleum products sold to tax-exempt international carriers.
As to the jurisprudence cited by the petitioner, respondent argues that they
are not applicable to the case at bar. It points out that Maceda v. Macaraig,
Jr. is an adjudication on the issue of tax exemption of NPC from direct and
indirect taxes given the passage of various laws relating thereto. What was
put in issue in said case was NPC's right to claim for refund of indirect taxes.
Here, respondent's claim for refund is not anchored on the exemption of the
buyer from direct and indirect taxes but on the tax exemption of the goods
themselves under Sec. 135. Respondent further stressed that in Maceda v.
Macaraig, Jr., this Court recognized that if NPC purchases oil from oil
companies, NPC is entitled to claim reimbursement from the BIR for that part
of the purchase price that represents excise taxes paid by the oil company to
the BIR. Philippine Acetylene Co. v. CIR, on the other hand, involved sales tax,
which is a tax on the transaction, which this Court held as due from the seller
even if such tax cannot be passed on to the buyers who are tax-exempt
entities. In this case, the excise tax is a tax on the goods themselves. While
indeed it is the manufacturer who has the duty to pay the said tax, by specific
provision of law, Sec. 135, the goods are stripped of such tax under the
circumstances provided therein. Philippine Acetylene Co., Inc. v. CIR was thus
not anchored on an exempting provision of law but merely on the argument
that the tax burden cannot be passed on to someone. ATHCac
Respondent further contends that requiring it to shoulder the burden of excise
taxes on petroleum products sold to international carriers would effectively
defeat the principle of international comity upon which the grant of tax
exemption on aviation fuel used in international flights was founded. If the
excise taxes paid by respondent are not allowed to be refunded or credited
based on the exemption provided in Sec. 135 (a), respondent avers that the
manufacturers or oil companies would then be constrained to shift the tax
burden to international carriers in the form of addition to the selling price.
Respondent cites as an analogous case Commissioner of International
Revenue v. Tours Specialists, Inc.14 which involved the inclusion of hotel room
charges remitted by partner foreign tour agents in respondent TSI's gross
receipts for purposes of computing the 3% contractor's tax. TSI opposed the
deficiency assessment invoking, among others, Presidential Decree No. 31,
which exempts foreign tourists from paying hotel room tax. This Court upheld
the CTA in ruling that while CIR may claim that the 3% contractor's tax is
imposed upon a different incidence, i.e., the gross receipts of the tourist
agency which he asserts includes the hotel room charges entrusted to it, the
effect would be to impose a tax, and though different, it nonetheless imposes
a tax actually on room charges. One way or the other, said the CTA, it would
not have the effect of promoting tourism in the Philippines as that would
increase the costs or expenses by the addition of a hotel room tax in the
overall expenses of said tourists.
The instant petition squarely raised the issue of whether respondent as
manufacturer or producer of petroleum products is exempt from the payment
of excise tax on such petroleum products it sold to international carriers.
In the previous cases 15 decided by this Court involving excise taxes on
petroleum products sold to international carriers, what was only resolved is the
question of who is the proper party to claim the refund of excise taxes paid on
petroleum products if such tax was either paid by the international carriers
themselves or incorporated into the selling price of the petroleum products
sold to them. We have ruled in the said cases that the statutory taxpayer, the
local manufacturer of the petroleum products who is directly liable for the
payment of excise tax on the said goods, is the proper party to seek a tax
refund. Thus, a foreign airline company who purchased locally manufactured
petroleum products for use in its international flights, as well as a foreign oil
company who likewise bought petroleum products from local manufacturers
and later sold these to international carriers, have no legal personality to file a
claim for tax refund or credit of excise taxes previously paid by the local
manufacturers even if the latter passed on to the said buyers the tax burden
in the form of additional amount in the price.
Excise taxes, as the term is used in the NIRC, refer to taxes applicable to
certain specified goods or articles manufactured or produced in the
Philippines for domestic sales or consumption or for any other disposition and
to things imported into the Philippines. These taxes are imposed in addition to
the value-added tax (VAT). 16
As to petroleum products, Sec. 148 provides that excise taxes attach to the
following refined and manufactured mineral oils and motor fuels as soon as
they are in existence as such:
(a)Lubricating oils and greases;
(b)Processed gas;
(c)Waxes and petrolatum;
(d)Denatured alcohol to be used for motive power;
(e)Naphtha, regular gasoline and other similar products
of distillation;
(f)Leaded premium gasoline;
(g)Aviation turbo jet fuel;
(h)Kerosene;
(i)Diesel fuel oil, and similar fuel oils having more or less
the same generating power; HAICET
(j)Liquefied petroleum gas;
(k)Asphalts; and
(l)Bunker fuel oil and similar fuel oils having more or less
the same generating capacity.
Beginning January 1, 1999, excise taxes levied on locally manufactured
petroleum products and indigenous petroleum are required to be paid before
their removal from the place of production. 17 However, Sec. 135 provides:
SEC. 135.Petroleum Products Sold to International
Carriers and Exempt Entities or Agencies. Petroleum
products sold to the following are exempt from excise
tax:
(a)International carriers of Philippine or foreign registry
on their use or consumption outside the Philippines:
Provided, That the petroleum products sold to these
international carriers shall be stored in a bonded
storage tank and may be disposed of only in
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner;
(b)Exempt entities or agencies covered by tax treaties,
conventions and other international agreements for
their use or consumption: Provided, however, That the
country of said foreign international carrier or exempt
entities or agencies exempts from similar taxes
petroleum products sold to Philippine carriers, entities or
agencies; and
(c)Entities which are by law exempt from direct and
indirect taxes.
Respondent claims it is entitled to a tax refund because those petroleum
products it sold to international carriers are not subject to excise tax, hence
the excise taxes it paid upon withdrawal of those products were erroneously
or illegally collected and should not have been paid in the first place. Since
the excise tax exemption attached to the petroleum products themselves, the
manufacturer or producer is under no duty to pay the excise tax thereon.
We disagree.
Under Chapter II "Exemption or Conditional Tax-Free Removal of Certain
Goods" of Title VI, Sections 133, 137, 138, 139 and 140 cover conditional tax-
free removal of specified goods or articles, whereas Sections 134 and 135
provide for tax exemptions. While the exemption found in Sec. 134 makes
reference to the nature and quality of the goods manufactured (domestic
denatured alcohol) without regard to the tax status of the buyer of the said
goods, Sec. 135 deals with the tax treatment of a specified article (petroleum
products) in relation to its buyer or consumer. Respondent's failure to make this
important distinction apparently led it to mistakenly assume that the tax
exemption under Sec. 135 (a) "attaches to the goods themselves" such that
the excise tax should not have been paid in the first place.
On July 26, 1996, petitioner Commissioner issued Revenue Regulations 8-96 18
("Excise Taxation of Petroleum Products") which provides:
SEC. 4.Time and Manner of Payment of Excise Tax on
Petroleum Products, Non-Metallic Minerals and
Indigenous Petroleum.
I.Petroleum Products
xxx xxx xxx
a)On locally manufactured petroleum
products
The specific tax on petroleum
products locally manufactured or
produced in the Philippines shall be
paid by the manufacturer,
producer, owner or person having
possession of the same, and such
tax shall be paid within fifteen (15)
days from date of removal from the
place of production. (Underscoring
supplied.) IaEACT
Thus, if an airline company purchased jet fuel from an unregistered supplier
who could not present proof of payment of specific tax, the company is liable
to pay the specific tax on the date of purchase. 19 Since the excise tax must
be paid upon withdrawal from the place of production, respondent cannot
anchor its claim for refund on the theory that the excise taxes due thereon
should not have been collected or paid in the first place.
Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally
collected. An "erroneous or illegal tax" is defined as one levied without
statutory authority, or upon property not subject to taxation or by some officer
having no authority to levy the tax, or one which is some other similar respect
is illegal. 20
Respondent's locally manufactured petroleum products are clearly subject to
excise tax under Sec. 148. Hence, its claim for tax refund may not be
predicated on Sec. 229 of the NIRC allowing a refund of erroneous or excess
payment of tax. Respondent's claim is premised on what it determined as a
tax exemption "attaching to the goods themselves," which must be based on
a statute granting tax exemption, or "the result of legislative grace." Such a
claim is to be construed strictissimi juris against the taxpayer, meaning that the
claim cannot be made to rest on vague inference. Where the rule of strict
interpretation against the taxpayer is applicable as the claim for refund
partakes of the nature of an exemption, the claimant must show that he
clearly falls under the exempting statute. 21
The exemption from excise tax payment on petroleum products under Sec.
135 (a) is conferred on international carriers who purchased the same for their
use or consumption outside the Philippines. The only condition set by law is for
these petroleum products to be stored in a bonded storage tank and may be
disposed of only in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
On January 22, 2008, or five years after the sale by respondent of the subject
petroleum products, then Secretary of Finance Margarito B. Teves issued
Revenue Regulations No. 3-2008 "Amending Certain Provisions of Existing
Revenue Regulations on the Granting of Outright Excise Tax Exemption on
Removal of Excisable Articles Intended for Export or Sale/Delivery to
International Carriers or to Tax-Exempt Entities/Agencies and Prescribing the
Provisions for Availing Claims for Product Replenishment." Said issuance
recognized the "tax relief to which the taxpayers are entitled" by availing of
the following remedies: (a) a claim for excise tax exemption pursuant to
Sections 204 and 229 of the NIRC; or (2) a product replenishment.
SEC. 2.IMPOSITION OF EXCISE TAX ON REMOVAL OF
EXCISABLE ARTICLES FOR EXPORT OR SALE/DELIVERY TO
INTERNATIONAL CARRIERS AND OTHER TAX-EXEMPT
ENTITIES/AGENCIES. Subject to the subsequent filing of
a claim for excise tax credit/refund or product
replenishment, all manufacturers of articles subject to
excise tax under Title VI of the NIRC of 1997, as
amended, shall pay the excise tax that is otherwise due
on every removal thereof from the place of production
that is intended for exportation or sale/delivery to
international carriers or to tax-exempt entities/agencies:
Provided, That in case the said articles are likewise
being sold in the domestic market, the applicable
excise tax rate shall be the same as the excise tax rate
imposed on the domestically sold articles. CDESIA
In the absence of a similar article that is being sold in
the domestic market, the applicable excise tax shall be
computed based on the value appearing in the
manufacturer's sworn statement converted to Philippine
currency, as may be applicable.
xxx xxx xxx (Emphasis supplied.)
In this case, however, the Solicitor General has adopted a position contrary to
existing BIR regulations and rulings recognizing the right of oil companies to
seek a refund of excise taxes paid on petroleum products they sold to
international carriers. It is argued that there is nothing in Sec. 135 (a) which
explicitly grants exemption from the payment of excise tax in favor of oil
companies selling their petroleum products to international carriers and that
the only claim for refund of excise taxes authorized by the NIRC is the
payment of excise tax on exported goods, as explicitly provided in Sec. 130
(D), Chapter I under the same Title VI:
(D)Credit for Excise Tax on Goods Actually Exported.
When goods locally produced or manufactured are
removed and actually exported without returning to
the Philippines, whether so exported in their original
state or as ingredients or parts of any manufactured
goods or products, any excise tax paid thereon shall be
credited or refunded upon submission of the proof of
actual exportation and upon receipt of the
corresponding foreign exchange payment: Provided,
That the excise tax on mineral products, except coal
and coke, imposed under Section 151 shall not be
creditable or refundable even if the mineral products
are actually exported.
According to the Solicitor General, Sec. 135 (a) in relation to the other
provisions on excise tax and from the nature of indirect taxation, may only be
construed as prohibiting the manufacturers-sellers of petroleum products from
passing on the tax to international carriers by incorporating previously paid
excise taxes into the selling price. In other words, respondent cannot shift the
tax burden to international carriers who are allowed to purchase its petroleum
products without having to pay the added cost of the excise tax.
We agree with the Solicitor General.
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue22 this
Court held that petitioner manufacturer who sold its oxygen and acetylene
gases to NPC, a tax-exempt entity, cannot claim exemption from the
payment of sales tax simply because its buyer NPC is exempt from taxation.
The Court explained that the percentage tax on sales of merchandise
imposed by the Tax Code is due from the manufacturer and not from the
buyer.
Respondent attempts to distinguish this case from Philippine Acetylene Co.,
Inc. on grounds that what was involved in the latter is a tax on the transaction
(sales) and not excise tax which is a tax on the goods themselves, and that
the exemption sought therein was anchored merely on the tax-exempt status
of the buyer and not a specific provision of law exempting the goods sold
from the excise tax. But as already stated, the language of Sec. 135 indicates
that the tax exemption mentioned therein is conferred on specified buyers or
consumers of the excisable articles or goods (petroleum products). Unlike Sec.
134 which explicitly exempted the article or goods itself (domestic denatured
alcohol) without due regard to the tax status of the buyer or purchaser, Sec.
135 exempts from excise tax petroleum products which were sold to
international carriers and other tax-exempt agencies and entities.
Considering that the excise taxes attaches to petroleum products "as soon as
they are in existence as such," 23 there can be no outright exemption from the
payment of excise tax on petroleum products sold to international carriers.
The sole basis then of respondent's claim for refund is the express grant of
excise tax exemption in favor of international carriers under Sec. 135 (a) for
their purchases of locally manufactured petroleum products. Pursuant to our
ruling in Philippine Acetylene, a tax exemption being enjoyed by the buyer
cannot be the basis of a claim for tax exemption by the manufacturer or seller
of the goods for any tax due to it as the manufacturer or seller. The excise tax
imposed on petroleum products under Sec. 148 is the direct liability of the
manufacturer who cannot thus invoke the excise tax exemption granted to its
buyers who are international carriers. EHSCcT
In Maceda v. Macaraig, Jr., 24 the Court specifically mentioned excise tax as
an example of an indirect tax where the tax burden can be shifted to the
buyer:
On the other hand, "indirect taxes are taxes primarily
paid by persons who can shift the burden upon
someone else". For example, the excise and ad
valorem taxes that the oil companies pay to the Bureau
of Internal Revenue upon removal of petroleum
products from its refinery can be shifted to its buyer, like
the NPC, by adding them to the "cash" and/or "selling
price."
An excise tax is basically an indirect tax. Indirect taxes are those that are
demanded, in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to someone else.
Stated elsewise, indirect taxes are taxes wherein the liability for the payment
of the tax falls on one person but the burden thereof can be shifted or passed
on to another person, such as when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it. When the seller passes on
the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it,
to the purchaser as part of the price of goods sold or services rendered. 25
Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax
exemptions privileges being enjoyed by NPC under existing laws, the tax
burden may not be shifted to it by the oil companies who shall pay for fuel oil
taxes on oil they supplied to NPC. Thus:
In view of all the foregoing, the Court rules and
declares that the oil companies which supply bunker
fuel oil to NPC have to pay the taxes imposed upon
said bunker fuel oil sold to NPC. By the very nature of
indirect taxation, the economic burden of such
taxation is expected to be passed on through the
channels of commerce to the user or consumer of the
goods sold. Because, however, the NPC has been
exempted from both direct and indirect taxation, the
NPC must be held exempted from absorbing the
economic burden of indirect taxation. This means, on
the one hand, that the oil companies which wish to sell
to NPC absorb all or part of the economic burden of the
taxes previously paid to BIR, which they could shift to
NPC if NPC did not enjoy exemption from indirect taxes.
This means also, on the other hand, that the NPC may
refuse to pay that part of the "normal" purchase price
of bunker fuel oil which represents all or part of the
taxes previously paid by the oil companies to BIR. If NPC
nonetheless purchases such oil from the oil companies
because to do so may be more convenient and
ultimately less costly for NPC than NPC itself importing
and hauling and storing the oil from overseas NPC is
entitled to be reimbursed by the BIR for that part of the
buying price of NPC which verifiably represents the tax
already paid by the oil company-vendor to the BIR. 26
(Emphasis supplied.)
In the case of international air carriers, the tax exemption granted under Sec.
135 (a) is based on "a long-standing international consensus that fuel used for
international air services should be tax-exempt." The provisions of the 1944
Convention of International Civil Aviation or the "Chicago Convention", which
form binding international law, requires the contracting parties not to charge
duty on aviation fuel already on board any aircraft that has arrived in their
territory from another contracting state. Between individual countries, the
exemption of airlines from national taxes and customs duties on a range of
aviation-related goods, including parts, stores and fuel is a standard element
of the network of bilateral "Air Service Agreements." 27 Later, a Resolution
issued by the International Civil Aviation Organization (ICAO) expanded the
provision as to similarly exempt from taxes all kinds of fuel taken on board for
consumption by an aircraft from a contracting state in the territory of another
contracting State departing for the territory of any other State. 28 Though
initially aimed at establishing uniformity of taxation among parties to the treaty
to prevent double taxation, the tax exemption now generally applies to fuel
used in international travel by both domestic and foreign carriers.
On April 21, 1978, then President Ferdinand E. Marcos issued Presidential
Decree (P.D.) No. 1359: ETDHSa
PRESIDENTIAL DECREE No. 1359
AMENDING SECTION 134 OF THE NATIONAL INTERNAL
REVENUE CODE OF 1977.
WHEREAS, under the present law oil products sold to
international carriers are subject to the specific tax;
WHEREAS, some countries allow the sale of petroleum
products to Philippine Carriers without payment of taxes
thereon;
WHEREAS, to foster goodwill and better relationship with
foreign countries, there is a need to grant similar tax
exemption in favor of foreign international carriers;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President
of the Philippines, by virtue of the powers vested in me
by the Constitution, do hereby order and decree the
following:
Section 1.Section 134 of the National Internal Revenue
Code of 1977 is hereby amended to read as follows:
"Sec. 134.Articles subject to specific tax.
Specific internal revenue taxes apply to things
manufactured or produced in the Philippines
for domestic sale or consumption and to
things imported, but not to anything
produced or manufactured here which shall
be removed for exportation and is actually
exported without returning to the Philippines,
whether so exported in its original state or as
an ingredient or part of any manufactured
article or product.
"HOWEVER, PETROLEUM PRODUCTS SOLD TO
AN INTERNATIONAL CARRIER FOR ITS USE OR
CONSUMPTION OUTSIDE OF THE PHILIPPINES
SHALL NOT BE SUBJECT TO SPECIFIC TAX,
PROVIDED, THAT THE COUNTRY OF SAID
CARRIER EXEMPTS FROM TAX PETROLEUM
PRODUCTS SOLD TO PHILIPPINE CARRIERS.
"In case of importations the internal revenue
tax shall be in addition to the customs duties,
if any."
Section 2.This Decree shall take effect immediately.
Contrary to respondent's assertion that the above amendment to the former
provision of the 1977 Tax Code supports its position that it was not liable for
excise tax on the petroleum products sold to international carriers, we find
that no such inference can be drawn from the words used in the amended
provision or its introductory part. Founded on the principles of international
comity and reciprocity, P.D. No. 1359 granted exemption from payment of
excise tax but only to foreign international carriers who are allowed to
purchase petroleum products free of specific tax provided the country of said
carrier also grants tax exemption to Philippine carriers. Both the earlier
amendment in the 1977 Tax Code and the present Sec. 135 of the 1997 NIRC
did not exempt the oil companies from the payment of excise tax on
petroleum products manufactured and sold by them to international carriers.
Because an excise tax is a tax on the manufacturer and not on the purchaser,
and there being no express grant under the NIRC of exemption from payment
of excise tax to local manufacturers of petroleum products sold to
international carriers, and absent any provision in the Code authorizing the
refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a)
should be construed as prohibiting the shifting of the burden of the excise tax
to the international carriers who buys petroleum products from the local
manufacturers. Said provision thus merely allows the international carriers to
purchase petroleum products without the excise tax component as an added
cost in the price fixed by the manufacturers or distributors/sellers.
Consequently, the oil companies which sold such petroleum products to
international carriers are not entitled to a refund of excise taxes previously
paid on the goods. DEcTIS
Time and again, we have held that tax refunds are in the nature of tax
exemptions which result to loss of revenue for the government. Upon the
person claiming an exemption from tax payments rests the burden of justifying
the exemption by words too plain to be mistaken and too categorical to be
misinterpreted, 29 it is never presumed 30 nor be allowed solely on the ground
of equity. 31 These exemptions, therefore, must not rest on vague, uncertain or
indefinite inference, but should be granted only by a clear and unequivocal
provision of law on the basis of language too plain to be mistaken. Such
exemptions must be strictly construed against the taxpayer, as taxes are the
lifeblood of the government. 32
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision
dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax
Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE. The
claims for tax refund or credit filed by respondent Pilipinas Shell Petroleum
Corporation are DENIED for lack of basis.
No pronouncement as to costs. EaHDcS
SO ORDERED.
||| (CIR v. Pilipinas Shell Petroleum Corp., G.R. No. 188497, April 25, 2012)


EN BANC
[G.R. No. 193007. July 19, 2011.]
THE RENATO V. DIAZ and AURORA MA. F. TIMBOL,
petitioners, vs. THE SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
ABAD, J p:
May toll fees collected by tollway operators be subjected to value-added
tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief 1 assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR)
on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they
have an interest as regular users of tollways in stopping the BIR action.
Additionally, Diaz claims that he sponsored the approval of Republic Act 7716
(the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997
National Internal Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant Secretary of the
Department of Trade and Industry and consultant of the Toll Regulatory Board
(TRB) in the past administration. CIaHDc
Petitioners allege that the BIR attempted during the administration of President
Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition was
deferred, however, in view of the consistent opposition of Diaz and other
sectors to such move. But, upon President Benigno C. Aquino III's assumption
of office in 2010, the BIR revived the idea and would impose the challenged
tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of "sale of services" that are
subject to VAT; that a toll fee is a "user's tax," not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution. ITSacC
On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department
of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice. 2 Later, the Court issued
another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the government's
comment. 4 The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the
law provides otherwise; that the Court should seek the meaning and intent of
the law from the words used in the statute; and that the imposition of VAT on
tollway operations has been the subject as early as 2003 of several BIR rulings
and circulars. 5
The government also argues that petitioners have no right to invoke the non-
impairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and
tollway operators. At any rate, the non-impairment clause cannot limit the
State's sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the
parametric formula for computing toll rates cannot exempt tollway operators
from VAT. In any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the VAT since this
is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.
In their reply 6 to the government's comment, petitioners point out that tollway
operators cannot be regarded as franchise grantees under the NIRC since
they do not hold legislative franchises. Further, the BIR intends to collect the
VAT by rounding off the toll rate and putting any excess collection in an
escrow account. But this would be illegal since only the Congress can modify
VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum
Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become
liable to VAT a transitional input tax credit of 2% on beginning inventory. For
this reason, the VAT on toll fees cannot be implemented. HaTAEc
The Issues Presented
The case presents two procedural issues:
1.Whether or not the Court may treat the petition for declaratory relief as one
for prohibition; and
2.Whether or not petitioners Diaz and Timbol have legal standing to file the
action.
The case also presents two substantive issues:
1.Whether or not the government is unlawfully expanding VAT coverage by
including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and
2.Whether or not the imposition of VAT on tollway operators a) amounts to a
tax on tax and not a tax on services; b) will impair the tollway operators' right
to a reasonable return of investment under their TOAs; and c) is not
administratively feasible and cannot be implemented. SICaDA
The Court's Rulings
A.On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one
for prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought
reconsideration of the Court's resolution, 7 however, arguing that petitioners'
allegations clearly made out a case for declaratory relief, an action over
which the Court has no original jurisdiction. The government adds, moreover,
that the petition does not meet the requirements of Rule 65 for actions for
prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial
functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary course
of law against the BIR action in the form of an appeal to the Secretary of
Finance.
But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that
need to be resolved for the public good. 8 The Court has also held that a
petition for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative authority. 9
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists
who use the tollways everyday, but more so on the government's effort to
raise revenue for funding various projects and for reducing budgetary deficits.
aEcTDI
To dismiss the petition and resolve the issues later, after the challenged VAT
has been imposed, could cause more mischief both to the tax-paying public
and the government. A belated declaration of nullity of the BIR action would
make any attempt to refund to the motorists what they paid an administrative
nightmare with no solution. Consequently, it is not only the right, but the duty
of the Court to take cognizance of and resolve the issues that the petition
raises.
Although the petition does not strictly comply with the requirements of Rule
65, the Court has ample power to waive such technical requirements when
the legal questions to be resolved are of great importance to the public. The
same may be said of the requirement of locus standi which is a mere
procedural requisite. 10
B.On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT
is levied, assessed, and collected, according to Section 108, on the gross
receipts derived from the sale or exchange of services as well as from the use
or lease of properties. The third paragraph of Section 108 defines "sale or
exchange of services" as follows:
The phrase 'sale or exchange of services' means the
performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration,
including those performed or rendered by construction
and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or
keepers of hotels, motels, resthouses, pension houses,
inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their
transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of
goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by
generation companies, transmission, and distribution
companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television
broadcasting and all other franchise grantees except
those under Section 119 of this Code and non-life
insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or
use of the physical or mental faculties. (Underscoring
supplied) EACIaT
It is plain from the above that the law imposes VAT on "all kinds of services"
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive. 11 By qualifying "services"
with the words "all kinds," Congress has given the term "services" an all-
encompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VAT's reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as
a form of "service" rendered for a fee should be deemed included unless
some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services
that tollway operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the operators'
expense. Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads. Traffic in
the regular public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable returns from
their investments. cITAaD
When a tollway operator takes a toll fee from a motorist, the fee is in effect for
the latter's use of the tollway facilities over which the operator enjoys private
proprietary rights 12 that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities for a fee:
1.Lessors of property, whether personal or real;
2.Warehousing service operators;
3.Lessors or distributors of cinematographic films; DISHEA
4.Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5.Lending investors (for use of money);
6.Transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes;
and
7.Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines. CaESTA
It does not help petitioners' cause that Section 108 subjects to VAT "all kinds of
services" rendered for a fee "regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties." This
means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of
human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of
services," they also come under the specific class described in Section 108 as
"all other franchise grantees" who are subject to VAT, "except those under
Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting companies
with gross annual incomes of less than P10 million and gas and water utilities)
that Section 119 13 spares from the payment of VAT. The word "franchise"
broadly covers government grants of a special right to do an act or series of
acts of public concern. 14
Petitioners of course contend that tollway operators cannot be considered
"franchise grantees" under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the "franchise grantees" it
speaks of are those who hold legislative franchises. Petitioners give no reason,
and the Court cannot surmise any, for making a distinction between
franchises granted by Congress and franchises granted by some other
government agency. The latter, properly constituted, may grant franchises.
Indeed, franchises conferred or granted by local authorities, as agents of the
state, constitute as much a legislative franchise as though the grant had been
made by Congress itself. 15 The term "franchise" has been broadly construed
as referring, not only to authorizations that Congress directly issues in the form
of a special law, but also to those granted by administrative agencies to
which the power to grant franchises has been delegated by Congress. 16
Tollway operators are, owing to the nature and object of their business,
"franchise grantees." The construction, operation, and maintenance of toll
facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway concessionaire
for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its
delegated powers under P.D. 1112. 17 The franchise in this case is evidenced
by a "Toll Operation Certificate." 18
Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term "sale of services" under Section
108 of the Code. But, again, nothing in Section 108 supports this contention.
The reverse is true. In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public service for a
fee to the imposition of VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for its use or service is a franchise.
19
Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law.
As the Court said in South African Airways v. Commissioner of Internal
Revenue, 20 "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and
are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the
lawmakers voted on. Consequently, the meaning and intention of the law
must first be sought "in the words of the statute itself, read and considered in
their natural, ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced or
subtle construction."
Two. Petitioners argue that a toll fee is a "user's tax" and to impose VAT on toll
fees is tantamount to taxing a tax. 21 Actually, petitioners base this argument
on the following discussion in Manila International Airport Authority (MIAA) v.
Court of Appeals: 22
No one can dispute that properties of public dominion
mentioned in Article 420 of the Civil Code, like "roads,
canals, rivers, torrents, ports and bridges constructed by
the State," are owned by the State. The term "ports"
includes seaports and airports. The MIAA Airport Lands
and Buildings constitute a "port" constructed by the
State. Under Article 420 of the Civil Code, the MIAA
Airport Lands and Buildings are properties of public
dominion and thus owned by the State or the Republic
of the Philippines.TASCDI
. . . The operation by the government of a tollway does
not change the character of the road as one for public
use. Someone must pay for the maintenance of the
road, either the public indirectly through the taxes they
pay the government, or only those among the public
who actually use the road through the toll fees they pay
upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for
the maintenance of public roads.
The charging of fees to the public does not determine
the character of the property whether it is for public
dominion or not. Article 420 of the Civil Code defines
property of public dominion as "one intended for public
use." Even if the government collects toll fees, the road
is still "intended for public use" if anyone can use the
road under the same terms and conditions as the rest of
the public. The charging of fees, the limitation on the
kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road
do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well
as the landing fees MIAA charges to airlines, constitute
the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the
character of MIAA as an airport for public use. Such
fees are often termed user's tax. This means taxing
those among the public who actually use a public
facility instead of taxing all the public including those
who never use the particular public facility. A user's tax
is more equitable a principle of taxation mandated in
the 1987 Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to
a "user's tax" must also pertain to tollway fees. But the main issue in the MIAA
case was whether or not Paraaque City could sell airport lands and buildings
under MIAA administration at public auction to satisfy unpaid real estate
taxes. Since local governments have no power to tax the national
government, the Court held that the City could not proceed with the auction
sale. MIAA forms part of the national government although not integrated in
the department framework." 24 Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man under Article
420 (1) 25 of the Civil Code and could not be sold at public auction. caIEAD
As can be seen, the discussion in the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are user's tax, but to make the
point that airport lands and buildings are properties of public dominion and
that the collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and
collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a
user's tax, collectible from motorists, for the construction and maintenance of
certain roadways. The tax in such a case goes directly to the government for
the replenishment of resources it spends for the roadways. This is not the case
here. What the government seeks to tax here are fees collected from tollways
that are constructed, maintained, and operated by private tollway operators
at their own expense under the build, operate, and transfer scheme that the
government has adopted for expressways. 26 Except for a fraction given to
the government, the toll fees essentially end up as earnings of the tollway
operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are
not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures. 27 Toll fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll fees are charged for the
use of public facilities, therefore, they are not government exactions that can
be properly treated as a tax. Taxes may be imposed only by the government
under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of ownership. 28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax
due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is
made between the liability for the tax and burden of the tax. The seller who is
liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the
seller's liability but merely the burden of the VAT. 29
Thus, the seller remains directly and legally liable for payment of the VAT, but
the buyer bears its burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT ceases to be a tax 30 and
simply becomes part of the cost that the buyer must pay in order to purchase
the good, property or service. aEcADH
Consequently, VAT on tollway operations is not really a tax on the tollway user,
but on the tollway operator. Under Section 105 of the Code, 31 VAT is
imposed on any person who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely shifts the
burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll
fees were deemed as a "user's tax." VAT is assessed against the tollway
operator's gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not make
the latter directly liable for the VAT. The shifted VAT burden simply becomes
part of the toll fees that one has to pay in order to use the tollways. 32
Three. Petitioner Timbol has no personality to invoke the non-impairment of
contract clause on behalf of private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the alleged diminution in return
of investments that may result from the VAT imposition. She has no interest at
all in the profits to be earned under the TOAs. The interest in and right to
recover investments solely belongs to the private tollway investors. ScaCEH
Besides, her allegation that the private investors' rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion that a stipulation in the
TOAs known as the Material Adverse Grantor Action will be activated if VAT is
thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign
taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming
input VAT make the VAT on tollway operations impractical and incapable of
implementation. They cite the fact that, in order to claim input VAT, the name,
address and tax identification number of the tollway user must be indicated in
the VAT receipt or invoice. The manner by which the BIR intends to implement
the VAT by rounding off the toll rate and putting any excess collection in an
escrow account is also illegal, while the alternative of giving "change" to
thousands of motorists in order to meet the exact toll rate would be a
logistical nightmare. Thus, according to them, the VAT on tollway operations is
not administratively feasible. 33
Administrative feasibility is one of the canons of a sound tax system. It simply
means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer.
Non-observance of the canon, however, will not render a tax imposition
invalid "except to the extent that specific constitutional or statutory limitations
are impaired." 34 Thus, even if the imposition of VAT on tollway operations may
seem burdensome to implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement
the VAT on tollway operations. Any declaration by the Court that the manner
of its implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing provides some
clue as to how the BIR intends to go about it, 35 the facts pertaining to the
matter are not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of implementing
tax laws primarily and exclusively rests. The Court cannot preempt the BIR's
discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR
RMC 63-2010 which directs toll companies to record an accumulated input
VAT of zero balance in their books as of August 16, 2010, the date when the
VAT imposition was supposed to take effect. The issuance allegedly violates
Section 111 (A) 36 of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory. DCASIT
In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed VAT
as early as 2005, but failed to charge VAT-inclusive toll fees which by now can
no longer be collected. The tollway operators agreed to waive the 2%
transitional input VAT, in exchange for cancellation of their past due VAT
liabilities. Notably, the right to claim the 2% transitional input VAT belongs to
the tollway operators who have not questioned the circular's validity. They are
thus the ones who have a right to challenge the circular in a direct and
proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT law's coverage when she sought to impose
VAT on tollway operations. Section 108 (A) of the Code clearly states that
services of all other franchise grantees are subject to VAT, except as may be
provided under Section 119 of the Code. Tollway operators are not among
the franchise grantees subject to franchise tax under the latter provision.
Neither are their services among the VAT-exempt transactions under Section
109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law to
clearly say so. Tax exemptions must be justified by clear statutory grant and
based on language in the law too plain to be mistaken. 37 But as the law is
written, no such exemption obtains for tollway operators. The Court is thus
duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is within
the exclusive prerogative of Congress. The Court's role is to merely uphold this
legislative policy, as reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has no
discretion on the matter but simply applies the law. cTADCH
The VAT on franchise grantees has been in the statute books since 1994 when
R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now,
however, that the executive has earnestly pursued the VAT imposition against
tollway operators. The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws. Consequently,
the executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenue's motion for reconsideration of its August 24,
2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F.
Timbol's petition for lack of merit, and SETS ASIDE the Court's temporary
restraining order dated August 13, 2010.
SO ORDERED.
||| (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, 2011)


EN BANC
[G.R. No. 172087. March 15, 2011.]
PHILIPPINE AMUSEMENT AND GAMING CORPORATION
(PAGCOR), petitioner, vs. THE BUREAU OF INTERNAL
REVENUE (BIR), represented herein by HON. JOSE MARIO
BUAG, in his official capacity as COMMISSIONER OF
INTERNAL REVENUE, public respondent,
JOHN DOE and JANE DOE, who are persons acting for,
in behalf, or under the authority of Respondent, public
and private respondents.
DECISION
PERALTA, J p:
For resolution of this Court is the Petition for Certiorari and Prohibition 1 with
prayer for the issuance of a Temporary Restraining Order and/or Preliminary
Injunction, dated April 17, 2006, of petitioner Philippine Amusement and
Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1
of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the
National Internal Revenue Code of 1997, by excluding petitioner from
exemption from corporate income tax for being repugnant to Sections 1 and
10 of Article III of the Constitution. Petitioner further seeks to prohibit the
implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No.
16-2005 for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A 2 on
January 1, 1977. Simultaneous to its creation, P.D. No. 1067-B 3 (supplementing
P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any
type of tax, except a franchise tax of five percent (5%) of the gross revenue. 4
Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of
PAGCOR's exemption. 5
To consolidate the laws pertaining to the franchise and powers of PAGCOR,
P.D. No. 1869 6 was issued. Section 13 thereof reads as follows:
Sec. 13.Exemptions. . . .
(1)Customs Duties, taxes and other imposts on
importations. All importations of equipment, vehicles,
automobiles, boats, ships, barges, aircraft and such
other gambling paraphernalia, including accessories or
related facilities, for the sole and exclusive use of the
casinos, the proper and efficient management and
administration thereof and such other clubs, recreation
or amusement places to be established under and by
virtue of this Franchise shall be exempt from the
payment of duties, taxes and other imposts, including
all kinds of fees, levies, or charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be
imported by any corporation having existing
contractual arrangements with the Corporation, for the
sole and exclusive use of the casino or to be used to
service the operations and requirements of the casino,
shall likewise be totally exempt from the payment of all
customs duties, taxes and other imposts, including all
kinds of fees, levies, assessments or charges of any kind
or nature, whether National or Local.
(2)Income and other taxes. (a) Franchise Holder: No
tax of any kind or form, income or otherwise, as well as
fees, charges, or levies of whatever nature, whether
National or Local, shall be assessed and collected
under this Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to the earnings
of the Corporation, except a Franchise Tax of five
percent (5%)of the gross revenue or earnings derived
by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly
to the National Government and shall be in lieu of all
kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established, or collected
by any municipal, provincial or national government
authority.
(b)Others: The exemption herein granted for earnings
derived from the operations conducted under the
franchise, specifically from the payment of any tax,
income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has
any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted
under this Franchise and to those receiving
compensation or other remuneration from the
Corporation as a result of essential facilities furnished
and/or technical services rendered to the Corporation
or operator. DcSTaC
The fee or remuneration of foreign entertainers
contracted by the Corporation or operator in
pursuance of this provision shall be free of any tax.
(3)Dividend Income. Notwithstanding any provision of
law to the contrary, in the event the Corporation should
declare a cash dividend income corresponding to the
participation of the private sector shall, as an incentive
to the beneficiaries, be subject only to a final flat
income rate of ten percent (10%) of the regular income
tax rates. The dividend income shall not in such case be
considered as part of the beneficiaries' taxable income;
provided, however, that such dividend income shall be
totally exempted from income or other form of taxes if
invested within six (6) months from the date the
dividend income is received in the following:
(a)operation of the casino(s) or investments in
any affiliate activity that will ultimately
redound to the benefit of the Corporation; or
any other corporation with whom the
Corporation has any existing arrangements in
connection with or related to the operations
of the casino(s);
(b)Government bonds, securities, treasury
notes, or government debentures; or
(c)BOI-registered or export-oriented
corporation(s). 7
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931,
but it was later restored by Letter of Instruction No. 1430, which was issued in
September 1984.
On January 1, 1998, R.A. No. 8424, 8 otherwise known as the National Internal
Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides
that government-owned and controlled corporations (GOCCs) shall pay
corporate income tax, except petitioner PAGCOR, the Government Service
and Insurance Corporation, the Social Security System, the Philippine Health
Insurance Corporation, and the Philippine Charity Sweepstakes Office, thus:
(c)Government-owned or Controlled Corporations,
Agencies or Instrumentalities. The provisions of existing
special general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and
controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO), and the Philippine Amusement and
Gaming Corporation (PAGCOR), shall pay such rate of
tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in
similar business, industry, or activity. 9
With the enactment of R.A. No. 9337 10 on May 24, 2005, certain sections of
the National Internal Revenue Code of 1997 were amended. The particular
amendment that is at issue in this case is Section 1 of R.A. No. 9337, which
amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from
payment of corporate income tax, thus:
(c)Government-owned or Controlled Corporations,
Agencies or Instrumentalities. The provisions of existing
special general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned and
controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity
Sweepstakes Office (PCSO), shall pay such rate of tax
upon their taxable income as are imposed by this
Section upon corporations or associations engaged in
similar business, industry, or activity.
Different groups came to this Court via petitions for certiorari and prohibition
11 assailing the validity and constitutionality of R.A. No. 9337, in particular:
1)Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods
and properties; Section 5, which imposes a 10% VAT on importation of goods;
and Section 6, which imposes a 10% VAT on sale of services and use or lease
of properties, all contain a uniform proviso authorizing the President, upon the
recommendation of the Secretary of Finance, to raise the VAT rate to 12%.
The said provisions were alleged to be violative of Section 28 (2), Article VI of
the Constitution, which section vests in Congress the exclusive authority to fix
the rate of taxes, and of Section 1, Article III of the Constitution on due
process, as well as of Section 26 (2), Article VI of the Constitution, which
section provides for the "no amendment rule" upon the last reading of a bill;
2)Sections 8 and 12 were alleged to be violative of Section 1, Article III of the
Constitution, or the guarantee of equal protection of the laws, and Section 28
(1), Article VI of the Constitution; and
3)other technical aspects of the passage of the law, questioning the manner
it was passed. THCSAE
On September 1, 2005, the Court dismissed all the petitions and upheld the
constitutionality of R.A. No. 9337. 12
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-
2005, 13 specifically identifying PAGCOR as one of the franchisees subject to
10% VAT imposed under Section 108 of the National Internal Revenue Code of
1997, as amended by R.A. No. 9337. The said revenue regulation, in part,
reads:
Sec. 4. 108-3.Definitions and Specific Rules on Selected
Services.
xxx xxx xxx
(h). . .
Gross Receipts of all other franchisees, other than those
covered by Sec. 119 of the Tax Code, regardless of how
their franchisees may have been granted, shall be
subject to the 10% VAT imposed under Sec.108 of the
Tax Code. This includes, among others, the Philippine
Amusement and Gaming Corporation (PAGCOR), and
its licensees or franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND
VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE
III OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND
VOID AB INITIO FOR BEING REPUGNANT TO THE NON-
IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10,
ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3,
PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING
BEYOND THE SCOPE OF THE BASIC LAW, RA 8424,
SECTION 108, INSOFAR AS THE SAID REGULATION
IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS
WELL AS PETITIONER'S LICENSEES OR FRANCHISEES WHEN
THE BASIC LAW, AS INTERPRETED BY APPLICABLE
JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER
OR ON PETITIONER'S LICENSEES OR FRANCHISEES. 14
The BIR, in its Comment 15 dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D.
1869 ARE BOTH VALID AND CONSTITUTIONAL
PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY
CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL
OF THEIR PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF
SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND
CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES. AaCTcI
The Office of the Solicitor General (OSG), by way of Manifestation in Lieu of
Comment, 16 concurred with the arguments of the petitioner. It added that
although the State is free to select the subjects of taxation and that the
inequity resulting from singling out a particular class for taxation or exemption
is not an infringement of the constitutional limitation, a tax law must operate
with the same force and effect to all persons, firms and corporations placed in
a similar situation. Furthermore, according to the OSG, public respondent BIR
exceeded its statutory authority when it enacted RR No. 16-2005, because the
latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to
R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from corporate
income tax and VAT with the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court finds
the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National
Internal Revenue Code of 1977, petitioner is no longer exempt from corporate
income tax as it has been effectively omitted from the list of GOCCs that are
exempt from it. Petitioner argues that such omission is unconstitutional, as it is
violative of its right to equal protection of the laws under Section 1, Article III of
the Constitution:
Sec. 1.No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws.
In City of Manila v. Laguio, Jr., 17 this Court expounded the meaning and
scope of equal protection, thus:
Equal protection requires that all persons or things
similarly situated should be treated alike, both as to
rights conferred and responsibilities imposed. Similar
subjects, in other words, should not be treated
differently, so as to give undue favor to some and
unjustly discriminate against others. The guarantee
means that no person or class of persons shall be
denied the same protection of laws which is enjoyed by
other persons or other classes in like circumstances. The
"equal protection of the laws is a pledge of the
protection of equal laws." It limits governmental
discrimination. The equal protection clause extends to
artificial persons but only insofar as their property is
concerned.
xxx xxx xxx
Legislative bodies are allowed to classify the subjects of
legislation. If the classification is reasonable, the law
may operate only on some and not all of the people
without violating the equal protection clause. The
classification must, as an indispensable requisite, not be
arbitrary. To be valid, it must conform to the following
requirements:
1)It must be based on substantial distinctions.
2)It must be germane to the purposes of the law.
3)It must not be limited to existing conditions only.
4)It must apply equally to all members of the class. 18
It is not contested that before the enactment of R.A. No. 9337, petitioner was
one of the five GOCCs exempted from payment of corporate income tax as
shown in R.A. No. 8424, Section 27 (c) of which, reads:
(c)Government-owned or Controlled Corporations,
Agencies or Instrumentalities. The provisions of existing
special or general laws to the contrary notwithstanding,
all corporations, agencies or instrumentalities owned
and controlled by the Government, except the
Government Service and Insurance Corporation (GSIS),
the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall
pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or
associations engaged in similar business, industry, or
activity. 19DIETcH
A perusal of the legislative records of the Bicameral Conference Meeting of
the Committee on Ways on Means dated October 27, 1997 would show that
the exemption of PAGCOR from the payment of corporate income tax was
due to the acquiescence of the Committee on Ways on Means to the request
of PAGCOR that it be exempt from such tax. 20 The records of the Bicameral
Conference Meeting reveal:
HON. R. DIAZ.
The other thing, sir, is we I noticed we imposed a tax
on lotto winnings.
CHAIRMAN ENRILE.
Wala na, tinanggal na namin yon.
HON. R. DIAZ.
Tinanggal na ba natin yon?
CHAIRMAN ENRILE.
Oo.
HON. R. DIAZ.
Because I was wondering whether we covered the tax
on Whether on a universal basis, we
included a tax on cockfighting winnings.
CHAIRMAN ENRILE.
No, we removed the
HON. R. DIAZ.
I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE.
Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER.
Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE.
Philippine Insurance Health, health ba. Yon ang
request ng Chairman, I will accept. (laughter)
Pag-Pag-ibig yon, maliliit na sa tao yon.
HON. ROXAS.
Mr. Chairman, I wonder if in the revenue gainers if we
factored in an amount that would reflect the
VAT and other sales taxes
CHAIRMAN ENRILE.
No, we're talking of this measure only. We will not
(discontinued)
HON. ROXAS.
No, no, no, no, from the arising from the exemption.
Assuming that when we release the money
into the hands of the public, they will not use
that to for wallpaper. They will spend that
eh, Mr. Chairman. So when they spend that
CHAIRMAN ENRILE.
There's a VAT. TAacHE
HON. ROXAS.
There will be a VAT and there will be other sales taxes
no. Is there a quantification? Is there an
approximation?
CHAIRMAN JAVIER.
Not anything.
HON. ROXAS.
So, in effect, we have sterilized that entire seven billion.
In effect, it is not circulating in the economy
which is unrealistic.
CHAIRMAN ENRILE.
It does, it does, because this is taken and spent by
government, somebody receives it in the form
of wages and supplies and other services and
other goods. They are not being taken from
the public and stored in a vault.
CHAIRMAN JAVIER.
That 7.7 loss because of tax exemption. That will be
extra income for the taxpayers.
HON. ROXAS.
Precisely, so they will be spending it. 21
The discussion above bears out that under R.A. No. 8424, the exemption of
PAGCOR from paying corporate income tax was not based on a
classification showing substantial distinctions which make for real differences,
but to reiterate, the exemption was granted upon the request of PAGCOR
that it be exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424,
PAGCOR has been excluded from the enumeration of GOCCs that are
exempt from paying corporate income tax. The records of the Bicameral
Conference Meeting dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show
that it is the legislative intent that PAGCOR be subject to the payment of
corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO).
Yes, Osmea, the proponent of the amendment.
SEN. OSMEA.
Yeah. Mr. Chairman, one of the reasons why we're
even considering this VAT bill is we want to
show the world who our creditors, that we are
increasing official revenues that go to the
national budget. Unfortunately today, Pagcor
is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor
had a net income of 9.7 billion after paying
some small taxes that they are subjected to.
Of the 9.7 billion, they claim they remitted to
national government seven billion.
Pagkatapos, there are other specific
remittances like to the Philippine Sports
Commission, etc., as mandated by various
laws, and then about 400 million to the
President's Social Fund. But all in all, their net
profit today should be about 12 billion. That's
why I am questioning this two billion. Because
while essentially they claim that the money
goes to government, and I will accept that
just for the sake of argument. It does not pass
through the appropriation process. And I think
that at least if we can capture 35 percent or
32 percent through the budgetary process,
first, it is reflected in our official income of
government which is applied to the national
budget, and secondly, it goes through what is
constitutionally mandated as Congress
appropriating and defining where the money
is spent and not through a board of directors
that has absolutely no accountability.
REP. PUENTEBELLA. cCTAIE
Well, with all due respect, Mr. Chairman, follow up lang.
There is wisdom in the comments of my good friend
from Cebu, Senator Osmea.
SEN. OSMEA.
And Negros.
REP. PUENTEBELLA.
And Negros at the same time ay Kasimanwa. But I
would not want to put my friends from the
Department of Finance in a difficult position,
but may we know your comments on this
knowing that as Senator Osmea just
mentioned, he said, "I accept that that a lot
of it is going to spending for basic services,"
you know, going to most, I think, supposedly a
lot or most of it should go to government
spending, social services and the like. What is
your comment on this? This is going to affect
a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS).
Mr. Chair, Mr. Chair.
SEN. OSMEA.
It goes from pocket to the other, Monico.
REP. PUENTEBELLA.
I know that. But I wanted to ask them, Mr. Senator,
because you may have your own pre-
judgment on this and I don't blame you. I
don't blame you. And I know you have your
own research. But will this not affect a lot, the
disbursements on social services and other?
REP. LOCSIN.
Mr. Chairman. Mr. Chairman, if I can add to that
question also. Wouldn't it be easier for you to
explain to, say, foreign creditors, how do you
explain to them that if there is a fiscal gap
some of our richest corporations has [been]
spared [from] taxation by the government
which is one rich source of revenues. Now,
why do you save, why do you spare certain
government corporations on that, like
Pagcor? So, would it be easier for you to
make an argument if everything was exposed
to taxation?
REP. TEVES.
Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS).
Can we ask the DOF to respond to those before we call
Congressman Teves?
MR. PURISIMA.
Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help
us because it will then enter as an official
revenue although when dividends declare it
also goes in as other income.(sic)
xxx xxx xxx
REP. TEVES.
Mr. Chairman. DCcIaE
xxx xxx xxx
THE CHAIRMAN (REP. LAPUS).
Congressman Teves.
REP. TEVES.
Yeah. Pagcor is controlled under Section 27, that is on
income tax. Now, we are talking here on
value-added tax. Do you mean to say we are
going to amend it from income tax to value-
added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO).
No. We are just amending that section with regard to
the exemption from income tax of Pagcor.
xxx xxx xxx
REP. NOGRALES.
Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS).
Congressman Nograles.
REP. NOGRALES.
Just a point of inquiry from the Chair. What exactly are
the functions of Pagcor that are VATable?
What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS).
This is on own income tax. This is Pagcor income tax.
REP. NOGRALES.
No, that's why. Anong i-va-Vat natin sa kanya. Sale of
what?
xxx xxx xxx
REP. VILLAFUERTE.
Mr. Chairman, my question is, what are we VATing
Pagcor with, is it the . . .
REP. NOGRALES.
Mr. Chairman, this is a secret agreement or the way
they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO).
Congressman Nograles, the Senate version does not
discuss a VAT on Pagcor but it just takes away
their exemption from non-payment of income
tax.22
Taxation is the rule and exemption is the exception. 23 The burden of proof
rests upon the party claiming exemption to prove that it is, in fact, covered by
the exemption so claimed. 24 As a rule, tax exemptions are construed strongly
against the claimant. 25 Exemptions must be shown to exist clearly and
categorically, and supported by clear legal provision. 26
In this case, PAGCOR failed to prove that it is still exempt from the payment of
corporate income tax, considering that Section 1 of R.A. No. 9337 amended
Section 27 (c) of the National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to
pay corporate income tax; hence, the omission or removal of PAGCOR from
exemption from the payment of corporate income tax. It is a basic precept of
statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio
unius est exclusio alterius.27 Thus, the express mention of the GOCCs
exempted from payment of corporate income tax excludes all others. Not
being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax,
expressed in the maxim: exceptio firmat regulam in casibus non
exceptis.28CSIDEc
PAGCOR cannot find support in the equal protection clause of the
Constitution, as the legislative records of the Bicameral Conference Meeting
dated October 27, 1997, of the Committee on Ways and Means, show that
PAGCOR's exemption from payment of corporate income tax, as provided in
Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997,
was not made pursuant to a valid classification based on substantial
distinctions and the other requirements of a reasonable classification by
legislative bodies, so that the law may operate only on some, and not all,
without violating the equal protection clause. The legislative records show
that the basis of the grant of exemption to PAGCOR from corporate income
tax was PAGCOR's own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void
ab initio for violating the non-impairment clause of the Constitution. Petitioner
avers that laws form part of, and is read into, the contract even without the
parties expressly saying so. Petitioner states that the private parties/investors
transacting with it considered the tax exemptions, which inure to their benefit,
as the main consideration and inducement for their decision to
transact/invest with it. Petitioner argues that the withdrawal of its exemption
from corporate income tax by R.A. No. 9337 has the effect of changing the
main consideration and inducement for the transactions of private parties
with it; thus, the amendatory provision is violative of the non-impairment
clause of the Constitution.
Petitioner's contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the
Constitution, which provides that no law impairing the obligation of contracts
shall be passed. The non-impairment clause is limited in application to laws
that derogate from prior acts or contracts by enlarging, abridging or in any
manner changing the intention of the parties. 29 There is impairment if a
subsequent law changes the terms of a contract between the parties,
imposes new conditions, dispenses with those agreed upon or withdraws
remedies for the enforcement of the rights of the parties. 30
As regards franchises, Section 11, Article XII of the Constitution 31 provides that
no franchise or right shall be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. 32
In Manila Electric Company v. Province of Laguna, 33 the Court held that a
franchise partakes the nature of a grant, which is beyond the purview of the
non-impairment clause of the Constitution. 34 The pertinent portion of the
case states:
While the Court has, not too infrequently, referred to tax
exemptions contained in special franchises as being in
the nature of contracts and a part of the inducement
for carrying on the franchise, these exemptions,
nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of
the term and where the non-impairment clause of the
Constitution can rightly be invoked, are those agreed
to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its
cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be
revoked without impairing the obligations of contracts.
These contractual tax exemptions, however, are not to
be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant
which is beyond the purview of the non-impairment
clause of the Constitution. Indeed, Article XII, Section
11, of the 1987 Constitution, like its precursor provisions
in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be
granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by
Congress as and when the common good so
requires.35
In this case, PAGCOR was granted a franchise to operate and maintain
gambling casinos, clubs and other recreation or amusement places, sports,
gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea,
within the territorial jurisdiction of the Republic of the Philippines. 36 Under
Section 11, Article XII of the Constitution, PAGCOR's franchise is subject to
amendment, alteration or repeal by Congress such as the amendment under
Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337,
amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of
PAGCOR from corporate income tax, which may affect any benefits to
PAGCOR's transactions with private parties, is not violative of the non-
impairment clause of the Constitution. SIcEHC
Anent the validity of RR No. 16-2005, the Court holds that the provision
subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337.
Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to
VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption
from the payment of corporate income tax, which was already addressed
above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT
pursuant to Section 7 (k) thereof, which reads:
Sec. 7.Section 109 of the same Code, as amended, is
hereby further amended to read as follows:
Section 109.Exempt Transactions. (1) Subject
to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from
the value-added tax:
xxx xxx xxx
(k)Transactions which are
exempt under international
agreements to which the Philippines is
a signatory or under special laws,
except Presidential Decree No. 529. 37
Petitioner is exempt from the payment of VAT, because PAGCOR's charter,
P.D. No. 1869, is a special law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of
R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code
(R.A. No. 8424), as amended, is hereby further
amended to read as follows:
SEC. 108.Value-Added Tax on Sale of Services
and Use or Lease of Properties.
(A)Rate and Base of Tax. There shall be
levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or
exchange of services, including the use or
lease of properties: . . .
xxx xxx xxx
(B)Transactions Subject to Zero Percent (0%)
Rate. The following services performed in the
Philippines by VAT registered persons shall be
subject to zero percent (0%) rate;
xxx xxx xxx
(3)Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively subjects
the supply of such services to zero percent
(0%) rate;
xxx xxx xxx 38
As pointed out by petitioner, although R.A. No. 9337 introduced amendments
to Section 108 of R.A. No. 8424 by imposing VAT on other services not
previously covered, it did not amend the portion of Section 108 (B) (3) that
subjects to zero percent rate services performed by VAT-registered persons to
persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the
supply of such services to 0% rate. cSCTID
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has
been thoroughly and extensively discussed in Commissioner of Internal
Revenue v. Acesite (Philippines) Hotel Corporation.39 Acesite was the owner
and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of
the hotel's premises to PAGCOR. It incurred VAT amounting to P30,152,892.02
from its rental income and sale of food and beverages to PAGCOR from
January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR by
incorporating it in the amount assessed to PAGCOR. However, PAGCOR
refused to pay the taxes because of its tax-exempt status. PAGCOR paid only
the amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite
paid VAT in the amount of P30,152,892.02 to the Commissioner of Internal
Revenue, fearing the legal consequences of its non-payment. In May 1998,
Acesite sought the refund of the amount it paid as VAT on the ground that its
transaction with PAGCOR was subject to zero rate as it was rendered to a tax-
exempt entity. The Court ruled that PAGCOR and Acesite were both exempt
from paying VAT, thus:
xxx xxx xxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating
PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869 pertinently
provides:
Sec. 13.Exemptions.
xxx xxx xxx
(2)Income and other taxes. (a) Franchise
Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local,
shall be assessed and collected under this
Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to
the earnings of the Corporation, except a
Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the
Corporation from its operation under this
Franchise. Such tax shall be due and payable
quarterly to the National Government and
shall be in lieu of all kinds of taxes, levies, fees
or assessments of any kind, nature or
description, levied, established or collected
by any municipal, provincial, or national
government authority.
(b)Others: The exemptions herein granted for
earnings derived from the operations
conducted under the franchise specifically
from the payment of any tax, income or
otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and
extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the
Corporation or operator has any contractual
relationship in connection with the operations
of the casino(s) authorized to be conducted
under this Franchise and to those receiving
compensation or other remuneration from the
Corporation or operator as a result of
essential facilities furnished and/or technical
services rendered to the Corporation or
operator.
Petitioner contends that the above tax exemption
refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT. ITScHa
We disagree.
A close scrutiny of the above provisos clearly gives
PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect.
We are one with the CA ruling that PAGCOR is also
exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b)
of P.D. 1869], the term "Corporation" or
operator refers to PAGCOR. Although the law
does not specifically mention PAGCOR's
exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes
because the law exempts from taxes persons
or entities contracting with PAGCOR in casino
operations. Although, differently worded, the
provision clearly exempts PAGCOR from
indirect taxes. In fact, it goes one step further
by granting tax exempt status to persons
dealing with PAGCOR in casino operations.
The unmistakable conclusion is that PAGCOR
is not liable for the P30,152,892.02 VAT and
neither is Acesite as the latter is effectively
subject to zero percent rate under Sec. 108 B
(3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or
individuals dealing with PAGCOR, the legislature clearly
granted exemption also from indirect taxes. It must be
noted that the indirect tax of VAT, as in the instant case,
can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or
individuals dealing with PAGCOR in casino operations, it
is exempting PAGCOR from being liable to indirect
taxes.
The manner of charging VAT does not make PAGCOR
liable to said tax.
It is true that VAT can either be incorporated in the
value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such
value, or charged as an additional 10% to the value.
Verily, the seller or lessor has the option to follow either
way in charging its clients and customer. In the instant
case, Acesite followed the latter method, that is,
charging an additional 10% of the gross sales and
rentals. Be that as it may, the use of either method, and
in particular, the first method, does not denigrate the
fact that PAGCOR is exempt from an indirect tax, like
VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the
10% VAT charged by Acesite, the latter is not liable for
the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax.
Such exemption falls within the former Section 102 (b)
(3) of the 1977 Tax Code, as amended (now Sec. 108
[b] [3] of R.A. 8424), which provides:
Section 102.Value-added tax on sale of
services. (a) Rate and base of tax There
shall be levied, assessed and collected, a
value-added tax equivalent to 10% of gross
receipts derived by any person engaged in
the sale of services . . .; Provided, that the
following services performed in the Philippines
by VATregistered persons shall be subject to
0%.
xxx xxx xxx
(3)Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively subjects
the supply of such services to zero (0%) rate
(emphasis supplied).
The rationale for the exemption from indirect taxes
provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with
PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v.
John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO)
upon an international agreement was upheld. We held
in said case that the exemption of contractee WHO
should be implemented to mean that the entity or
person exempt is the contractor itself who constructed
the building owned by contractee WHO, and such
does not violate the rule that tax exemptions are
personal because the manifest intention of the
agreement is to exempt the contractor so that no
contractor's tax may be shifted to the contractee WHO.
Thus, the proviso in P.D. 1869, extending the exemption
to entities or individuals dealing with PAGCOR in casino
operations, is clearly to proscribe any indirect tax, like
VAT, that may be shifted to PAGCOR. 40SCHIcT
Although the basis of the exemption of PAGCOR and Acesite from VAT in the
case of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which
section was retained as Section 108 (B) (3) in R.A. No. 8424, 41 it is still
applicable to this case, since the provision relied upon has been retained in
R.A. No. 9337. 42
It is settled rule that in case of discrepancy between the basic law and a rule
or regulation issued to implement said law, the basic law prevails, because
the said rule or regulation cannot go beyond the terms and provisions of the
basic law. 43 RR No. 16-2005, therefore, cannot go beyond the provisions of
R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR
exceeded its authority in subjecting PAGCOR to 10% VAT under RR No. 16-
2005; hence, the said regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No.
9337, amending Section 27 (c) of the National Internal Revenue Code of 1997,
by excluding petitioner Philippine Amusement and Gaming Corporation from
the enumeration of government-owned and controlled corporations
exempted from corporate income tax is valid and constitutional, while BIR
Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is
null and void for being contrary to the National Internal Revenue Code of
1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.
Corona, C.J., Carpio, Carpio Morales, Velasco, Jr., Leonardo-de Castro,
Bersamin, Del Castillo, Abad, Villarama, Jr., Perez, Mendoza and Sereno, JJ.,
concur.
||| (PAGCOR v. BIR, G.R. No. 172087, March 15, 2011)


THIRD DIVISION
[G.R. No. 178788. September 29, 2010.]
UNITED AIRLINES, INC., petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
DECISION
VILLARAMA, JR., J p:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, of the Decision 1 dated July 5, 2007 of the Court
of Tax Appeals En Banc (CTA En Banc)in C.T.A. EB No. 227 denying petitioner's
claim for tax refund of P5.03 million.
The undisputed facts are as follows:
Petitioner United Airlines, Inc. is a foreign corporation organized and existing
under the laws of the State of Delaware, U.S.A., engaged in the international
airline business.
Petitioner used to be an online international carrier of passenger and cargo,
i.e., it used to operate passenger and cargo flights originating in the
Philippines. Upon cessation of its passenger flights in and out of the Philippines
beginning February 21, 1998, petitioner appointed a sales agent in the
Philippines Aerotel Ltd. Corp., an independent general sales agent acting
as such for several international airline companies. 2 Petitioner continued
operating cargo flights from the Philippines until January 31, 2001. 3
On April 12, 2002, petitioner filed with respondent Commissioner a claim for
income tax refund, pursuant to Section 28 (A) (3) (a) 4 of the National Internal
Revenue Code of 1997 (NIRC) in relation to Article 4 (7) 5 of the Convention
between the Government of the Republic of the Philippines and the
Government of the United States of America with respect to Income Taxes
(RP-US Tax Treaty). Petitioner sought to refund the total amount of
P15,916,680.69 pertaining to income taxes paid on gross passenger and cargo
revenues for the taxable years 1999 to 2001, which included the amount of
P5,028,813.23 allegedly representing income taxes paid in 1999 on passenger
revenue from tickets sold in the Philippines, the uplifts of which did not
originate in the Philippines. Citing the change in definition of Gross Philippine
Billings (GPB) in the NIRC, petitioner argued that since it no longer operated
passenger flights originating from the Philippines beginning February 21, 1998,
its passenger revenue for 1999, 2000 and 2001 cannot be considered as
income from sources within the Philippines, and hence should not be subject
to Philippine income tax under Article 9 6 of the RP-US Tax Treaty. 7cCAIDS
As no resolution on its claim for refund had yet been made by the respondent
and in view of the two (2)-year prescriptive period (from the time of filing the
Final Adjustment Return for the taxable year 1999) which was about to expire
on April 15, 2002, petitioner filed on said date a petition for review with the
Court of Tax Appeals (CTA). 8
Petitioner asserted that under the new definition of GPB under the 1997 NIRC
and Article 4 (7) of the RP-US Tax Treaty, Philippine tax authorities have
jurisdiction to tax only the gross revenue derived by US air and shipping
carriers from outgoing traffic in the Philippines. Since the Bureau of Internal
Revenue (BIR) erroneously imposed and collected income tax in 1999 based
on petitioner's gross passenger revenue, as beginning 1998 petitioner no
longer flew passenger flights to and from the Philippines, petitioner is entitled
to a refund of such erroneously collected income tax in the amount of
P5,028,813.23. 9
In its Decision 10 dated May 18, 2006, the CTA's First Division 11 ruled that no
excess or erroneously paid tax may be refunded to petitioner because the
income tax on GPB under Section 28 (A) (3) (a) of the NIRC applies as well to
gross revenue from carriage of cargoes originating from the Philippines. It
agreed that petitioner cannot be taxed on its 1999 passenger revenue from
flights originating outside the Philippines. However, in reporting a cargo
revenue of P740.33 million in 1999, it was found that petitioner deducted two
(2) items from its gross cargo revenue of P2.84 billion: P141.79 million as
commission and P1.98 billion as other incentives of its agent. These deductions
were erroneous because the gross revenue referred to in Section 28 (A) (3) (a)
of the NIRC was total revenue before any deduction of commission and
incentives. Petitioner's gross cargo revenue in 1999, being P2.84 billion, the
GPB tax thereon was P42.54 million and not P11.1 million, the amount
petitioner paid for the reported net cargo revenue of P740.33 million. The CTA
First Division further noted that petitioner even underpaid its taxes on cargo
revenue by P31.43 million, which amount was much higher than the P5.03
million it asked to be refunded.
A motion for reconsideration was filed by petitioner but the First Division
denied the same. It held that petitioner's claim for tax refund was not offset
with its tax liability; that petitioner's tax deficiency was due to erroneous
deductions from its gross cargo revenue; that it did not make an assessment
against petitioner; and that it merely determined if petitioner was entitled to a
refund based on the undisputed facts and whether petitioner had paid the
correct amount of tax. 12
Petitioner elevated the case to the CTA En Banc which affirmed the decision
of the First Division.
Hence, this petition anchored on the following grounds:
I.THE CTA EN BANC GROSSLY ERRED IN DENYING THE
PETITIONER'S CLAIM FOR REFUND OF
ERRONEOUSLY PAID INCOME TAX ON GROSS
PHILIPPINE BILLINGS [GPB] BASED ON ITS
FINDING THAT PETITIONER'S UNDERPAYMENT
OF [P31.43 MILLION] GPB TAX ON CARGO
REVENUES IS A LOT HIGHER THAN THE GPB TAX
OF [P5.03 MILLION] ON PASSENGER REVENUES,
WHICH IS THE SUBJECT OF THE INSTANT CLAIM
FOR REFUND. THE DENIAL OF PETITIONER'S
CLAIM ON SUCH GROUND CLEARLY
AMOUNTS TO AN OFF-SETTING OF TAX
LIABILITIES, CONTRARY TO WELL-SETTLED
JURISPRUDENCE. prcd
II.THE DECISION OF THE CTA EN BANC VIOLATED
PETITIONER'S RIGHT TO DUE PROCESS.
III.THE CTA EN BANC ACTED IN EXCESS OF ITS
JURISDICTION BY DENYING PETITIONER'S CLAIM
FOR REFUND OF ERRONEOUSLY PAID INCOME
TAX ON GROSS PHILIPPINE BILLINGS BASED ON
ITS FINDING THAT PETITIONER UNDERPAID GPB
TAX ON CARGO REVENUES IN THE AMOUNT
OF [P31.43 MILLION] FOR THE TAXABLE YEAR
1999.
IV.THE CTA EN BANC HAS NO AUTHORITY UNDER THE
LAW TO MAKE ANY ASSESSMENTS FOR
DEFICIENCY TAXES. THE AUTHORITY TO MAKE
ASSESSMENTS FOR DEFICIENCY NATIONAL
INTERNAL REVENUE TAXES IS VESTED BY THE
1997 NIRC UPON RESPONDENT.
V.ANY ASSESSMENT AGAINST PETITIONER FOR
DEFICIENCY INCOME TAX FOR THE TAXABLE
YEAR 1999 IS ALREADY BARRED BY
PRESCRIPTION. 13
The main issue to be resolved is whether the petitioner is entitled to a refund of
the amount of P5,028,813.23 it paid as income tax on its passenger revenues
in 1999.
Petitioner argues that its claim for refund of erroneously paid GPB tax on off-
line passenger revenues cannot be denied based on the finding of the CTA
that petitioner allegedly underpaid the GPB tax on cargo revenues by
P31,431,171.09, which underpayment is allegedly higher than the GPB tax of
P5,028,813.23 on passenger revenues, the amount of the instant claim. The
denial of petitioner's claim for refund on such ground is tantamount to an
offsetting of petitioner's claim for refund of erroneously paid GPB against its
alleged tax liability. Petitioner thus cites the well-entrenched rule in taxation
cases that internal revenue taxes cannot be the subject of set-off or
compensation. 14
According to petitioner, the offsetting of the liabilities is very clear in the
instant case because the amount of petitioner's claim for refund of
erroneously paid GPB tax of P5,028,813.23 for the taxable year 1999 is being
offset against petitioner's alleged deficiency GPB tax liability on cargo
revenues for the same year, which was not even the subject of an
investigation nor any valid assessment issued by respondent against the
petitioner. Under Section 228 15 of the NIRC, 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." This administrative process of issuing an
assessment is part of procedural due process enshrined in the 1987
Constitution. Records do not show that petitioner has been assessed by the
BIR for any deficiency GBP tax for 1999, nor was there any finding or
investigation being conducted by respondent of any liability of petitioner for
GPB tax for the said taxable period. Clearly, petitioner's right to due process
was violated. 16cdasiajur
Petitioner further argues that the CTA acted in excess of its jurisdiction
because the exclusive appellate jurisdiction of the CTA covers only decisions
or inactions of the respondent in cases involving disputed assessments. The
CTA has effectively assessed petitioner with a P31.43 million tax deficiency
when it concluded that petitioner underpaid its GPB tax on cargo revenue.
Since respondent did not issue an assessment for any deficiency tax, the
alleged deficiency tax on its cargo revenue in 1999 cannot be considered a
disputed assessment that may be passed upon by the CTA. Petitioner stresses
that the authority to issue an assessment for deficiency internal revenue taxes
is vested by law on respondent, not with the CTA. 17
Lastly, petitioner argues that any assessment against it for deficiency income
tax for taxable year 1999 is barred by prescription. Petitioner claims that the
prescriptive period within which an assessment for deficiency income tax may
be made has prescribed on April 17, 2003, three (3) years after it filed its 1999
tax return. 18
Respondent Commissioner maintains that the CTA acted within its jurisdiction
in denying petitioner's claim for tax refund. It points out that the objective of
the CTA's determination of whether petitioner correctly paid its GPB tax for the
taxable year 1999 was to ascertain the latter's entitlement to the claimed
refund and not for the purpose of imposing any deficiency tax. Hence,
petitioner's arguments regarding the propriety of the CTA's determination of its
deficiency tax on its GPB for gross cargo revenues for 1999 are clearly
misplaced. 19
The petition has no merit.
As correctly pointed out by petitioner, inasmuch as it ceased operating
passenger flights to or from the Philippines in 1998, it is not taxable under
Section 28 (A) (3) (a) of the NIRC for gross passenger revenues. This much was
also found by the CTA. In South African Airways v. Commissioner of Internal
Revenue, 20 we ruled that the correct interpretation of the said provisions is
that, if an international air carrier maintains flights to and from the Philippines,
it shall be taxed at the rate of 2 1/2% of its GPB, while international air carriers
that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of
such income.
Here, the subject of claim for tax refund is the tax paid on passenger revenue
for taxable year 1999 at the time when petitioner was still operating cargo
flights originating from the Philippines although it had ceased passenger flight
operations. The CTA found that petitioner had underpaid its GPB tax for 1999
because petitioner had made deductions from its gross cargo revenues in the
income tax return it filed for the taxable year 1999, the amount of
underpayment even greater than the refund sought for erroneously paid GPB
tax on passenger revenues for the same taxable period. Hence, the CTA ruled
petitioner is not entitled to a tax refund. DHcTaE
Petitioner's arguments regarding the propriety of such determination by the
CTA are misplaced.
Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner
made erroneous deductions on its gross cargo revenue; that because of the
erroneous deductions, petitioner reported a lower cargo revenue and paid a
lower income tax thereon; and that petitioner's underpayment of the income
tax on cargo revenue is even higher than the income tax it paid on passenger
revenue subject of the claim for refund, such that the refund cannot be
granted.
Section 72 of the NIRC reads:
SEC. 72.Suit to Recover Tax Based on False or Fraudulent
Returns. When an assessment is made in case of any
list, statement or return, which in the opinion of the
Commissioner was false or fraudulent or contained any
understatement or undervaluation, no tax collected
under such assessment shall be recovered by any suit,
unless it is proved that the said list, statement or return
was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be
made in good faith regarding annual depreciation of
oil or gas wells and mines.
In the afore-cited case of South African Airways, this Court rejected similar
arguments on the denial of claim for tax refund, as follows:
Precisely, petitioner questions the offsetting of its payment
of the tax under Sec. 28(A)(3)(a) with their liability under
Sec. 28(A)(1), considering that there has not yet been any
assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of
legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of
legal compensation, to wit:
Art. 1279.In order that compensation may be
proper, it is necessary:
(1)That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2)That both debts consist in a sum of money, or
if the things due are consumable, they be of the
same kind, and also of the same quality if the
latter has been stated;
(3)That the two debts be due;
(4)That they be liquidated and demandable;
(5)That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor. CTHaSD
And we ruled in Philex Mining Corporation v.
Commissioner of Internal Revenue, thus:
In several instances prior to the instant case, we
have already made the pronouncement that
taxes cannot be subject to compensation for
the simple reason that the government and the
taxpayer are not creditors and debtors of each
other. There is a material distinction between a
tax and debt. Debts are due to the Government
in its corporate capacity, while taxes are due to
the Government in its sovereign capacity. We
find no cogent reason to deviate from the
aforementioned distinction.
Prescinding from this premise, in Francia v.
Intermediate Appellate Court, we categorically
held that taxes cannot be subject to set-off or
compensation, thus:
We have consistently ruled that there
can be no off-setting of taxes against
the claims that the taxpayer may
have against the government. A
person cannot refuse to pay a tax on
the ground that the government owes
him an amount equal to or greater
than the tax being collected. The
collection of a tax cannot await the
results of a lawsuit against the
government.
The ruling in Francia has been applied to the
subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes
due from the claims that he may have
against the government. Taxes cannot
be the subject of compensation
because the government and
taxpayer are not mutually creditors
and debtors of each other and a
claim for taxes is not such a debt,
demand, contract or judgment as is
allowed to be set-off.
Verily, petitioner's argument is correct that the offsetting of
its tax refund with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,
however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of
Tax Appeals erred in denying petitioner's
supplemental motion for reconsideration
alleging bringing to said court's attention the
existence of the deficiency income and
business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately
related to and inextricably intertwined with the
right of respondent bank to claim for a tax
refund for the same year. To award such refund
despite the existence of that deficiency
assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent
cannot be entitled to refund and at the same
time be liable for a tax deficiency assessment
for the same year. DACTSa
The grant of a refund is founded on the
assumption that the tax return is valid, that is, the
facts stated therein are true and correct. The
deficiency assessment, although not yet final,
created a doubt as to and constitutes a
challenge against the truth and accuracy of the
facts stated in said return which, by itself and
without unquestionable evidence, cannot be
the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal
Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was
filed, provides that "(w)hen an assessment is
made in case of any list, statement, or return,
which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or
contained any understatement or
undervaluation, no tax collected under such
assessment shall be recovered by any suits
unless it is proved that the said list, statement, or
return was not false nor fraudulent and did not
contain any understatement or undervaluation;
but this provision shall not apply to statements or
returns made or to be made in good faith
regarding annual depreciation of oil or gas wells
and mines."
Moreover, to grant the refund without
determination of the proper assessment and the
tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency
assessment should subsequently be upheld, the
Government will be forced to institute anew a
proceeding for the recovery of erroneously
refunded taxes which recourse must be filed
within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the
false or fraudulent return involved. This would
necessarily require and entail additional efforts
and expenses on the part of the Government,
impose a burden on and a drain of government
funds, and impede or delay the collection of
much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and
unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that
the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its claim
for tax refund, to determine once and for all in a
single proceeding the true and correct amount
of tax due or refundable.
In fact, as the Court of Tax Appeals itself has
heretofore conceded, it would be only just and
fair that the taxpayer and the Government alike
be given equal opportunities to avail of
remedies under the law to defeat each other's
claim and to determine all matters of dispute
between them in one single case. It is important
to note that in determining whether or not
petitioner is entitled to the refund of the amount
paid, it would [be] necessary to determine how
much the Government is entitled to collect as
taxes. This would necessarily include the
determination of the correct liability of the
taxpayer and, certainly, a determination of this
case would constitute res judicata on both
parties as to all the matters subject thereof or
necessarily involved therein. (Emphasis
supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72,
Chapter XI of the 1997 NIRC. The above pronouncements
are, therefore, still applicable today. EaISDC
Here, petitioner's similar tax refund claim assumes that the
tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec.
28(A)(1), the correctness of the return filed by petitioner is
now put in doubt. As such, we cannot grant the prayer for
a refund. 21 (Additional emphasis supplied.)
In the case at bar, the CTA explained that it merely determined whether
petitioner is entitled to a refund based on the facts. On the assumption that
petitioner filed a correct return, it had the right to file a claim for refund of GPB
tax on passenger revenues it paid in 1999 when it was not operating
passenger flights to and from the Philippines. However, upon examination by
the CTA, petitioner's return was found erroneous as it understated its gross
cargo revenue for the same taxable year due to deductions of two (2) items
consisting of commission and other incentives of its agent. Having underpaid
the GPB tax due on its cargo revenues for 1999, petitioner is not entitled to a
refund of its GPB tax on its passenger revenue, the amount of the former
being even much higher (P31.43 million) than the tax refund sought (P5.2
million). The CTA therefore correctly denied the claim for tax refund after
determining the proper assessment and the tax due. Obviously, the matter of
prescription raised by petitioner is a non-issue. The prescriptive periods under
Sections 203 22 and 222 23 of the NIRC find no application in this case.
We must emphasize that tax refunds, like tax exemptions, are construed strictly
against the taxpayer and liberally in favor of the taxing authority. 24 In any
event, petitioner has not discharged its burden of proof in establishing the
factual basis for its claim for a refund and we find no reason to disturb the
ruling of the CTA. It has been a long-standing policy and practice of the Court
to respect the conclusions of quasi-judicial agencies such as the CTA, a highly
specialized body specifically created for the purpose of reviewing tax cases.
25
WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision
dated July 5, 2007 of the Court of Tax Appeals En Banc in C.T.A. EB No. 227.
With costs against the petitioner.
SO ORDERED.||| (United Airlines, Inc. v. Commr., G.R. No. 178788, September
29, 2010)
[G.R. Nos. 179045-46. August 25, 2010.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
SMART COMMUNICATION, INC., *respondent.
DECISION
DEL CASTILLO, J p:
The right of a withholding agent to claim a refund of erroneously or illegally
withheld taxes comes with the responsibility to return the same to the principal
taxpayer.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks
to set aside the Decision 1 dated June 28, 2007 and the Resolution 2 dated
July 31, 2007 of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Respondent Smart Communications, Inc. is a corporation organized and
existing under Philippine law. It is an enterprise duly registered with the Board
of Investments.
On May 25, 2001, respondent entered into three Agreements for Programming
and Consultancy Services 3 with Prism Transactive (M) Sdn. Bhd. (Prism), a non-
resident corporation duly organized and existing under the laws of Malaysia.
Under the agreements, Prism was to provide programming and consultancy
services for the installation of the Service Download Manager (SDM) and the
Channel Manager (CM), and for the installation and implementation of Smart
Money and Mobile Banking Service SIM Applications (SIM Applications) and
Private Text Platform (SIM Application).
On June 25, 2001, Prism billed respondent in the amount of US$547,822.45,
broken down as follows:
SDM AgreementUS$236,000.00
CM Agreement296,000.00
SIM Application Agreement15,822.45

TotalUS$547,822.45 4
=============
Thinking that these payments constitute royalties, respondent withheld the
amount of US$136,955.61 or P7,008,840.43, 5 representing the 25% royalty tax
under the RP-Malaysia Tax Treaty. 6ITScAE
On September 25, 2001, respondent filed its Monthly Remittance Return of
Final Income Taxes Withheld (BIR Form No. 1601-F) 7 for the month of August
2001.
On September 24, 2003, or within the two-year period to claim a refund,
respondent filed with the Bureau of Internal Revenue (BIR), through the
International Tax Affairs Division (ITAD), an administrative claim for refund 8 of
the amount of P7,008,840.43.
Proceedings before the CTA Second Division
Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to
act on the claim for refund, respondent filed a Petition for Review 9 with the
CTA, docketed as CTA Case No. 6782 which was raffled to its Second Division.
In its Petition for Review, respondent claimed that it is entitled to a refund
because the payments made to Prism are not royalties 10 but "business
profits," 11 pursuant to the definition of royalties under the RP-Malaysia Tax
Treaty, 12 and in view of the pertinent Commentaries of the Organization for
Economic Cooperation and Development (OECD) Committee on Fiscal
Affairs through the Technical Advisory Group on Treaty Characterization of
Electronic Commerce Payments. 13 Respondent further averred that since
under Article 7 of the RP-Malaysia Tax Treaty, "business profits" are taxable in
the Philippines "only if attributable to a permanent establishment in the
Philippines, the payments made to Prism, a Malaysian company with no
permanent establishment in the Philippines," 14 should not be taxed. 15
On December 1, 2003, petitioner filed his Answer 16 arguing that respondent,
as withholding agent, is not a party-in-interest to file the claim for refund, 17
and that assuming for the sake of argument that it is the proper party, there is
no showing that the payments made to Prism constitute "business profits." 18
Ruling of the CTA Second Division
In a Decision 19 dated February 23, 2006, the Second Division of the CTA
upheld respondent's right, as a withholding agent, to file the claim for refund
citing the cases of Commissioner of Internal Revenue v. Wander Philippines,
Inc., 20Commissioner of Internal Revenue v. Procter & Gamble Philippine
Manufacturing Corporation21 and Commissioner of Internal Revenue v. The
Court of Tax Appeals. 22
However, as to the claim for refund, the Second Division found respondent
entitled only to a partial refund. Although it agreed with respondent that the
payments for the CM and SIM Application Agreements are "business profits,"
23 and therefore, not subject to tax 24 under the RP-Malaysia Tax Treaty, the
Second Division found the payment for the SDM Agreement a royalty subject
to withholding tax. 25 Accordingly, respondent was granted refund in the
amount of P3,989,456.43, computed as follows: 26cESDCa
ParticularsAmount (in US$)
1.CM296,000.00
2.SIM Application15,822.45

TotalUS$311,822.45
===========
ParticularsAmount
Tax BaseUS$311,822.45
Multiply by: Withholding Tax Rate25%

Final Withholding TaxUS$77,955.61
Multiply by: Prevailing Exchange Rate51.176

Tax Refund DueP3,989,456.43
============
The dispositive portion of the Decision of the CTA Second Division reads:
WHEREFORE, premises considered, the instant petition is
partially GRANTED. Accordingly, respondent
Commissioner of Internal Revenue is hereby ORDERED
to REFUND or ISSUE a TAX CREDIT CERTIFICATE to
petitioner Smart Communications, Inc. in the amount of
P3,989,456.43, representing overpaid final withholding
taxes for the month of August 2001.
SO ORDERED. 27
Both parties moved for partial reconsideration 28 but the CTA Second Division
denied the motions in a Resolution 29 dated July 18, 2006.
Ruling of the CTA En Banc
Unsatisfied, both parties appealed to the CTA En Banc by filing their
respective Petitions for Review, 30 which were consolidated per Resolution 31
dated February 8, 2007.
On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial
refund granted to respondent. In sustaining respondent's right to file the claim
for refund, the CTA En Banc said that although respondent "and Prism are
unrelated entities, such circumstance does not affect the status of
[respondent] as a party-in-interest [as its legal interest] is based on its direct
and independent liability under the withholding tax system." 32 The CTA En
Banc also concurred with the Second Division's characterization of the
payments made to Prism, specifically that the payments for the CM and SIM
Application Agreements constitute "business profits," 33 while the payment for
the SDM Agreement is a royalty. 34
The dispositive portion of the CTA En Banc Decision reads: IHCESD
WHEREFORE, the instant petition is hereby DISMISSED.
Accordingly, the assailed Decision and Resolution are
hereby AFFIRMED.
SO ORDERED. 35
Only petitioner sought reconsideration 36 of the Decision. The CTA En Banc,
however, found no cogent reason to reverse its Decision, and thus, denied
petitioner's motion for reconsideration in a Resolution 37 dated July 31, 2007.
Unfazed, petitioner availed of the present recourse.
Issues
The two issues to be resolved are: (1) whether respondent has the right to file
the claim for refund; and (2) if respondent has the right, whether the
payments made to Prism constitute "business profits" or royalties.
Petitioner's Arguments
Petitioner contends that the cases relied upon by the CTA in upholding
respondent's right to claim the refund are inapplicable since the withholding
agents therein are wholly owned subsidiaries of the principal taxpayers, unlike
in the instant case where the withholding agent and the taxpayer are
unrelated entities. Petitioner further claims that since respondent did not file
the claim on behalf of Prism, it has no legal standing to claim the refund. To
rule otherwise would result to the unjust enrichment of respondent, who never
shelled-out any amount to pay the royalty taxes. Petitioner, thus, posits that
the real party-in-interest to file a claim for refund of the erroneously withheld
taxes is Prism. He cites as basis the case of Silkair (Singapore) Pte, Ltd. v.
Commissioner of Internal Revenue, 38 where it was ruled that the proper party
to file a refund is the statutory taxpayer. 39 Finally, assuming that respondent is
the proper party, petitioner counters that it is still not entitled to any refund
because the payments made to Prism are taxable as royalties, having been
made in consideration for the use of the programs owned by Prism.
Respondent's Arguments
Respondent, on the other hand, maintains that it is the proper party to file a
claim for refund as it has the statutory and primary responsibility and liability to
withhold and remit the taxes to the BIR. It points out that under the withholding
tax system, the agent-payor becomes a payee by fiction of law because the
law makes the agent personally liable for the tax arising from the breach of its
duty to withhold. Thus, the fact that respondent is not in any way related to
Prism is immaterial.
Moreover, respondent asserts that the payments made to Prism do not fall
under the definition of royalties since the agreements are for programming
and consultancy services only, wherein Prism undertakes to perform services
for the creation, development or the bringing into existence of software
applications solely for the satisfaction of the peculiar needs and requirements
of respondent.
Our Ruling
The petition is bereft of merit. ASCTac
Withholding agent may file a claim for
refund
Sections 204 (c) and 229 of the National Internal Revenue Code (NIRC)
provide:
Sec. 204.Authority of the Commissioner to Compromise,
Abate, and Refund or Credit Taxes. The Commissioner
may
xxx xxx xxx
(C)Credit or refund taxes erroneously or illegally
received or penalties imposed without authority, refund
the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have
been rendered unfit for use and refined their value
upon proof of destruction. No credit or refund of taxes
or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or
refund within two (2) years after the payment of the tax
or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a
written claim for credit or refund.
xxx xxx xxx
Sec. 229.Recovery of Tax Erroneously or Illegally
Collected. No suit or proceeding shall be maintained
in any court for the recovery of any national internal
revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without
authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until
a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum
has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed
after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any
supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any
tax, where on the face of the return upon which
payment was made, such payment appears clearly to
have been erroneously paid. (Emphasis supplied)
Pursuant to the foregoing, the person entitled to claim a tax refund is the
taxpayer. However, in case the taxpayer does not file a claim for refund, the
withholding agent may file the claim.
In Commissioner of Internal Revenue v. Procter & Gamble Philippine
Manufacturing Corporation,40 a withholding agent was considered a proper
party to file a claim for refund of the withheld taxes of its foreign parent
company. Pertinent portions of the Decision read:
The term "taxpayer" is defined in our NIRC as referring to
"any person subject to tax imposed by the Title [on Tax
on Income]." It thus becomes important to note that
under Section 53(c) 41 of the NIRC, the withholding
agent who is "required to deduct and withhold any tax"
is made "personally liable for such tax" and indeed is
indemnified against any claims and demands which
the stockholder might wish to make in questioning the
amount of payments effected by the withholding
agent in accordance with the provisions of the NIRC.
The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax
that should be withheld from the dividend remittances.
The withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be
finally found to be less than the amount that should
have been withheld under law. SCcHIE
A "person liable for tax" has been held to be a "person
subject to tax" and properly considered a "taxpayer."
The terms "liable for tax" and "subject to tax" both
connote legal obligation or duty to pay a tax. It is very
difficult, indeed conceptually impossible, to consider a
person who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from
him.
In Philippine Guaranty Company, Inc. v. Commissioner
of Internal Revenue, this Court pointed out that a
withholding agent is in fact the agent both of the
government and of the taxpayer, and that the
withholding agent is not an ordinary government
agent:
"The law sets no condition for the personal
liability of the withholding agent to attach.
The reason is to compel the withholding
agent to withhold the tax under all
circumstances. In effect, the responsibility for
the collection of the tax as well as the
payment thereof is concentrated upon the
person over whom the Government has
jurisdiction. Thus, the withholding agent is
constituted the agent of both the
Government and the taxpayer. With respect
to the collection and/or withholding of the
tax, he is the Government's agent. In regard
to the filing of the necessary income tax
return and the payment of the tax to the
Government, he is the agent of the taxpayer.
The withholding agent, therefore, is no
ordinary government agent especially
because under Section 53 (c) he is held
personally liable for the tax he is duty bound
to withhold; whereas the Commissioner and
his deputies are not made liable by law."
If, as pointed out in Philippine Guaranty,the withholding
agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary
income tax return and with respect to actual payment
of the tax to the government, such authority may
reasonably be held to include the authority to file a
claim for refund and to bring an action for recovery of
such claim. This implied authority is especially
warranted where, as in the instant case, the
withholding agent is the wholly owned subsidiary of the
parent-stockholder and therefore, at all times, under
the effective control of such parent-stockholder. In the
circumstances of this case, it seems particularly unreal
to deny the implied authority of P&G-Phil. to claim a
refund and to commence an action for such refund.
xxx xxx xxx
We believe and so hold that, under the circumstances
of this case, P&G-Phil. is properly regarded as a
"taxpayer" within the meaning of Section 309, 42 NIRC,
and as impliedly authorized to file the claim for refund
and the suit to recover such claim. (Emphasis supplied.)
Petitioner, however, submits that this ruling applies only when the withholding
agent and the taxpayer are related parties, i.e., where the withholding agent
is a wholly owned subsidiary of the taxpayer. TaDSHC
We do not agree.
Although such relation between the taxpayer and the withholding agent is a
factor that increases the latter's legal interest to file a claim for refund, there is
nothing in the decision to suggest that such relationship is required or that the
lack of such relation deprives the withholding agent of the right to file a claim
for refund. Rather, what is clear in the decision is that a withholding agent has
a legal right to file a claim for refund for two reasons. First, he is considered a
"taxpayer" under the NIRC as he is personally liable for the withholding tax as
well as for deficiency assessments, surcharges, and penalties, should the
amount of the tax withheld be finally found to be less than the amount that
should have been withheld under law. Second, as an agent of the taxpayer,
his authority to file the necessary income tax return and to remit the tax
withheld to the government impliedly includes the authority to file a claim for
refund and to bring an action for recovery of such claim.
In this connection, it is however significant to add that while the withholding
agent has the right to recover the taxes erroneously or illegally collected, he
nevertheless has the obligation to remit the same to the principal taxpayer. As
an agent of the taxpayer, it is his duty to return what he has recovered;
otherwise, he would be unjustly enriching himself at the expense of the
principal taxpayer from whom the taxes were withheld, and from whom he
derives his legal right to file a claim for refund.
As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue43 cited
by the petitioner, we find the same inapplicable as it involves excise taxes, not
withholding taxes. In that case, it was ruled that the proper party to question,
or seek a refund of, an indirect tax "is the statutory taxpayer, the person on
whom the tax is imposed by law and who paid the same even if he shifts the
burden thereof to another."
In view of the foregoing, we find no error on the part of the CTA in upholding
respondent's right as a withholding agent to file a claim for refund.
The payments for the CM and the SIM
Application Agreements constitute
"business profits"
Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of
any kind received as consideration for: "(i) the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, any
copyright of literary, artistic or scientific work, or for the use of, or the right to
use, industrial, commercial, or scientific equipment, or for information
concerning industrial, commercial or scientific experience; (ii) the use of, or
the right to use, cinematograph films, or tapes for radio or television
broadcasting." 44 These are taxed at the rate of 25% of the gross amount.
45CHcTIA
Under the same Treaty, the "business profits" of an enterprise of a Contracting
State is taxable only in that State, unless the enterprise carries on business in
the other Contracting State through a permanent establishment. 46 The term
"permanent establishment" is defined as a fixed place of business where the
enterprise is wholly or partly carried on. 47 However, even if there is no fixed
place of business, an enterprise of a Contracting State is deemed to have a
permanent establishment in the other Contracting State if it carries on
supervisory activities in that other State for more than six months in connection
with a construction, installation or assembly project which is being undertaken
in that other State. 48
In the instant case, it was established during the trial that Prism does not have
a permanent establishment in the Philippines. Hence, "business profits" derived
from Prism's dealings with respondent are not taxable. The question is whether
the payments made to Prism under the SDM, CM, and SIM Application
agreements are "business profits" and not royalties.
Paragraph 1.3 of the Programming Services (Schedule A) of the SDM
Agreement, 49 reads:
1.3Intellectual Property Rights (IPR)
The SDM shall be installed by
PRISM, including the SDM
Libraries,the IPR of which shall be
retained by PRISM. PRISM,
however, shall provide the Client
the APIs for the SDM at no cost to
the Client. The Client shall be
permitted to develop programs
to interface with the SDM or the
SDM Libraries, using the related
APIs as appropriate. 50 (Emphasis
supplied.)
Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM
Agreement and paragraph 1.3 of the Programming Services (Schedule A) of
the SIM Agreement provide:
1.4Intellectual Property Rights (IPR)
TheIPR of all components of the
CM belong to the Clientwith the
exception of the following
components, which are
provided, without technical or
commercial restraints or
obligations:
ConfigurationException.java
DataStructures (DblLinkedListjava,
DblListNodejava,
ListEmptyException.java,
ListFullException.java,
ListNodeNotFoundException.java,
QueueEmptyException.java,
QueueFullException.java,
QueueList.java, QueuListEx.java,
and
QueueNodeNotFoundException.jav
a)
FieldMappedObjeet.java
LogFileEx.java
Logging (BaseLogger.java and
Logger.java)
PrismGenericException.java SIcCEA
PrismGenericObject.java
ProtocolBuilders/CIMD2 (Alive.java,
BaseMessageData.java,
DeliverMessage.java, Login.java,
Logout.java, Nack.java,
SubmitMessage.java,
TemplateManagement
(FileTemplateDataBag.java,
TemplateDataBag.java,
TemplateManagerExBag.java, and
TemplateParserExBag.java)
TemplateManager.class
TemplateServer.class
TemplateServer$RequestThread.class
Template Server_skel.class
TemplateServer_stub.class
TemplateService.class
Prism Crypto Server module for PHP4 51
xxx xxx xxx
1.3Intellectual Property Rights (IPR)
The Client shall own the IPR for
the Specifications and the Source
Code for the SIM Applications.
PRISM shall develop an
executable compiled code (the
"Executable Version") of the SIM
Applications for use on the
aSIMetric card which, however,
shall only be for the Client's use.
The Executable Version may not
be provided by PRISM to any
third [party] without the prior
written consent of the Client. It is
further recognized that the Client
anticipates licensing the use of
the SIM Applications, but it is
agreed that no license fee will be
charged to PRISM or to a
licensee of the aSIMetrix card
from PRISM when SIMs are
supplied to the Client. 52
(Emphases supplied.)
The provisions in the agreements are clear. Prism has intellectual property right
over the SDM program, but not over the CM and SIM Application programs as
the proprietary rights of these programs belong to respondent. In other words,
out of the payments made to Prism, only the payment for the SDM program is
a royalty subject to a 25% withholding tax. A refund of the erroneously
withheld royalty taxes for the payments pertaining to the CM and SIM
Application Agreements is therefore in order.
Indeed, the government has no right to retain what does not belong to it. "No
one, not even the State, should enrich oneself at the expense of another.''
53TADcCS
WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007
and the Resolution dated July 31, 2007 of the Court of Tax Appeals En Banc
are hereby AFFIRMED. The Bureau of Internal Revenue is hereby ORDERED to
ISSUE a TAX CREDIT CERTIFICATE to Prism Transactive (M) Sdn. Bhd. in the
amount of P3,989,456.43 representing the overpaid final withholding taxes for
the month of August 2001.
SO ORDERED.
||| (Commr. v. Smart Communication, Inc., G.R. Nos. 179045-46, August 25,
2010)


SECOND DIVISION
[G.R. No. 162175. June 28, 2010.]
MIGUEL J. OSSORIO PENSION FOUNDATION,
INCORPORATED, petitioner, vs. COURT OF APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
CARPIO, J p:
The Case
The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI)
filed this Petition for Certiorari1 with Prayer for the Issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction to reverse the Court of
Appeals' (CA) Decision 2 dated 30 May 2003 in CA-G.R. SP No. 61829 as well
as the Resolution 3 dated 7 November 2003 denying the Motion for
Reconsideration. In the assailed decision, the CA affirmed the Court of Tax
Appeals' (CTA) Decision 4 dated 24 October 2000. The CTA denied petitioner's
claim for refund of withheld creditable tax of P3,037,500 arising from the sale
of real property of which petitioner claims to be a co-owner as trustee of the
employees' trust or retirement funds.
The Facts
Petitioner, a non-stock and non-profit corporation, was organized for the
purpose of holding title to and administering the employees' trust or retirement
funds (Employees' Trust Fund) established for the benefit of the employees of
Victorias Milling Company, Inc. (VMC). 5 Petitioner, as trustee, claims that the
income earned by the Employees' Trust Fund is tax exempt under Section 53
(b) of the National Internal Revenue Code (Tax Code).
Petitioner alleges that on 25 March 1992, petitioner decided to invest part of
the Employees' Trust Fund to purchase a lot 6 in the Madrigal Business Park
(MBP lot) in Alabang, Muntinlupa. Petitioner bought the MBP lot through VMC.
7 Petitioner alleges that its investment in the MBP lot came about upon the
invitation of VMC, which also purchased two lots. Petitioner claims that its
share in the MBP lot is 49.59%. Petitioner's investment manager, the Citytrust
Banking Corporation (Citytrust), 8 in submitting its Portfolio Mix Analysis,
regularly reported the Employees' Trust Fund's share in the MBP lot. 9 The MBP
lot is covered by Transfer Certificate of Title No. 183907 (TCT 183907) with VMC
as the registered owner. 10
Petitioner claims that since it needed funds to pay the retirement and pension
benefits of VMC employees and to reimburse advances made by VMC,
petitioner's Board of Trustees authorized the sale of its share in the MBP lot. 11
On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan
Bank and Trust Company, Inc. (Metrobank) for P81,675,000, but the
consummation of the sale was withheld. 12 On 26 March 1997, VMC
eventually sold the MBP lot to Metrobank. VMC, through its Vice President
Rolando Rodriguez and Assistant Vice President Teodorico Escober, signed the
Deed of Absolute Sale as the sole vendor.
Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR)
P6,125,625 as withholding tax on the sale of real property.
Petitioner alleges that the parties who co-owned the MBP lot executed a
notarized Memorandum of Agreement as to the proceeds of the sale, the
pertinent provisions of which state: 13
2.The said parcels of land are actually co-owned by the
following:
BLOCK 4, LOT 1 COVERED BY TCT NO. 183907
% SQ. M. AMOUNT
MJOPFI 49.59% 450.00 P5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30
3.Since Lot 1 has been sold for P81,675,000.00 (gross of
7.5% withholding tax and 3% broker's commission,
MJOPFI's share in the proceeds of the sale is
P40,500,000.00 (gross of 7.5% withholding tax and 3%
broker's commission. However, MJO Pension Fund is
indebted to VMC representing pension benefit
advances paid to retirees amounting to P21,425,141.54,
thereby leaving a balance of P14,822,358.46 in favor of
MJOPFI. Check for said amount of P14,822,358.46 will
therefore be issued to MJOPFI as its share in the
proceeds of the sale of Lot 1. The check corresponding
to said amount will be deposited with MJOPFI's account
with BPI Asset Management & Trust Group which will
then be invested by it in the usual course of its
administration of MJOPFI funds.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the
Employees' Trust Fund, based on the notarized Memorandum of Agreement
presented before the appellate courts. Petitioner asserts that VMC has
confirmed that petitioner, as trustee of the Employees' Trust Fund, is VMC's co-
owner of the MBP lot. Petitioner maintains that its ownership of the MBP lot is
supported by the excerpts of the minutes and the resolutions of petitioner's
Board Meetings. Petitioner further contends that there is no dispute that the
Employees' Trust Fund is exempt from income tax. Since petitioner, as trustee,
purchased 49.59% of the MBP lot using funds of the Employees' Trust Fund,
petitioner asserts that the Employees' Trust Fund's 49.59% share in the income
tax paid (or P3,037,697.40 rounded off to P3,037,500) should be refunded. 14
Petitioner maintains that the tax exemption of the Employees' Trust Fund
rendered the payment of P3,037,500 as illegal or erroneous. On 5 May 1997,
petitioner filed a claim for tax refund. 15
On 14 August 1997, the BIR, through its Revenue District Officer, wrote
petitioner stating that under Section 26 of the Tax Code, petitioner is not
exempt from tax on its income from the sale of real property. The BIR asked
petitioner to submit documents to prove its co-ownership of the MBP lot and
its exemption from tax. 16
On 2 September 1997, petitioner replied that the applicable provision granting
its claim for tax exemption is not Section 26 but Section 53 (b) of the Tax Code.
Petitioner claims that its co-ownership of the MBP lot is evidenced by Board
Resolution Nos. 92-34 and 96-46 and the memoranda of agreement among
petitioner, VMC and its subsidiaries. 17
Since the BIR failed to act on petitioner's claim for refund, petitioner elevated
its claim to the Commissioner of Internal Revenue (CIR) on 26 October 1998.
The CIR did not act on petitioner's claim for refund. Hence, petitioner filed a
petition for tax refund before the CTA. On 24 October 2000, the CTA rendered
a decision denying the petition. 18
On 22 November 2000, petitioner filed its Petition for Review before the Court
of Appeals. On 20 May 2003, the CA rendered a decision denying the appeal.
The CA also denied petitioner's Motion for Reconsideration. 19
Aggrieved by the appellate court's Decision, petitioner elevated the case
before this Court.
The Ruling of the Court of Tax Appeals
The CTA held that under Section 53 (b) 20 [now Section 60 (b)] of the Tax
Code, it is not petitioner that is entitled to exemption from income tax but the
income or earnings of the Employees' Trust Fund. The CTA stated that
petitioner is not the pension trust itself but it is a separate and distinct entity
whose function is to administer the pension plan for some VMC employees. 21
The CTA, after evaluating the evidence adduced by the parties, ruled that
petitioner is not a party in interest.
To prove its co-ownership over the MBP lot, petitioner presented the following
documents:
a.Secretary's Certificate showing how the purchase
and eventual sale of the MBP lot came
about.
b.Memoranda of Agreement showing various details:
i.That the MBP lot was co-owned by VMC and
petitioner on a 50/50 basis;
ii.That VMC held the property in trust for North
Legaspi Land Development
Corporation, North Negros
Marketing Co., Inc., Victorias
Insurance Factors Corporation,
Victorias Science and Technical
Foundation, Inc. and Canetown
Development Corporation.
iii.That the previous agreement (ii) was
cancelled and it showed that the
MBP lot was co-owned by
petitioner, VMC and Victorias
Insurance Factors Corporation
(VFC). 22
The CTA ruled that these pieces of evidence are self-serving and cannot by
themselves prove petitioner's co-ownership of the MBP lot when the TCT, the
Deed of Absolute Sale, and the Monthly Remittance Return of Income Taxes
Withheld (Remittance Return) disclose otherwise. The CTA further ruled that
petitioner failed to present any evidence to prove that the money used to
purchase the MBP lot came from the Employees' Trust Fund. 23
The CTA concluded that petitioner is estopped from claiming a tax
exemption. The CTA pointed out that VMC has led the government to believe
that it is the sole owner of the MBP lot through its execution of the Deeds of
Absolute Sale both during the purchase and subsequent sale of the MBP lot
and through the registration of the MBP lot in VMC's name. Consequently, the
tax was also paid in VMC's name alone. The CTA stated that petitioner may
not now claim a refund of a portion of the tax paid by the mere expediency
of presenting Secretary's Certificates and memoranda of agreement in order
to prove its ownership. These documents are self-serving; hence, these
documents merit very little weight. 24
The Ruling of the Court of Appeals
The CA declared that the findings of the CTA involved three types of
documentary evidence that petitioner presented to prove its contention that
it purchased 49.59% of the MBP lot with funds from the Employees' Trust Fund:
(1) the memoranda of agreement executed by petitioner and other VMC
subsidiaries; (2) Secretary's Certificates containing excerpts of the minutes of
meetings conducted by the respective boards of directors or trustees of VMC
and petitioner; (3) Certified True Copies of the Portfolio Mix Analysis issued by
Citytrust regarding the investment of P5,504,748.25 in Madrigal Business Park I
for the years 1994 to 1997. 25
The CA agreed with the CTA that these pieces of documentary evidence
submitted by petitioner are largely self-serving and can be contrived easily.
The CA ruled that these documents failed to show that the funds used to
purchase the MBP lot came from the Employees' Trust Fund. The CA
explained, thus:
We are constrained to echo the findings of the Court of
Tax Appeals in regard to the failure of the petitioner to
ensure that legal documents pertaining to its
investments, e.g., title to the subject property, were
really in its name, considering its awareness of the
resulting tax benefit that such foresight or providence
would produce; hence, genuine efforts towards that
end should have been exerted, this notwithstanding the
alleged difficulty of procuring a title under the names of
all the co-owners. Indeed, we are unable to
understand why petitioner would allow the title of the
property to be placed solely in the name of petitioner's
alleged co-owner, i.e., the VMC, although it allegedly
owned a much bigger (nearly half), portion thereof.
Withal, petitioner failed to ensure a "fix" so to speak, on
its investment, and we are not impressed by the
documents which the petitioner presented, as the
same apparently allowed "mobility" of the subject real
estate assets between or among the petitioner, the
VMC and the latter's subsidiaries. Given the fact that
the subject parcel of land was registered and sold
under the name solely of VMC, even as payment of
taxes was also made only under its name, we cannot
but concur with the finding of the Court of Tax Appeals
that petitioner's claim for refund of withheld creditable
tax is bereft of solid juridical basis. 26
The Issues
The issues presented are:
1.Whether petitioner or the Employees' Trust Fund is
estopped from claiming that the Employees'
Trust Fund is the beneficial owner of 49.59% of
the MBP lot and that VMC merely held 49.59%
of the MBP lot in trust for the Employees' Trust
Fund.
2.If petitioner or the Employees' Trust Fund is not
estopped, whether they have sufficiently
established that the Employees' Trust Fund is
the beneficial owner of 49.59% of the MBP lot,
and thus entitled to tax exemption for its
share in the proceeds from the sale of the
MBP lot.
The Ruling of the Court
We grant the petition.
The law expressly allows a co-owner (first co-owner) of a parcel of land to
register his proportionate share in the name of his co-owner (second co-
owner) in whose name the entire land is registered. The second co-owner
serves as a legal trustee of the first co-owner insofar as the proportionate
share of the first co-owner is concerned. The first co-owner remains the owner
of his proportionate share and not the second co-owner in whose name the
entire land is registered. Article 1452 of the Civil Code provides:
Art. 1452.If two or more persons agree to purchase a
property and by common consent the legal title is
taken in the name of one of them for the benefit of all,
a trust is created by force of law in favor of the others in
proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is
"common consent" among the purchasing co-owners to put the legal title to
the purchased property in the name of one co-owner for the benefit of all.
Once this "common consent" is shown, "a trust is created by force of law." The
BIR has no option but to recognize such legal trust as well as the beneficial
ownership of the real owners because the trust is created by force of law. The
fact that the title is registered solely in the name of one person is not
conclusive that he alone owns the property.
Thus, this case turns on whether petitioner can sufficiently establish that
petitioner, as trustee of the Employees' Trust Fund, has a common agreement
with VMC and VFC that petitioner, VMC and VFC shall jointly purchase the
MBP lot and put the title to the MBP lot in the name of VMC for the benefit
petitioner, VMC and VFC.
We rule that petitioner, as trustee of the Employees' Trust Fund, has more than
sufficiently established that it has an agreement with VMC and VFC to
purchase jointly the MBP lot and to register the MBP lot solely in the name of
VMC for the benefit of petitioner, VMC and VFC.
Factual findings of the CTA will be reviewed
when judgment is based on a misapprehension of facts.
Generally, the factual findings of the CTA, a special court exercising expertise
on the subject of tax, are regarded as final, binding and conclusive upon this
Court, especially if these are substantially similar to the findings of the CA
which is normally the final arbiter of questions of fact. 27 However, there are
recognized exceptions to this rule, 28 such as when the judgment is based on
a misapprehension of facts.
Petitioner contends that the CA erred in evaluating the documents as self-
serving instead of considering them as truthful and genuine because they are
public documents duly notarized by a Notary Public and presumed to be
regular unless the contrary appears. Petitioner explains that the CA erred in
doubting the authenticity and genuineness of the three memoranda of
agreement presented as evidence. Petitioner submits that there is nothing
wrong in the execution of the three memoranda of agreement by the parties.
Petitioner points out that VMC authorized petitioner to administer its
Employees' Trust Fund which is basically funded by donation from its founder,
Miguel J. Ossorio, with his shares of stocks and share in VMC's profits. 29
Petitioner argues that the Citytrust report reflecting petitioner's investment in
the MBP lot is concrete proof that money of the Employees' Trust Funds was
used to purchase the MBP lot. In fact, the CIR did not dispute the authenticity
and existence of this documentary evidence. Further, it would be unlikely for
Citytrust to issue a certified copy of the Portfolio Mix Analysis stating that
petitioner invested in the MBP lot if it were not true. 30
Petitioner claims that substantial evidence is all that is required to prove
petitioner's co-ownership and all the pieces of evidence have overwhelmingly
proved that petitioner is a co-owner of the MBP lot to the extent of 49.59% of
the MBP lot. Petitioner explains:
Thus, how the parties became co-owners was shown by
the excerpts of the minutes and the resolutions of the
Board of Trustees of the petitioner and those of VMC. All
these documents showed that as far as March 1992,
petitioner already expressed intention to be co-owner
of the said property. It then decided to invest the
retirement funds to buy the said property and
culminated in it owning 49.59% thereof. When it was
sold to Metrobank, petitioner received its share in the
proceeds from the sale thereof. The excerpts and
resolutions of the parties' respective Board of Directors
were certified under oath by their respective Corporate
Secretaries at the time. The corporate certifications are
accorded verity by law and accepted as prima facie
evidence of what took place in the board meetings
because the corporate secretary is, for the time being,
the board itself. 31
Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC
registered the land solely in its name, it does not make VMC the absolute
owner of the whole property or deprive petitioner of its rights as a co-owner.
32 Petitioner argues that under the Torrens system, the issuance of a TCT does
not create or vest a title and it has never been recognized as a mode of
acquiring ownership. 33
The issues of whether petitioner or the Employees' Trust Fund is estopped from
claiming 49.59% ownership in the MBP lot, whether the documents presented
by petitioner are self-serving, and whether petitioner has proven its exemption
from tax, are all questions of fact which could only be resolved after
reviewing, examining and evaluating the probative value of the evidence
presented. The CTA ruled that the documents presented by petitioner cannot
prove its co-ownership over the MBP lot especially that the TCT, Deed of
Absolute Sale and the Remittance Return disclosed that VMC is the sole
owner and taxpayer.
However, the appellate courts failed to consider the genuineness and due
execution of the notarized Memorandum of Agreement acknowledging
petitioner's ownership of the MBP lot which provides:
2.The said parcels of land are actually co-owned by the
following:
BLOCK 4, LOT 1 COVERED BY TCT NO. 183907
% SQ. M. AMOUNT
MJOPFI 49.59% 450.00 P5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30
Thus, there is a "common consent" or agreement among petitioner, VMC
and VFC to co-own the MBP lot in the proportion specified in the
notarized Memorandum of Agreement.
In Cuizon v. Remoto,34 we held:
Documents acknowledged before notaries public are
public documents and public documents are
admissible in evidence without necessity of preliminary
proof as to their authenticity and due execution. They
have in their favor the presumption of regularity, and to
contradict the same, there must be evidence that is
clear, convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the
notarized Memorandum of Agreement is fictitious or has no legal effect.
Likewise, VMC, the registered owner, did not repudiate petitioner's share in the
MBP lot. Further, Citytrust, a reputable banking institution, has prepared a
Portfolio Mix Analysis for the years 1994 to 1997 showing that petitioner
invested P5,504,748.25 in the MBP lot. Absent any proof that the Citytrust bank
records have been tampered or falsified, and the BIR has presented none, the
Portfolio Mix Analysis should be given probative value.
The BIR argues that under the Torrens system, a third person dealing with
registered property need not go beyond the TCT and since the registered
owner is VMC, petitioner is estopped from claiming ownership of the MBP lot.
This argument is grossly erroneous. The trustor-beneficiary is not estopped from
proving its ownership over the property held in trust by the trustee when the
purpose is not to contest the disposition or encumbrance of the property in
favor of an innocent third-party purchaser for value. The BIR, not being a
buyer or claimant to any interest in the MBP lot, has not relied on the face of
the title of the MBP lot to acquire any interest in the lot. There is no basis for the
BIR to claim that petitioner is estopped from proving that it co-owns, as trustee
of the Employees' Trust Fund, the MBP lot. Article 1452 of the Civil Code
recognizes the lawful ownership of the trustor-beneficiary over the property
registered in the name of the trustee. Certainly, the Torrens system was not
established to foreclose a trustor or beneficiary from proving its ownership of a
property titled in the name of another person when the rights of an innocent
purchaser or lien-holder are not involved. More so, when such other person, as
in the present case, admits its being a mere trustee of the trustor or
beneficiary.
The registration of a land under the Torrens system does not create or vest title,
because registration is not one of the modes of acquiring ownership. A TCT is
merely an evidence of ownership over a particular property and its issuance
in favor of a particular person does not foreclose the possibility that the
property may be co-owned by persons not named in the certificate, or that it
may be held in trust for another person by the registered owner. 35
No particular words are required for the creation of a trust, it being sufficient
that a trust is clearly intended. 36 It is immaterial whether or not the trustor and
the trustee know that the relationship which they intend to create is called a
trust, and whether or not the parties know the precise characteristic of the
relationship which is called a trust because what is important is whether the
parties manifested an intention to create the kind of relationship which in law
is known as a trust. 37
The fact that the TCT, Deed of Absolute Sale and the Remittance Return were
in VMC's name does not forestall the possibility that the property is owned by
another entity because Article 1452 of the Civil Code expressly authorizes a
person to purchase a property with his own money and to take conveyance
in the name of another.
In Tigno v. Court of Appeals, the Court explained, thus:
An implied trust arises where a person purchases land
with his own money and takes conveyance thereof in
the name of another. In such a case, the property is
held on resulting trust in favor of the one furnishing the
consideration for the transfer, unless a different intention
or understanding appears. The trust which results under
such circumstances does not arise from a contract or
an agreement of the parties, but from the facts and
circumstances; that is to say, the trust results because of
equity and it arises by implication or operation of law.
38
In this case, the notarized Memorandum of Agreement and the certified true
copies of the Portfolio Mix Analysis prepared by Citytrust clearly prove that
petitioner invested P5,504,748.25, using funds of the Employees' Trust Fund, to
purchase the MBP lot. Since the MBP lot was registered in VMC's name only, a
resulting trust is created by operation of law. A resulting trust is based on the
equitable doctrine that valuable consideration and not legal title determines
the equitable interest and is presumed to have been contemplated by the
parties. 39 Based on this resulting trust, the Employees' Trust Fund is considered
the beneficial co-owner of the MBP lot.
Petitioner has sufficiently proven that it had a "common consent" or
agreement with VMC and VFC to jointly purchase the MBP lot. The absence of
petitioner's name in the TCT does not prevent petitioner from claiming before
the BIR that the Employees' Trust Fund is the beneficial owner of 49.59% of the
MBP lot and that VMC merely holds 49.59% of the MBP lot in trust, through
petitioner, for the benefit of the Employees' Trust Fund.
The BIR has acknowledged that the owner of a land can validly place the title
to the land in the name of another person. In BIR Ruling [DA-(I-012) 190-09]
dated 16 April 2009, a certain Amelia Segarra purchased a parcel of land and
registered it in the names of Armin Segarra and Amelito Segarra as trustees on
the condition that upon demand by Amelia Segarra, the trustees would
transfer the land in favor of their sister, Arleen May Segarra-Guevara. The BIR
ruled that an implied trust is deemed created by law and the transfer of the
land to the beneficiary is not subject to capital gains tax or creditable
withholding tax.
Income from Employees' Trust Fund is Exempt from Income Tax
Petitioner claims that the Employees' Trust Fund is exempt from the payment of
income tax. Petitioner further claims that as trustee, it acts for the Employees'
Trust Fund, and can file the claim for refund. As trustee, petitioner considers
itself as the entity that is entitled to file a claim for refund of taxes erroneously
paid in the sale of the MBP lot. 40
The Office of the Solicitor General argues that the cardinal rule in taxation is
that tax exemptions are highly disfavored and whoever claims a tax
exemption must justify his right by the clearest grant of law. Tax exemption
cannot arise by implication and any doubt whether the exemption exists is
strictly construed against the taxpayer. 41 Further, the findings of the CTA,
which were affirmed by the CA, should be given respect and weight in the
absence of abuse or improvident exercise of authority. 42
Section 53 (b) and now Section 60 (b) of the Tax Code provides:
SEC. 60.Imposition of Tax.
(A)Application of Tax. . . .
(B)Exception. The tax imposed by this Title shall not
apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees (1) if
contributions are made to the trust by such employer,
or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund
accumulated by the trust in accordance with such
plan, and (2) if under the trust instrument it is impossible,
at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of
the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than
for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee
or distributee shall be taxable to him in the year in
which so distributed to the extent that it exceeds the
amount contributed by such employee or distributee.
Petitioner's Articles of Incorporation state the purpose for which the
corporation was formed:
Primary Purpose
To hold legal title to, control, invest and administer in
the manner provided, pursuant to applicable rules and
conditions as established, and in the interest and for the
benefit of its beneficiaries and/or participants, the
private pension plan as established for certain
employees of Victorias Milling Company, Inc., and
other pension plans of Victorias Milling Company
affiliates and/or subsidiaries, the pension funds and
assets, as well as accruals, additions and increments
thereto, and such amounts as may be set aside or
accumulated for the benefit of the participants of said
pension plans; and in furtherance of the foregoing and
as may be incidental thereto. 43 (Emphasis supplied)
Petitioner is a corporation that was formed to administer the Employees' Trust
Fund. Petitioner invested P5,504,748.25 of the funds of the Employees' Trust
Fund to purchase the MBP lot. When the MBP lot was sold, the gross income of
the Employees' Trust Fund from the sale of the MBP lot was P40,500,000. The
7.5% withholding tax of P3,037,500 and broker's commission were deducted
from the proceeds. In Commissioner of Internal Revenue v. Court of
Appeals,44 the Court explained the rationale for the tax-exemption privilege
of income derived from employees' trusts:
It is evident that tax-exemption is likewise to be enjoyed
by the income of the pension trust. Otherwise, taxation
of those earnings would result in a diminution of
accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This
would run afoul of the very intendment of the law.
In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal
Revenue,45 the CTA held that petitioner is entitled to a refund of withholding
taxes paid on interest income from direct loans made by the Employees' Trust
Fund since such interest income is exempt from tax. The CTA, in recognizing
petitioner's entitlement for tax exemption, explained:
In or about 1968, Victorias Milling Co., Inc. established a
retirement or pension plan for its employees and those
of its subsidiary companies pursuant to a 22-page plan.
Pursuant to said pension plan, Victorias Milling Co., Inc.
makes a (sic) regular financial contributions to the
employee trust for the purpose of distributing or paying
to said employees, the earnings and principal of the
funds accumulated by the trust in accordance with
said plan. Under the plan, it is imposable, at any time
prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or
income to be used for, or diverted to, purposes other
than for the exclusive benefit of said employees.
Moreover, upon the termination of the plan, any
remaining assets will be applied for the benefit of all
employees and their beneficiaries entitled thereto in
proportion to the amount allocated for their respective
benefits as provided in said plan.
The petitioner and Victorias Milling Co., Inc., on January
22, 1970, entered into a Memorandum of
Understanding, whereby they agreed that petitioner
would administer the pension plan funds and assets, as
assigned and transferred to it in trust, as well as all
amounts that may from time to time be set aside by
Victorias Milling Co., Inc. "For the benefit of the Pension
Plan, said administration is to be strictly adhered to
pursuant to the rules and regulations of the Pension Plan
and of the Articles of Incorporation and By Laws" of
petitioner.
The pension plan was thereafter submitted to the
Bureau of Internal Revenue for registration and for a
ruling as to whether its income or earnings are exempt
from income tax pursuant to Rep. Act 4917, in relation
to Sec. 56(b), now Sec. 54(b), of the Tax Code.
In a letter dated January 18, 1974 addressed to
Victorias Milling Co., Inc., the Bureau of Internal
Revenue ruled that "the income of the trust fund of your
retirement benefit plan is exempt from income tax,
pursuant to Rep. Act 4917 in relation to Section 56(b) of
the Tax Code."
In accordance with petitioner's Articles of Incorporation
(Annex A), petitioner would "hold legal title to, control,
invest and administer, in the manner provided, pursuant
to applicable rules and conditions as established, and
in the interest and for the benefit of its beneficiaries
and/or participants, the private pension plan as
established for certain employees of Victorias Milling
Co., Inc. and other pension plans of Victorias Milling Co.
affiliates and/or subsidiaries, the pension funds and
assets, as well as the accruals, additions and
increments thereto, and such amounts as may be set
aside or accumulated of said pension plans. Moreover,
pursuant to the same Articles of Incorporations,
petitioner is empowered to "settle, compromise or
submit to arbitration, any claims, debts or damages due
or owing to or from pension funds and assets and other
funds and assets of the corporation, to commence or
defend suits or legal proceedings and to represent said
funds and assets in all suits or legal proceedings."
Petitioner, through its investment manager, the City Trust
Banking Corporation, has invested the funds of the
employee trust in treasury bills, Central Bank bills, direct
lending, etc. so as to generate income or earnings for
the benefit of the employees-beneficiaries of the
pension plan. Prior to the effectivity of Presidential
Decree No. 1959 on October 15, 1984, respondent did
not subject said income or earning of the employee
trust to income tax because they were exempt from
income tax pursuant to Sec. 56(b), now Sec. 54(b) of
the Tax Code and the BIR Ruling dated January 18,
1984 (Annex D). (Boldfacing supplied; italicization in the
original)
xxx xxx xxx
It asserted that the pension plan in question was
previously submitted to the Bureau of Internal Revenue
for a ruling as to whether the income or earnings of the
retirement funds of said plan are exempt from income
tax and in a letter dated January 18, 1984, the Bureau
ruled that the earnings of the trust funds of the pension
plan are exempt from income tax under Sec. 56(b) of
the Tax Code. (Emphasis supplied)
"A close review of the provisions of the plan
and trust instrument disclose that in reality the
corpus and income of the trust fund are not
at no time used for, or diverted to, any
purpose other than for the exclusive benefit
of the plan beneficiaries. This fact was likewise
confirmed after verification of the plan
operations by the Revenue District No. 63 of
the Revenue Region No. 14, Bacolod City.
Section X also confirms this fact by providing
that if any assets remain after satisfaction of
the requirements of all the above clauses,
such remaining assets will be applied for the
benefits of all persons included in such classes
in proportion to the amounts allocated for
their respective benefits pursuant to the
foregoing priorities.
"In view of all the foregoing, this Office is of
the opinion, as it hereby holds, that the
income of the trust fund of your retirement
benefit plan is exempt from income tax
pursuant to Republic Act 4917 in relation to
Section 56(b) of the Tax Code. (Annex "D" of
Petition)
This CTA decision, which was affirmed by the CA in a decision dated 20
January 1993, became final and executory on 3 August 1993.
The tax-exempt character of petitioner's Employees' Trust Fund is not at issue in
this case. The tax-exempt character of the Employees' Trust Fund has long
been settled. It is also settled that petitioner exists for the purpose of holding
title to, and administering, the tax-exempt Employees' Trust Fund established
for the benefit of VMC's employees. As such, petitioner has the personality to
claim tax refunds due the Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and Investment Manager of
Various Retirement Funds v. Commissioner of Internal Revenue,46 the CTA
granted Citytrust's claim for refund on withholding taxes paid on the
investments made by Citytrust in behalf of the trust funds it manages,
including petitioner. 47 Thus:
In resolving the second issue, we note that the same is
not a case of first impression. Indeed, the petitioner is
correct in its adherence to the clear ruling laid by the
Supreme Court way back in 1992 in the case of
Commissioner of Internal Revenue vs. The Honorable
Court of Appeals, The Court of Tax Appeals and GCL
Retirement Plan, 207 SCRA 487 at page 496, supra,
wherein it was succinctly held:
xxx xxx xxx
There can be no denying either that the final
withholding tax is collected from income in
respect of which employees' trusts are
declared exempt (Sec. 56(b), now 53(b), Tax
Code). The application of the withholdings
system to interest on bank deposits or yield
from deposit substitutes is essentially to
maximize and expedite the collection of
income taxes by requiring its payment at the
source. If an employees' trust like the GCL
enjoys a tax-exempt status from income, we
see no logic in withholding a certain
percentage of that income which it is not
supposed to pay in the first place.
xxx xxx xxx
Similarly, the income of the trust funds involved herein is
exempt from the payment of final withholding taxes.
This CTA decision became final and executory when the CIR failed to file
a Petition for Review within the extension granted by the CA.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling
exempting it from the payment of withholding tax on the sale of the land by
various BIR-approved trustees and tax-exempt private employees' retirement
benefit trust funds 48 represented by Citytrust. The BIR ruled that the private
employees benefit trust funds, which included petitioner, have met the
requirements of the law and the regulations and therefore qualify as
reasonable retirement benefit plans within the contemplation of Republic Act
No. 4917 (now Sec. 28 (b) (7) (A), Tax Code). The income from the trust fund
investments is therefore exempt from the payment of income tax and
consequently from the payment of the creditable withholding tax on the sale
of their real property. 49
Thus, the documents issued and certified by Citytrust showing that money
from the Employees' Trust Fund was invested in the MBP lot cannot simply be
brushed aside by the BIR as self-serving, in the light of previous cases holding
that Citytrust was indeed handling the money of the Employees' Trust Fund.
These documents, together with the notarized Memorandum of Agreement,
clearly establish that petitioner, on behalf of the Employees' Trust Fund, indeed
invested in the purchase of the MBP lot. Thus, the Employees' Trust Fund owns
49.59% of the MBP lot.
Since petitioner has proven that the income from the sale of the MBP lot
came from an investment by the Employees' Trust Fund, petitioner, as trustee
of the Employees' Trust Fund, is entitled to claim the tax refund of P3,037,500
which was erroneously paid in the sale of the MBP lot.
WHEREFORE, we GRANT the petition and SET ASIDE the Decision of 30 May 2003
of the Court of Appeals in CA-G.R. SP No. 61829. Respondent Commissioner of
Internal Revenue is directed to refund petitioner Miguel J. Ossorio Pension
Foundation, Incorporated, as trustee of the Employees' Trust Fund, the amount
of P3,037,500, representing income tax erroneously paid.
SO ORDERED. ||| (Miguel J. Ossorio Pension Foundation, Inc. v. Court of
Appeals, G.R. No. 162175, June 28, 2010)
G.R. No. L-15270 September 30, 1961
JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners,
vs.
THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.
Angel A. Sison for petitioners.
Jaime Agloro for respondent.


CONCEPCION, J.:
Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a
decision of the Court of Tax Appeals affirming that of the Board of Assessment
Appeals of Quezon City, which held that certain properties of said petitioners
are subject to assessment for purposes of real estate tax.
The facts and the issue are set forth in the aforementioned decision of the
Court of Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of Hospitals authorized
the petitioners to establish and operate the "St. Catherine's Hospital",
located at 58 D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-
1", p. 7, BIR rec.). On or about January 3, 1953, the petitioners sent a
letter to the Quezon City Assessor requesting exemption from
payment of real estate tax on the lot, building and other
improvements comprising the hospital stating that the same was
established for charitable and humanitarian purposes and not for
commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection
of the premises in question and after a careful study of the case, the
exemption from real property taxes was granted effective the years
1953, 1954 and 1955.
Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E",
p. 65, CTA rec.) the Quezon City Assessor notified the petitioners that
the aforesaid properties were re-classified from exempt to "taxable"
and thus assessed for real property taxes effective 1956, enclosing
therewith copies of Tax Declarations Nos. 19321 to 19322 covering
the said properties. The petitioners appealed the assessment to the
Quezon City Board of Assessment Appeals, which, in a decision
dated March 31, 1956 and received by the former on May 17, 1956,
affirmed the decision of the City Assessor. A motion for
reconsideration thereof was denied on March 8, 1957. From this
decision, the petitioners instituted the instant appeal.1awphl.nt
The building involved in this case is principally used as a hospital. It is
mainly a surgical and orthopedic hospital with emphasis on
obstetrical cases, the latter constituting 90% of the total number of
cases registered therein. The hospital has thirty-two (32) beds, of
which twenty (20) are for charity-patients and twelve (12) for pay-
patients. From the evidence presented by petitioners, it is made to
appear that there are two kinds of charity patients (a) those who
come for consultation only ("out-charity patients"); and (b) those
who remain in the hospital for treatment ("lying-in-patients"). The out-
charity patients are given free consultation and prescription,
although sometimes they are furnished with free medicines which
are not costly like aspirin, sulfatiazole, etc. The charity lying-in-
patients are given free medical service and medicine although the
food served to the pay-patients is very much better than that given
to the former. Although no condition is imposed by the hospital on
the admission of charity lying-in-patients, they however, usually give
donations to the hospital. On the other hand, the pay-patients are
required to pay for hospital services ranging from the minimum
charge of P5.00 to the maximum of P40.00 for each day of stay in
the hospital. The income realized from pay-patients is spent for the
improvement of the charity wards. The hospital personnel is
composed of three nurses, two graduate midwives, a resident
physician receiving a salary of P170.00 a month and the petitioner,
Dr. Ester Ochangco Herrera, as directress. As such directress, the
latter does not receive any salary.
Petitioners also operate within the premises of the hospital the "St.
Catherine's School of Midwifery" which was granted government
recognition by the Secretary of Education on February 1, 1955
(Exhibit "F-3", p. 10, BIR rec.) This school has an enrollment of about
two hundred students. The students are charged a matriculation fee
of P300.00 for 1- years, plus P50.00 a month for board and lodging,
which includes transportation to the St. Mary's Hospital. The students
practice in the St. Catherine's Hospital, as well as in the St. Mary's
Hospital, which is also owned by the petitioners. A separate set of
accounting books is maintained by the school for midwifery distinct
from that kept by the hospital. The petitioners alleged that the
accounts of the school are not included in Exhibits "A", "A-1", "A-2",
"B", "B-1", "B-2", "C", "C-1" and "C-2" which relate to the hospital only.
However, the petitioners have refused to submit a separate
statement of accounts of the school. A brief tabulation indicating
the amount of income of the hospital for the years 1954, 1955 and
1956, and its operational expenses, is as follows:

1 9 5 4

Income Expenses Deficit
Charity Ward
Pay Ward
P14,779.50
P 5,280.04
P10,803.26

P16,083.30
P1,303.80
(Exhibits "A", "A-1" and "A-2")

1 9 5 5

Income Expenses Deficit
Charity Ward
Pay Ward
P17,433.30
P 6,859.32
14,038.92

P20,898.24
P3,464.94
(Exhibits "B", "B-1" and "B-2")

1 9 5 6

Income Expenses Deficit
Charity Ward
Pay Ward
P21,467.40
P 5,559.89
16,249.04

P21,809.93
P 341.53
(Exhibits "C", "C-1" and "C-2")
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared
that they also own lands and coconut plantations in Quezon Province, and
other real estate in the City of Manila consisting of apartments for rent. The
petitioner, Jose V. Herrera, is an architect, actively engaged in the practice of
his profession, with office at Tuason Building, Escolta, Manila. He was formerly
Chairman, Board of Examiners for Architects and Chairman, Board of
Architects connected with the United Nations. He was also connected with
the Allied Technologists which constructed the Veterans Hospital in Quezon
City.
The only issue raised, is whether or not the lot, building and other
improvements occupied by the St. Catherine Hospital are exempt from the
real property tax. The resolution of this question boils down to the corollary
issue as to whether or not the said properties are used exclusively for
charitable or educational purposes. (Petitioners' brief, pp. 24-29).
The Court of Tax Appeals decided the issue in the negative, upon the ground
that the St. Catherine's Hospital "has a pay ward for ... pay-patients, who are
charged for the use of the private rooms, operating room, laboratory room,
delivery room, etc., like other hospitals operated for profit" and that
"petitioners and their family occupy a portion of the building for their
residence." With respect to petitioners' claim for exemption based upon the
operation of the school of midwifery, the Court conceded that "the
proposition might be proper if the property used for the school of midwifery
were separate and distinct from the hospital." It added, however, that, "in the
instant case, the portions of the building used for classrooms of the school of
midwifery have not been shown to be exclusively for school purposes"; that
said portions "rather ... have a dual use, i.e., for classroom and for hospital use,
the latter not being a purpose that renders the property tax exempt;" that part
of the building and lot in question "is used as a hospital, part as residence of
the petitioners, part as garage, part as dormitory and part as school"; and
that "the portion dedicated to educational and charitable purposes can not
be identified from those destined to other uses; and the building is itself an
indivisible unit of property."
It should be noted, however, that, according to the very statement of facts
made in the decision appealed from, of the thirty-two (32) beds in the
hospital, twenty (20) are for charity-patients; that "the income realized from
pay-patients is spent for improvement of the charity wards;" and that
"petitioners, Dr. Ester Ochangco Herrera, as directress" of said hospital, "does
not receive any salary," although its resident physician gets a monthly salary of
P170.00. It is well settled, in this connection, that the admission of pay-patients
does not detract from the charitable character of a hospital, if all its funds are
devoted "exclusively to the maintenance of the institution" as a "public
charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p.
1562; 144 A.L.R., 1489-1492). "In other words, where rendering charity is its
primary object, and the funds derived from payments made by patients able
to pay are devoted to the benevolent purposes of the institution, the mere
fact that a profit has been made will not deprive the hospital of its benevolent
character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien, 242
Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).
Thus, we have held that the U.S.T. Hospital was not established for profit-
making purposes, although it had 140 paying beds maintained only to partly
finance the expenses of the free wards, containing 203 beds for charity
patients (U.S.T. Hospital Employees Association vs. Sto. Tomas University
Hospital, L-6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a corporation
organized for "charitable educational and religious purposes" can not be
considered as engaged in business merely because its pharmacy department
charges paying patients the cost of their medicine, plus 10% thereof, to partly
offset the cost of medicines supplied free of charge to charity patients
(Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25,
1959), and that the amendment of the original articles of incorporation of the
University of Visayas to convert it from a non-stock to a stock corporation and
the increase of its assets from P9,000 to P50,000, distributed among the
members of the original non-stock corporation in terms of shares of stock, as
well as the subsequent move of its board of trustees to double the stock
dividends of the corporation, in view of a gain of P200,000.00 in property,
besides good-will, which was not carried out, does not justify the inference
that the corporation has become one for business and profit, none of its
profits having inured to the benefit of any stockholder or individual (Collector
of Internal Revenue vs. University of Visayas, L-13554, February 28, 1961).
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is "not limited to property actually indispensable"
therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which
are "incidental to and reasonably necessary for" the accomplishment of said
purposes, such as, in the case of hospitals, "a school for training nurses, a
nurses' home, property use to provide housing facilities for interns, resident
doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents" (84 C.J.S., 621),
such as "athletic fields," including "a farm used for the inmates of the
institution" (Cooley on Taxation, Vol. 2, p. 1430).
Within the purview of the Constitutional exemption from taxation, the St.
Catherine's Hospital is, therefore, a charitable institution, and the fact that it
admits pay-patients does not bar it from claiming that it is devoted exclusively
to benevolent purposes, it being admitted that the income derived from pay-
patients is devoted to the improvement of the charity wards, which represent
almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-
charity patients" who come only for consultation.
Again, the existence of "St. Catherine's School of Midwifery", with an
enrollment of about 200 students, who practice partly in St. Catherine's
Hospital and partly in St. Mary's Hospital, which, likewise, belongs to petitioners
herein, does not, and cannot, affect the exemption to which St. Catherine's
Hospital is entitled under our fundamental law. On the contrary, it furnishes
another ground for exemption. Seemingly, the Court of Tax Appeals was
impressed by the fact that the size of said enrollment and the matriculation
fee charged from the students of midwifery, aside from the amount they paid
for board and lodging, including transportation to St. Mary's Hospital, warrants
the belief that petitioners derive a substantial profit from the operation of the
school aforementioned. Such factor is, however, immaterial to the issue in the
case at bar, for "all lands, building and improvements used exclusively for
religious, charitable or educational purposes shall be exempt from taxation,"
pursuant to the Constitution, regardless of whether or not material profits are
derived from the operation of the institutions in question. In other words,
Congress may, if it deems fit to do so, impose taxes upon such "profits", but
said "lands, buildings and improvements" are beyond its taxing power.
Similarly, the garage in the building above referred to which was obviously
essential to the operation of the school of midwifery, for the students therein
enrolled practiced, not only in St. Catherine's Hospital, but, also, in St. Mary's
Hospital, and were entitled to transportation thereto for Mrs. Herrera
received no compensation as directress of St. Catherine's Hospital were
incidental to the operation of the latter and of said school, and, accordingly,
did not affect the charitable character of said hospital and the educational
nature of said school.
WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the
Assessment Board of Appeals of Quezon City, are hereby reversed and set
aside, and another one entered declaring that the lot, building and
improvements constituting the St. Catherine's Hospital are exempt from
taxation under the provisions of the Constitution, without special
pronouncement as to costs. It is so ordered.


G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of
Quezon City,respondents.
D E C I S I O N
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as
amended, of the Decision
1
dated July 17, 2000 of the Court of Appeals in CA-
G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment for purposes
of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit
entity established on January 16, 1981 by virtue of Presidential Decree No.
1823.
2
It is the registered owner of a parcel of land, particularly described as
Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner
Elliptical Road, Central District, Quezon City. The lot has an area of 121,463
square meters and is covered by Transfer Certificate of Title (TCT) No. 261320
of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid
lot is a hospital known as the Lung Center of the Philippines. A big space at
the ground floor is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional
services. Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the right side,
at the corner of Quezon Avenue and Elliptical Road, is being leased for
commercial purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders
medical services to out-patients, both paying and non-paying. Aside from its
income from paying patients, the petitioner receives annual subsidies from the
government.
On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City
Assessor of Quezon City.
3
Accordingly, Tax Declaration Nos. C-021-01226 (16-
2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital
building, respectively.
4
On August 25, 1993, the petitioner filed a Claim for
Exemption
5
from real property taxes with the City Assessor, predicated on its
claim that it is a charitable institution. The petitioners request was denied, and
a petition was, thereafter, filed before the Local Board of Assessment Appeals
of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the
City Assessor. The petitioner alleged that under Section 28, paragraph 3 of the
1987 Constitution, the property is exempt from real property taxes. It averred
that a minimum of 60% of its hospital beds are exclusively used for charity
patients and that the major thrust of its hospital operation is to serve charity
patients. The petitioner contends that it is a charitable institution and, as such,
is exempt from real property taxes. The QC-LBAA rendered judgment
dismissing the petition and holding the petitioner liable for real property taxes.
6

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

Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE
NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of
Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as
a charitable institution is not altered by the fact that it admits paying patients
and renders medical services to them, leases portions of the land to private
parties, and rents out portions of the hospital to private medical practitioners
from which it derives income to be used for operational expenses. The
petitioner points out that for the years 1995 to 1999, 100% of its out-patients
were charity patients and of the hospitals 282-bed capacity, 60% thereof, or
170 beds, is allotted to charity patients. It asserts that the fact that it receives
subsidies from the government attests to its character as a charitable
institution. It contends that the "exclusivity" required in the Constitution does
not necessarily mean "solely." Hence, even if a portion of its real estate is
leased out to private individuals from whom it derives income, it does not lose
its character as a charitable institution, and its exemption from the payment
of real estate taxes on its real property. The petitioner cited our ruling
in Herrera v. QC-BAA
9
to bolster its pose. The petitioner further contends that
even if P.D. No. 1823 does not exempt it from the payment of real estate
taxes, it is not precluded from seeking tax exemption under the 1987
Constitution.
In their comment on the petition, the respondents aver that the petitioner is
not a charitable entity. The petitioners real property is not exempt from the
payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and
that the said property is actually, directly and exclusively used for charitable
purposes. The respondents noted that in a newspaper report, it appears that
graft charges were filed with the Sandiganbayan against the director of the
petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the
Elliptical Orchids and Garden Center, for entering into a lease contract over
7,663.13 square meters of the property in 1990 for only P20,000 a month, when
the monthly rental should be P357,000 a month as determined by the
Commission on Audit; and that instead of complying with the directive of the
COA for the cancellation of the contract for being grossly prejudicial to the
government, the petitioner renewed the same on March 13, 1995 for a
monthly rental of onlyP24,000. They assert that the petitioner uses the subsidies
granted by the government for charity patients and uses the rest of its income
from the property for the benefit of paying patients, among other purposes.
They aver that the petitioner failed to adduce substantial evidence that 100%
of its out-patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak
well of its record of service. That before a patient is admitted for
treatment in the Center, first impression is that it is pay-patient and
required to pay a certain amount as deposit. That even if a patient
is living below the poverty line, he is charged with high hospital bills.
And, without these bills being first settled, the poor patient cannot
be allowed to leave the hospital or be discharged without first
paying the hospital bills or issue a promissory note guaranteed and
indorsed by an influential agency or person known only to the
Center; that even the remains of deceased poor patients suffered
the same fate. Moreover, before a patient is admitted for treatment
as free or charity patient, one must undergo a series of interviews
and must submit all the requirements needed by the Center, usually
accompanied by endorsement by an influential agency or person
known only to the Center. These facts were heard and admitted by
the Petitioner LCP during the hearings before the Honorable QC-
BAA and Honorable CBAA. These are the reasons of indigent
patients, instead of seeking treatment with the Center, they prefer
to be treated at the Quezon Institute. Can such practice by the
Center be called charitable?
10

The Issues
The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and
the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160;
and (b) whether the real properties of the petitioner are exempt from real
property taxes.
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its corporate purposes,
its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the
indefiniteness of the beneficiaries, and the use and occupation of the
properties.
11

In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or
otherwise lessening the burden of government.
12
It may be applied to almost
anything that tend to promote the well-doing and well-being of social man. It
embraces the improvement and promotion of the happiness of man.
13
The
word "charitable" is not restricted to relief of the poor or sick.
14
The test of a
charity and a charitable organization are in law the same. The test whether
an enterprise is charitable or not is whether it exists to carry out a purpose
reorganized in law as charitable or whether it is maintained for gain, profit, or
private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the
Office of the President of the Philippines with the Ministry of Health and the
Ministry of Human Settlements. It was organized for the welfare and benefit of
the Filipino people principally to help combat the high incidence of lung and
pulmonary diseases in the Philippines. The raison detre for the creation of the
petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority
concern, having been the leading cause of illness and death in the
Philippines, comprising more than 45% of the total annual deaths
from all causes, thus, exacting a tremendous toll on human
resources, which ailments are likely to increase and degenerate into
serious lung diseases on account of unabated pollution,
industrialization and unchecked cigarette smoking in the
country;lavvph!l.net
Whereas, the more common lung diseases are, to a great extent,
preventable, and curable with early and adequate medical care,
immunization and through prompt and intensive prevention and
health education programs;
Whereas, there is an urgent need to consolidate and reinforce
existing programs, strategies and efforts at preventing, treating and
rehabilitating people affected by lung diseases, and to undertake
research and training on the cure and prevention of lung diseases,
through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult
and problematical cases;
Whereas, to achieve this purpose, the Government intends to
provide material and financial support towards the establishment
and maintenance of a Lung Center for the welfare and benefit of
the Filipino people.
15

The purposes for which the petitioner was created are spelled out in its Articles
of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed
are as follows:
1. To construct, establish, equip, maintain, administer and
conduct an integrated medical institution which shall
specialize in the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with the concern of
the government to assist and provide material and
financial support in the establishment and maintenance
of a lung center primarily to benefit the people of the
Philippines and in pursuance of the policy of the State to
secure the well-being of the people by providing them
specialized health and medical services and by
minimizing the incidence of lung diseases in the country
and elsewhere.
2. To promote the noble undertaking of scientific research
related to the prevention of lung or pulmonary ailments
and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and
conferences;
3. To stimulate and, whenever possible, underwrite
scientific researches on the biological, demographic,
social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to
collect and publish the findings of such research for public
consumption;
4. To facilitate the dissemination of ideas and public
acceptance of information on lung consciousness or
awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the
general purposes or objects aforesaid, especially in
human lung requirements, general health and physical
fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses, health
officers, social workers and medical and technical
personnel in the practical and scientific implementation of
services to lung patients;
6. To assist universities and research institutions in their
studies about lung diseases, to encourage advanced
training in matters of the lung and related fields and to
support educational programs of value to general health;
7. To encourage the formation of other organizations on
the national, provincial and/or city and local levels; and
to coordinate their various efforts and activities for the
purpose of achieving a more effective programmatic
approach on the common problems relative to the
objectives enumerated herein;
8. To seek and obtain assistance in any form from both
international and local foundations and organizations;
and to administer grants and funds that may be given to
the organization;
9. To extend, whenever possible and expedient, medical
services to the public and, in general, to promote and
protect the health of the masses of our people, which has
long been recognized as an economic asset and a social
blessing;
10. To help prevent, relieve and alleviate the lung or
pulmonary afflictions and maladies of the people in any
and all walks of life, including those who are poor and
needy, all without regard to or discrimination, because of
race, creed, color or political belief of the persons helped;
and to enable them to obtain treatment when such
disorders occur;
11. To participate, as circumstances may warrant, in any
activity designed and carried on to promote the general
health of the community;
12. To acquire and/or borrow funds and to own all funds
or equipment, educational materials and supplies by
purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as
the Center shall, from time to time, deem proper and
best, under the particular circumstances, to serve its
general and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell,
exchange, transfer and dispose of properties, whether
real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or
convenient for the accomplishment of any of the powers
herein set forth and to do every other act and thing
incidental thereto or connected therewith.
16

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

As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from
paying patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons managing or operating
the institution.
18
In Congregational Sunday School, etc. v. Board of
Review,
19
the State Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable character, and
consequent exemption from taxation, by reason of the fact that
those recipients of its benefits who are able to pay are required to
do so, where no profit is made by the institution and the amounts so
received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor.
The fundamental ground upon which all exemptions in favor of
charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the
burden upon the state to care for and advance the interests of its
citizens.
20

As aptly stated by the State Supreme Court of South Dakota in Lutheran
Hospital Association of South Dakota v. Baker:
21

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

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

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

Second, the government subsidy payments are provided to the
project. Thus, those payments are like a gift or donation of any other
kind except they come from the government. In both Intermountain
Health Care and the present case, the crux is the presence or
absence of material reciprocity. It is entirely irrelevant to this analysis
that the government, rather than a private benefactor, chose to
make up the deficit resulting from the exchange between St. Marks
Tower and the tenants by making a contribution to the landlord, just
as it would have been irrelevant in Intermountain Health Care if the
patients income supplements had come from private individuals
rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing
such housing is by the government rather than private charitable
contributions does not dictate the denial of a charitable exemption
if the facts otherwise support such an exemption, as they do here.
25

In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and 1992 for its
patients and for the operation of the hospital. It even incurred a net loss in
1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent
the second issue, that those portions of its real property that are leased to
private entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi jurisagainst the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The effect
of an exemption is equivalent to an appropriation. Hence, a claim for
exemption from tax payments must be clearly shown and based on language
in the law too plain to be mistaken.
26
As held inSalvation Army v. Hoehn:
27

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

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-
stock corporation organized primarily to help combat the high
incidence of lung and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment and supplies
to be imported by authorized entities or persons and by the Board
of Trustees of the Lung Center of the Philippines, Inc., for the actual
use and benefit of the Lung Center, shall be exempt from income
and gift taxes, the same further deductible in full for the purpose of
determining the maximum deductible amount under Section 30,
paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from the
payment of taxes, charges and fees imposed by the Government or
any political subdivision or instrumentality thereof with respect to
equipment purchases made by, or for the Lung Center.
29

It is plain as day that under the decree, the petitioner does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have
been among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention
of one person, thing, or consequence implies the exclusion of all
others. The rule is expressed in the familiar maxim, expressio unius est
exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a
number of ways. One variation of the rule is the principle that what
is expressed puts an end to that which is implied. Expressium facit
cessare tacitum. Thus, where a statute, by its terms, is expressly
limited to certain matters, it may not, by interpretation or
construction, be extended to other matters.
...
The rule of expressio unius est exclusio alterius and its variations are
canons of restrictive interpretation. They are based on the rules of
logic and the natural workings of the human mind. They are
predicated upon ones own voluntary act and not upon that of
others. They proceed from the premise that the legislature would
not have made specified enumeration in a statute had the intention
been not to restrict its meaning and confine its terms to those
expressly mentioned.
30

The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to
grant at all, and that unless the privilege is limited to the very terms of the
statute the favor would be intended beyond what was meant.
31

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly and exclusively used
for religious, charitable or educational purposes shall be exempt
from taxation.
32

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

Consequently, the constitutional provision is implemented by Section 234(b) of
Republic Act No. 7160 (otherwise known as the Local Government Code of
1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are
exempted from payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and
improvements actually, directly, andexclusively used for
religious, charitable or educational purposes.
35

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

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

Under the 1935 Constitution: "Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious,
charitable, or educational purposes shall be exempt from taxation."
The present Constitution added "charitable institutions, mosques,
and non-profit cemeteries" and required that for the exemption of
"lands, buildings, and improvements," they should not only be
"exclusively" but also "actually" and "directly" used for religious or
charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were
the words "actually" as well as "directly" not added. There must be
proof therefore of the actual and direct use of the lands, buildings,
and improvements for religious or charitable purposes to be exempt
from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and "exclusively" is defined,
"in a manner to exclude; as enjoying a privilege exclusively."
40
If real property
is used for one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.
41
The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without
doing violence to the Constitutions and the law.
42
Solely is synonymous with
exclusively.
43

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

The petitioner failed to discharge its burden to prove that the entirety of its
real property is actually, directly and exclusively used for charitable purposes.
While portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics
and a canteen. Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name "Elliptical
Orchids and Garden Center." Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the
said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes.
45
On the other hand, the portions of the land occupied by
the hospital and portions of the hospital used for its patients, whether paying
or non-paying, are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
respondent Quezon City Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area thereof which are
leased to private persons, and to compute the real property taxes due
thereon as provided for by law.
SO ORDERED.


G.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M.
CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer,
Bangued, Abra; HEIRS OF PATERNO MILLARE, respondents.

PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court
of First Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case
No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V.
Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar
V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare,
defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby
declares:
That the distraint seizure and sale by the Municipal
Treasurer of Bangued, Abra, the Provincial Treasurer of
said province against the lot and building of the Abra
Valley Junior College, Inc., represented by Director Pedro
Borgonia located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it
should therefore pay all back taxes in the amount of
P5,140.31 and back taxes and penalties from the
promulgation of this decision;
That the amount deposited by the plaintaff him the sum of
P60,000.00 before the trial, be confiscated to apply for the
payment of the back taxes and for the redemption of the
property in question, if the amount is less than P6,000.00,
the remainder must be returned to the Director of Pedro
Borgonia, who represents the plaintiff herein;
That the deposit of the Municipal Treasurer in the amount
of P6,000.00 also before the trial must be returned to said
Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs
against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly
incorporated with the Securities and Exchange Commission in 1948, filed a
complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare;
Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void
the "Notice of Seizure' and the "Notice of Sale" of its lot and building located
at Bangued, Abra, for non-payment of real estate taxes and penalties
amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building
covered by Original Certificate of Title No. Q-83 duly registered in the name of
petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer
and Provincial Treasurer, defendants below, was issued for the satisfaction of
the said taxes thereon. The "Notice of Sale" was caused to be served upon the
petitioner by the respondent treasurers on July 8, 1972 for the sale at public
auction of said college lot and building, which sale was held on the same
date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the
highest bid of P6,000.00 which was duly accepted. The certificate of sale was
correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed
through counstel a motion to dismiss the complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal
Treasurer, through then Provincial Fiscal Loreto C. Roldan, filed their answer
(Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-
100) to the complaint. This was followed by an amended answer (Annex
"3," ibid, Rollo, pp. 101-103) on August 31, 1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex
"5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public
auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First
Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the
respondents provincial and municipal treasurers to deliver to the Clerk of
Court the proceeds of the auction sale. Hence, on December 14, 1972,
petitioner, through Director Borgonia, deposited with the trial court the sum of
P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and
embodied by the trial court in its questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this
Honorable Court respectfully enter into the following
agreed stipulation of facts:
1. That the personal circumstances of the parties as stated
in paragraph 1 of the complaint is admitted; but the
particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding
the position of Provincial Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the
owner of the lot and buildings thereon located in
Bangued, Abra under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal
treasurer of Bangued, Abra caused to be served upon the
Abra Valley Junior College, Inc. a Notice of Seizure on the
property of said school under Original Certificate of Title
No. 0-83 for the satisfaction of real property taxes thereon,
amounting to P5,140.31; the Notice of Seizure being the
one attached to the complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra
Valley Junior College, Inc. was sold at public auction for
the satisfaction of the unpaid real property taxes thereon
and the same was sold to defendant Paterno Millare who
offered the highest bid of P6,000.00 and a Certificate of
Sale in his favor was issued by the defendant Municipal
Treasurer.
5. That all other matters not particularly and specially
covered by this stipulation of facts will be the subject of
evidence by the parties.
WHEREFORE, it is respectfully prayed of the Honorable
Court to consider and admit this stipulation of facts on the
point agreed upon by the parties.
Bangued, Abra, April 12, 1973.
Sgd. Agripino Brillantes
Typ AGRIPINO BRILLANTES
Attorney for Plaintiff
Sgd. Loreto Roldan
Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra
Sgd. Demetrio V. Pre
Typ. DEMETRIO V. PRE
Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)
Aside from the Stipulation of Facts, the trial court among others, found the
following: (a) that the school is recognized by the government and is offering
Primary, High School and College Courses, and has a school population of
more than one thousand students all in all; (b) that it is located right in the
heart of the town of Bangued, a few meters from the plaza and about 120
meters from the Court of First Instance building; (c) that the elementary pupils
are housed in a two-storey building across the street; (d) that the high school
and college students are housed in the main building; (e) that the Director
with his family is in the second floor of the main building; and (f) that the
annual gross income of the school reaches more than one hundred thousand
pesos.
From all the foregoing, the only issue left for the Court to determine and as
agreed by the parties, is whether or not the lot and building in question
are used exclusively for educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon.
Eustaquio Z. Montero, filed a Memorandum for the Government on March 25,
1974, and a Supplemental Memorandum on May 7, 1974, wherein they
opined "that based on the evidence, the laws applicable, court decisions
and jurisprudence, the school building and school lot used for educational
purposes of the Abra Valley College, Inc., are exempted from the payment of
taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor
by the Director of petitioner school for residential purposes. He thus ruled for
the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974
within which to perfect its appeal (Per Order dated August 6, 1974; Annex "G"
of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for
review on certiorari with prayer for preliminary injunction before this Court,
which petition was filed on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE
COURSE to the petition (Rollo, p. 58). Respondents were required to answer
said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF
THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE
PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND
BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL
PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM
OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND
BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN
ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00
DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31
REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used
exclusively for educational purposes."
Petitioner contends that the primary use of the lot and building for
educational purposes, and not the incidental use thereof, determines and
exemption from property taxes under Section 22 (3), Article VI of the 1935
Constitution. Hence, the seizure and sale of subject college lot and building,
which are contrary thereto as well as to the provision of Commonwealth Act
No. 470, otherwise known as the Assessment Law, are without legal basis and
therefore void.
On the other hand, private respondents maintain that the college lot and
building in question which were subjected to seizure and sale to answer for
the unpaid tax are used: (1) for the educational purposes of the college; (2)
as the permanent residence of the President and Director thereof, Mr. Pedro
V. Borgonia, and his family including the in-laws and grandchildren; and (3) for
commercial purposes because the ground floor of the college building is
being used and rented by a commercial establishment, the Northern
Marketing Corporation (See photograph attached as Annex "8" (Comment;
Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in
the case at bar is Section 22, paragraph 3, Article VI, of the then 1935
Philippine Constitution, which expressly grants exemption from realty taxes for
"Cemeteries, churches and parsonages or convents appurtenant thereto,
and all lands, buildings, and improvements used exclusively for religious,
charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as
amended by Republic Act No. 409, otherwise known as the Assessment Law,
provides:
The following are exempted from real property tax under
the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used
exclusively for religious, charitable, scientific or
educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and
building is the basic and controlling guide, norm and standard to determine
tax exemption, and not the mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil.
217 [1916], this Court ruled that while it may be true that the YMCA keeps a
lodging and a boarding house and maintains a restaurant for its members, still
these do not constitute business in the ordinary acceptance of the word, but
an institution used exclusively for religious, charitable and educational
purposes, and as such, it is entitled to be exempted from taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51
Phil. 352 [1972], this Court included in the exemption a vegetable garden in
an adjacent lot and another lot formerly used as a cemetery. It was clarified
that the term "used exclusively" considers incidental use also. Thus, the
exemption from payment of land tax in favor of the convent includes, not only
the land actually occupied by the building but also the adjacent garden
devoted to the incidental use of the parish priest. The lot which is not used for
commercial purposes but serves solely as a sort of lodging place, also qualifies
for exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by
this Court in the cases ofHerrera vs. Quezon City Board of assessment Appeals,
3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the
Missionary District, 14 SCRA 991 [1965], thus
Moreover, the exemption in favor of property used
exclusively for charitable or educational purposes is 'not
limited to property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to
facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes, such
as in the case of hospitals, "a school for training nurses, a
nurses' home, property use to provide housing facilities for
interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities
for student nurses, interns, and residents' (84 CJS 6621),
such as "Athletic fields" including "a firm used for the
inmates of the institution. (Cooley on Taxation, Vol. 2, p.
1430).
The test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71
Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and
non-restrictive interpretation of the phrase "exclusively used for educational
purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935
Philippine Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes. Otherwise stated,
the use of the school building or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence. Thus, while the use of the second
floor of the main building in the case at bar for residential purposes of the
Director and his family, may find justification under the concept of incidental
use, which is complimentary to the main or primary purposeeducational,
the lease of the first floor thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be considered incidental to the
purpose of education.
It will be noted however that the aforementioned lease appears to have
been raised for the first time in this Court. That the matter was not taken up in
the to court is really apparent in the decision of respondent Judge. No
mention thereof was made in the stipulation of facts, not even in the
description of the school building by the trial judge, both embodied in the
decision nor as one of the issues to resolve in order to determine whether or
not said properly may be exempted from payment of real estate taxes (Rollo,
pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed
even after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken
up for the first time on appeal. Nonetheless, as an exception to the rule, this
Court has held that although a factual issue is not squarely raised below, still in
the interest of substantial justice, this Court is not prevented from considering a
pivotal factual matter. "The Supreme Court is clothed with ample authority to
review palpable errors not assigned as such if it finds that their consideration is
necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA
645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion
that the school building as well as the lot where it is built, should be taxed, not
because the second floor of the same is being used by the Director and his
family for residential purposes, but because the first floor thereof is being used
for commercial purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to the school
involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra,
Branch I, is hereby AFFIRMED subject to the modification that half of the
assessed tax be returned to the petitioner.
SO ORDERED.

G.R. No. 152904 June 8, 2007
CITY ASSESSOR OF CEBU CITY, petitioner,
vs.
ASSOCIATION OF BENEVOLA DE CEBU, INC., respondent.
D E C I S I O N
VELASCO, JR., J.:
Is a medical arts center built by a hospital to house its doctors a separate
commercial establishment or an appurtenant to the hospital? This is the core
issue to be resolved in the instant petition where petitioner insists on a 35%
assessment rate on the building which he considers commercial in nature
contrary to respondents position that it is a special real property entitled to a
10% assessment rate for purposes of realty tax.
The Case
This Petition for Review on Certiorari
1
under Rule 45 assails the October 31,
2001 Decision
2
of the Court of Appeals (CA) in CA-G.R. SP No. 62548, which
affirmed the January 24, 2000 Decision
3
and October 25, 2000 Resolution
4
of
the Central Board of Assessment Appeals (CBAA); and the March 11, 2002
Resolution
5
of the same court denying petitioners Motion for
Reconsideration.
6
The CBAA upheld the February 10, 1999 Decision of the
Local Board of Assessment Appeals (LBAA), which overturned the 35%
assessment rate of respondent Cebu City Assessor and ruled that petitioner is
entitled to a 10% assessment.
The Facts
Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit
organization organized under the laws of the Republic of the Philippines and is
the owner of Chong Hua Hospital (CHH) in Cebu City. In the late 1990s,
respondent constructed the CHH Medical Arts Center (CHHMAC). Thereafter,
an April 17, 1998 Certificate of Occupancy
7
was issued to the center with a
classification of "Commercial [Clinic]."
Petitioner City Assessor of Cebu City assessed the CHHMAC building under Tax
Declaration (TD) No. 97 GR-04-024-02529 as "commercial" with a market value
of PhP 28,060,520 and an assessed value of PhP 9,821,180 at the assessment
level of 35% for commercial buildings, and not at the 10% special assessment
currently imposed for CHH and its other separate buildingsthe CHHs Dietary
and Records Departments.
Thus, respondent filed its September 15, 1998 letter-petition with the Cebu City
LBAA for reconsideration, asserting that CHHMAC is part of CHH and ought to
be imposed the same special assessment level of 10% with that of CHH. On
September 25, 1998, respondent formally filed its appeal with the LBAA which
was docketed as Case No. 4406, TD No. 97 GR-04-024-02529 entitled
Association Benevola de Cebu, Inc. v. City Assessor.
In the September 30, 1998 Order, the LBAA directed petitioner to conduct an
ocular inspection of the subject property and to submit a report on the
scheduled date of hearing. In the October 7, 1998 hearing, the parties were
required to submit their respective position papers.
In its position paper, petitioner argued that CHHMAC is a newly constructed
five-storey building situated about 100 meters away from CHH and, based on
actual inspection, was ascertained that it is not a part of the CHH building but
a separate building which is actually used as commercial clinic/room spaces
for renting out to physicians and, thus, classified as "commercial." Petitioner
contended that in turn the medical specialists in CHHMAC charge
consultation fees for patients who consult for diagnosis and relief of bodily
ailment together with the ancillary (or support) services which include the
areas of anesthesia, radiology, pathology, and more. Petitioner concluded
the foregoing set up to be ultimately geared for commercial purposes, and
thus having the proper classification as "commercial" under Building Permit No.
B01-9750087 pursuant to Section 10 of the Local Assessment Regulations No. 1-
92 issued by the Department of Finance (DOF).
On the other hand, respondent contended in its position paper that CHHMAC
building is actually, directly, and exclusively part of CHH and should have a
special assessment level of 10% as provided under City Tax Ordinance LXX.
Respondent asserted that the CHHMAC building is similarly situated as the
buildings of CHH, housing its Dietary and Records Departments, are
completely separate from the main CHH building and are imposed the 10%
special assessment level. In fine, respondent argued that the CHHMAC,
though not actually indispensable, is nonetheless incidental and reasonably
necessary to CHHs operations.
The Ruling of the Local Board of Assessment Appeals
On February 10, 1999, the LBAA rendered a Decision,
8
the dispositive portion
of which reads:
WHEREFORE, premises considered, the appealed decision imposing a thirty
five (35) percent assessment level of TD No. 97 GR-04-024-02529 on the
Chong Hua Hospital Medical Arts building is reversed and set aside and other
[sic] one issued declaring that the building is entitled to a ten (10) percent
assessment level.
In reversing the ruling of petitioner City Assessor of Cebu City, the LBAA
reasoned that it is of public knowledge that hospitals have plenty of spaces
leased out to medical practitioners, which is both an accepted and desirable
fact; thus, respondents claim is not disputed that such is a must for a tertiary
hospital like CHH. The LBAA held that it is inconsequential that a separate
building was constructed for that purpose pointing out that departments or
services of other institutions and establishments are also not always housed in
the same building.
Thus, the LBAA pointed to the fact that respondents Dietary and Records
Departments which are housed in separate buildings were similarly imposed
with CHH the special assessment level of 10%, ratiocinating in turn that there is
no reason therefore why a higher level would be imposed for CHHMAC as it is
similarly situated with the Dietary and Records Departments of the CHH.
The Ruling of the Central Board of Assessment Appeals
Aggrieved, petitioner filed its March 15, 1999 Notice of Appeal
9
and March 16,
1999 Appeal Memorandum
10
before the CBAA Visayas Field Office which
docketed the appeal as CBAA Case No. V-15, In Re: LBAA Case No. 4406, TD
No. 97 GR-04-024-02529 entitled City Assessor of Cebu City v. Local Board of
Assessment Appeals of Cebu City and Associacion Benevola de Cebu, Inc.
On June 3, 1999, respondent filed its Answer
11
to petitioners appeal.
Subsequently, on January 24, 2000, the CBAA rendered a
Decision
12
affirming in toto the LBAA Decision and resolved the issue of
whether the subject building of CHHMAC is part and parcel of CHH. It agreed
with the above disquisition of the LBAA that it is a matter of public knowledge
that hospitals lease out spaces to its accredited medical practitioners, and in
particular it is of public knowledge that before the CHHMAC was constructed,
the accredited doctors of CHH were housed in the main hospital building of
CHH. Moreover, citingHerrera v. Quezon City Board of Assessment
Appeals
13
later applied in Abra Valley College, Inc. v. Aquino,
14
the CBAA held
that the fact that the subject building is detached from the main hospital
building is of no consequence as the exemption in favor of property used
exclusively for charitable or educational purposes is not only limited to
property actually indispensable to the hospital, but also extends to facilities
which are incidental and reasonably necessary for the accomplishment of
such purposes.
Through its October 25, 2000 Resolution,
15
the CBAA denied petitioners
Motion for Reconsideration.
16

The Ruling of the Court of Appeals
Not satisfied, petitioner brought before the CA a petition for review
17
under
Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 62548, ascribing
error on the CBAA in dismissing his appeal and in affirming the February 10,
1999 Decision
18
of the LBAA.
On October 31, 2001, the appellate court rendered the assailed
Decision
19
which affirmed the January 24, 2000 Decision of the CBAA. It
agreed with the CBAA that CHHMAC is part and parcel of CHH in line with the
ruling inHerrera
20
on what the term "appurtenant thereto" means. Thus, the CA
held that the facilities and utilities of CHHMAC are undoubtedly necessary
and indispensable for the CHH to achieve its ultimate purpose.
The CA likewise ruled that the fact that rentals are paid by CHH accredited
doctors and medical specialists for spaces in CHHMAC has no bearing on its
classification as a hospital since CHHMAC serves also as a place for medical
check-up, diagnosis, treatment, and care for its patients as well as a
specialized out-patient department of CHH where treatment and diagnosis
are done by accredited medical specialists in their respective fields of
anesthesia, radiology, pathology, and more.
The appellate court also applied Secs. 215 and 216 of the Local Government
Code (Republic Act No. 7160) which classify lands, buildings, and
improvements actually, directly, and exclusively used for hospitals as special
cases of real property and not as commercial. Thus, CHHMAC being an
integral part of CHH is not commercial but special and should be imposed the
10% special assessment, the same as CHH, instead of the 35% for commercial
establishments.
Lastly, the CA pointed out that courts generally will not interfere in matters
which are addressed to the sound discretion of the government agencies
entrusted with the regulation of activities under their special technical
knowledge and trainingtheir findings and conclusions are accorded not
only respect but even finality.
Through the assailed March 11, 2002 Resolution,
21
the CA denied petitioners
Motion for Reconsideration.
The Issues
Hence, before us is the instant petition with the solitary issue, as follows:
WHETHER OR NOT THERE IS SERIOUS ERROR BY THE COURT OF APPEALS IN
AFFIRMING THE DECISION OF THE CENTRAL BOARD OF ASSESSMENT APPEALS
THAT THE NEW BUILDING "CHONG HUA HOSPITAL AND MEDICAL ARTS CENTER"
(CHHMAC) IS AN ESSENTIAL PART OF THE OLD BUILDING KNOWN AS "CHONG
HUA HOSPITAL." IN THE NEGATIVE, WHETHER OR NOT THE NEW BUILDING IS
LIABLE TO PAY THE 35% ASSESSMENT LEVEL. AND WHETHER OR NOT THE COURT
OF APPEALS COULD INTERFERE WITH THE FINDINGS OF THE CENTRAL BOARD OF
ASSESSMENT APPEALS, A GOVERNMENT AGENCY HAVING SPECIAL TECHNICAL
KNOWLEDGE AND TRAINING ON THE MATTER SUBJECT OF THE PRESENT CASE.
22

The Courts Ruling
The petition is devoid of merit.
It is petitioners strong belief that the subject building, CHHMAC, which is built
on a rented land and situated about 100 meters from the main building of
CHH, is not an extension nor an integral part of CHH and thus should not enjoy
the 10% special assessment. Petitioner anchors the classification of CHHMAC
as "commercial," first, on Sec. 10 of Local Assessment Regulations No. 1-92
issued by the DOF, which provides:
SEC. 10. Actual use of Real Property as basis of Assessment.Real Property
shall be classified, valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and whoever uses it. (Sec. 217,
R.A. 7160)
A. "Actual use" refers to the purpose for which the property is principally or
predominantly utilized by the person in possession of the property. (Sec. 199
(b), R.A. 7160)
Secondly, the result of the inspection on subject building by the City Assessors
inspection team shows that CHHMAC is a commercial establishment based
on the following: (1) CHHMAC is exclusively intended for lease to doctors; (2)
there are neither operating rooms nor beds for patients; and (3) the doctors
renting the spaces earn income from the patients who avail themselves of
their services. Thus, petitioner argues that CHHMAC is principally and actually
used for lease to doctors, and respondent as owner of CHHMAC derives
rental income from it; hence, CHHMAC was built and is intended for profit and
functions commercially.
Moreover, petitioner asserts that CHHMAC is not part of the CHH main building
as it is exclusively used as private clinics of physicians who pay rental fees to
petitioner. And while the private clinics might be considered facilities, they are
not incidental to nor reasonably necessary for the accomplishment of the
hospitals purposes as CHH can still function and accomplish its purpose
without the existence of CHHMAC. In addition, petitioner contends that
the Abra Valley College, Inc.
23
ruling is not applicable to the instant case for
schools, the subject matter in said case, are already entitled to special
assessment. Besides, petitioner points CHHMAC is not among the facilities
mentioned in said case. Further, petitioner argues that CHHMAC is not in the
same category as nurses homes and housing facilities for the hospital staff as
these are clearly not for profit, that is, not commercial, and are clearly
incidental and reasonably necessary for the hospitals purposes.
We are not persuaded.
A careful review of the records compels us to affirm the assailed CA Decision
as we find no reversible error for us to reverse or alter it.
Chong Hua Hospital Medical Arts Center is an integral part of Chong Hua
Hospital
We so hold that CHHMAC is an integral part of CHH.
It is undisputed that the doctors and medical specialists holding clinics in
CHHMAC are those duly accredited by CHH, that is, they are consultants of
the hospital and the ones who can treat CHHs patients confined in it. This fact
alone takes away CHHMAC from being categorized as "commercial" since a
tertiary hospital like CHH is required by law to have a pool of physicians who
comprises the required medical departments in various medical fields. As
aptly pointed out by respondent:
Chong Hua Hospital is a duly licensed tertiary hospital and is covered by Dept.
of Health (DOH) Adm. Order No. 68-A and the "1989 Revised Rules and
Regulations" governing the registration, licensure and operation of hospitals in
the Philippines. Under Sec. 6, sub-sec. 6.3, it is mandated by law, that
respondent appellee in order to retain its classification as a "TERTIARY
HOSPITAL," must be fully departmentalized and equipped with the service
capabilities needed to support certified medical specialists and other
licensed physicians rendering services in the field of medicine, pediatrics,
obstetrics and gynecology, surgery, and their sub-specialties, ICCU and
ancillary services which is precisely the function of the Chong Hua Hospital
Medical Arts Center.
24

Sec. 6.3, Administrative Order No. (AO) 68-A, Series of 1989, Revised Rules and
Regulations Governing the Registration, Licensure and Operation of Hospitals
in the Philippines pertinently provides:
Tertiary Hospital is fully departmentalized and equipped with the service
capabilities needed to support certified medical specialists and other
licensed physicians rendering services in the field of Medicine, Pediatrics,
Obstetrics and Gynecology, Surgery, their subspecialties and ancillary
services. (Emphasis supplied.)
Moreover, AO 68-A likewise provides what clinic service and medical ancillary
service are, thus:
11.3.2 Clinical ServiceThe medical services to patients shall be performed by
the medical staff appointed by the governing body of the institution. x x x
11.3.3 Medical Ancillary ServiceThese are support services which include
Anesthesia Department, Pathology Department, Radiology Department, Out-
Patient Department (OPD), Emergency Service, Dental, Pharmacy, Medical
Records and Medical Social Services.
Based on these provisions, these physicians holding offices or clinics in
CHHMAC, duly appointed or accredited by CHH, precisely fulfill and carry out
their roles in the hospitals services for its patients through the CHHMAC. The
fact that they are holding office in a separate building, like at CHHMAC, does
not take away the essence and nature of their services vis--vis the over-all
operation of the hospital and the benefits to the hospitals patients. Given
what the law requires, it is clear that CHHMAC is an integral part of CHH.
These accredited physicians normally hold offices within the premises of the
hospital; in which case there is no question as to the conduct of their business
in the ambit of diagnosis, treatment and/or confinement of patients. This was
the case before 1998 and before CHHMAC was built. Verily, their transfer to a
more spacious and, perhaps, convenient place and location for the benefit
of the hospitals patients does not remove them from being an integral part of
the overall operation of the hospital.
Conversely, it would have been different if CHHMAC was also open for non-
accredited physicians, that is, any medical practitioner, for then respondent
would be running a commercial building for lease only to doctors which
would indeed subject the CHHMAC to the commercial level of 35%
assessment.
Moreover, the CHHMAC, being hundred meters away from the CHH main
building, does not denigrate from its being an integral part of the latter. As
aptly applied by the CBAA, the Herrera ruling on what constitutes property
exempt from taxation is indeed applicable in the instant case, thus:
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is "not limited to property actually indispensable"
therefore (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which
are "incidental to and reasonably necessary for" the accomplishment of said
purposes, such as, in the case of hospitals, "a school for training nurses, a
nurses home, property use to provide housing facilities for interns, resident
doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents" (84 C.J.S., 621),
such as "athletic fields," including "a farm used for the inmates of the
institution" (Cooley on Taxation, Vol. 2, p. 1430).
25

Verily, being an integral part of CHH, CHHMAC should be under the same
special assessment level of as that of the former.
The CHHMAC facility is definitely incidental to and reasonably necessary for
the operations of Chong Hua Hospital
Given our discussion above, the CHHMAC facility, while seemingly not
indispensable to the operations of CHH, is definitely incidental to and
reasonably necessary for the operations of the hospital. Considering the legal
requirements and the ramifications of the medical and clinical operations that
have been transferred to the CHHMAC from the CHH main building in light of
the accredited physicians transfer of offices in 1998 after the CHHMAC
building was finished, it cannot be gainsaid that the services done in
CHHMAC are indispensable and essential to the hospitals operation.
For one, as found by the appellate court, the CHHMAC facility is primarily used
by the hospitals accredited physicians to perform medical check-up,
diagnosis, treatment, and care of patients. For another, it also serves as a
specialized outpatient department of the hospital.
Indubitably, the operation of the hospital is not only for confinement and
surgical operations where hospital beds and operating theaters are required.
Generally, confinement is required in emergency cases and where a patient
necessitates close monitoring. The usual course is that patients have to be
diagnosed, and then treatment and follow-up consultations follow or are
required. Other cases may necessitate surgical operations or other medical
intervention and confinement. Thus, the more the patients, the more
important task of diagnosis, treatment, and care that may or may not require
eventual confinement or medical operation in the CHHMAC.
Thus, the importance of CHHMAC in the operation of CHH cannot be over-
emphasized nor disputed. Clearly, it plays a key role and provides critical
support to hospital operations.
Charging rentals for the offices used by its accredited physicians cannot be
equated to a commercial venture
Finally, respondents charge of rentals for the offices and clinics its accredited
physicians occupy cannot be equated to a commercial venture, which is
mainly for profit.
Respondents explanation on this point is well taken. First, CHHMAC is only for
its consultants or accredited doctors and medical specialists. Second, the
charging of rentals is a practical necessity: (1) to recoup the investment cost
of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3)
to maintain the CHHMAC building and its facilities. Third, as correctly pointed
out by respondent, it pays the proper taxes for its rental income. And, fourth, if
there is indeed any net income from the lease income of CHHMAC, such
does not inure to any private or individual person as it will be used for
respondents other charitable projects.
Given the foregoing arguments, we fail to see any reason why the CHHMAC
building should be classified as "commercial" and be imposed the
commercial level of 35% as it is not operated primarily for profit but as an
integral part of CHH. The CHHMAC, with operations being devoted for the
benefit of the CHHs patients, should be accorded the 10% special
assessment.
In this regard, we point with approbation the appellate courts application of
Sec. 216 in relation with Sec. 215 of the Local Government Code on the
proper classification of the subject CHHMAC building as "special" and not
"commercial." Secs. 215 and 216 pertinently provide:
SEC. 215. Classes of Real Property for Assessment Purposes.For purposes of
assessment, real property shall be classified as residential, agricultural,
commercial, industrial, mineral, timberland or special.
x x x x
SEC. 216. Special Classes of Real Property.All lands, buildings, and other
improvements thereon actually, directly and exclusively used for hospitals,
cultural or scientific purposes, and those owned and used by local water
districts, and government-owned or controlled corporations rendering
essential public services in the supply and distribution of water and/or
generation and transmission of electric power shall be classified as special.
(Emphasis supplied.)
Thus, applying the above provisos in line with City Tax Ordinance LXX of Cebu
City, the 10% special assessment should be imposed for the CHHMAC building
which should be classified as "special."
WHEREFORE, the petition is DENIED for lack of merit and the October 31, 2001
Decision and March 11, 2002 Resolution of the CA are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.


G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's
Christian Association of the Philippines, Inc. (YMCA) established as "a
welfare, educational and charitable non-profit corporation" subject to
income tax under the National Internal Revenue Code (NIRC) and the
Constitution?
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of Appeals
1
on
September 28, 1995
2
and February 29, 1996
3
in CA-GR SP No. 32007. Both
Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing
the YMCA to claim tax exemption on the latter's income from the lease of its
real property.
The Facts
The facts are undisputed.
4
Private Respondent YMCA is a non-stock, non-
profit institution, which conducts various programs and activities that are
beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80
from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and P44,259.00 from parking fees collected from non-
members. On July 2, 1984, the commissioner of internal revenue (CIR) issued
an assessment to private respondent, in the total amount of P415,615.01
including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency
withholding tax on wages. Private respondent formally protested the
assessment and, as a supplement to its basic protest, filed a letter dated
October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the
Court of Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued
this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small
shop owners, to restaurant and canteen operators and
the operation of the parking lot are reasonably incidental
to and reasonably necessary for the accomplishment of
the objectives of the [private respondents]. It appears
from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former
accountant of YMCA, that these facilities were leased to
members and that they have to service the needs of its
members and their guests. The rentals were minimal as for
example, the barbershop was only charged P300 per
month. He also testified that there was actually no lot
devoted for parking space but the parking was done at
the sides of the building. The parking was primarily for
members with stickers on the windshields of their cars and
they charged P.50 for non-members. The rentals and
parking fees were just enough to cover the costs of
operation and maintenance only. The earning[s] from
these rentals and parking charges including those from
lodging and other charges for the use of the recreational
facilities constitute [the] bulk of its income which [is]
channeled to support its many activities and attainment
of its objectives. As pointed out earlier, the membership
dues are very insufficient to support its program. We find it
reasonably necessary therefore for [private respondent] to
make [the] most out [of] its existing facilities to earn some
income. It would have been different if under the
circumstances, [private respondent] will purchase a lot
and convert it to a parking lot to cater to the needs of the
general public for a fee, or construct a building and lease
it out to the highest bidder or at the market rate for
commercial purposes, or should it invest its funds in the
buy and sell of properties, real or personal. Under these
circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably
necessary to the pursuit of the objectives of the
association and therefore, will fall under the last
paragraph of Section 27 of the Tax Code and any income
derived therefrom shall be taxable.
Considering our findings that [private respondent] was not
engaged in the business of operating or contracting [a]
parking lot, we find no legal basis also for the imposition of
[a] deficiency fixed tax and [a] contractor's tax in the
amount[s] of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following
assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July
2, 1984 until fully paid but not to exceed three (3) years
pursuant to Section 51(e)(2) & (3) of the National Internal
Revenue Code effective as of 1984.
5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of
Appeals (CA). In its Decision of February 16, 1994, the CA
6
initially decided in
favor of the CIR and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of
Abra vs. Hernando and Abra Valley College Inc. vs.
Aquino, the ruling of the respondent Court of Tax Appeals
that "the leasing of petitioner's (herein respondent's)
facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the petitioners, and
the income derived therefrom are tax exempt, must be
reversed.
WHEREFORE, the appealed decision is hereby REVERSED in
so far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P
3,129.23, &
1980 Deficiency Income Tax P
372,578.20
but the same is AFFIRMED in all other respect.
7

Aggrieved, the YMCA asked for reconsideration based on the following
grounds:
I
The findings of facts of the Public Respondent Court of Tax
Appeals being supported by substantial evidence [are]
final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting
[p]rivate [r]espondent from the income on rentals of small
shops and parking fees [are] in accord with the
applicable law and jurisprudence.
8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA
reversed itself and promulgated on September 28, 1995 its first assailed
Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact,
as they are supported by evidence beyond what is
considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did
not err in saying that the rental from small shops and
parking fees do not result in the loss of the exemption. Not
even the petitioner would hazard the suggestion that
YMCA is designed for profit. Consequently, the little
income from small shops and parking fees help[s] to keep
its head above the water, so to speak, and allow it to
continue with its laudable work.
The Court, therefore, finds the second ground of the
motion to be meritorious and in accord with law and
jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED;
the respondent CTA's decision is AFFIRMED in toto.
9

The internal revenue commissioner's own Motion for Reconsideration was
denied by Respondent Court in its second assailed Resolution of February 29,
1996. Hence, this petition for review under Rule 45 of the Rules of Court.
10

The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of
Respondent Court of Tax Appeals when it rendered its
Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax
Appeals that the income of private respondent from
rentals of small shops and parking fees [is] exempt from
taxation.
11

This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed
the factual findings of the CTA. On the other hand, petitioner argues that the
CA merely reversed the "ruling of the CTA that the leasing of private
respondent's facilities to small shop owners, to restaurant and canteen
operators and the operation of parking lots are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives of the private
respondent and that the income derived therefrom are tax
exempt."
12
Petitioner insists that what the appellate court reversed was the
legal conclusion, not the factual finding, of the CTA.
13
The commissioner has
a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when
supported by substantial evidence, will be disturbed on appeal unless it is
shown that the said court committed gross error in the appreciation of
facts.
14
In the present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter merely applied the
law to the facts as found by the CTA and ruled on the issue raised by the CIR:
"Whether or not the collection or earnings of rental income from the lease of
certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977, as
amended."
15

Clearly, the CA did not alter any fact or evidence. It merely resolved the
aforementioned issue, as indeed it was expected to. That it did so in a manner
different from that of the CTA did not necessarily imply a reversal of factual
findings.
The distinction between a question of law and a question of fact is clear-cut.
It has been held that "[t]here is a question of law in a given case when the
doubt or difference arises as to what the law is on a certain state of facts;
there is a question of fact when the doubt or difference arises as to the truth
or falsehood of alleged facts."
16
In the present case, the CA did not doubt,
much less change, the facts narrated by the CTA. It merely applied the law to
the facts. That its interpretation or conclusion is different from that of the CTA is
not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its
real estate subject to tax? At the outset, we set forth the relevant provision of
the NIRC:
Sec. 27. Exemptions from tax on corporations. The
following organizations shall not be taxed under this Title in
respect to income received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
(h) Club organized and operated exclusively for pleasure,
recreation, and other non-profitable purposes, no part of
the net income of which inures to the benefit of any
private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit, regardless of the disposition made of such
income, shall be subject to the tax imposed under this
Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations
enumerated in Section 27 (now Section 26) of the NIRC is, as a rule, exempted
from the payment of tax "in respect to income received by them as such," the
exemption does not apply to income derived ". . . from any of their properties,
real or personal, or from any of their activities conducted for profit, regardless
of the disposition made of such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization
from the lease of its properties, real or personal, [is] not, therefore, exempt
from income taxation, even if such income [is] exclusively used for the
accomplishment of its objectives."
17
We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied
the doctrine of strict in interpretation in construing tax
exemptions.
18
Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which
it is based. Thus, the claimed exemption "must expressly be granted in a
statute stated in a language too clear to be mistaken."
19

In the instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section 27 of the
NIRC which mandates that the income of exempt organizations (such as the
YMCA) from any of their properties, real or personal, be subject to the tax
imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the YMCA from its real
property,
20
the Court is duty-bound to abide strictly by its literal meaning and
to refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous,
its express terms must be applied.
21
Parenthetically, a consideration of the
question of construction must not even begin, particularly when such question
is on whether to apply a strict construction or a liberal one on statutes that
grant tax exemptions to "religious, charitable and educational propert[ies] or
institutions."
22

The last paragraph of Section 27, the YMCA argues, should be "subject to the
qualification that the income from the properties must arise from activities
'conducted for profit' before it may be considered taxable."
23
This argument is
erroneous. As previously stated, a reading of said paragraph ineludibly shows
that the income from any property of exempt organizations, as well as that
arising from any activity it conducts for profit, is taxable. The phrase "any of
their activities conducted for profit" does not qualify the word "properties." This
makes from the property of the organization taxable, regardless of how that
income is used whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals
committed reversible error when it allowed, on reconsideration, the tax
exemption claimed by YMCA on income it derived from renting out its real
property, on the solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its operation. The law does not
make a distinction. The rental income is taxable regardless of whence such
income is derived and how it is used or disposed of. Where the law does not
distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent
submits that Article VI, Section 28 of par. 3 of the 1987 Constitution,
24
exempts
"charitable institutions" from the payment not only of property taxes but also of
income tax from any source.
25
In support of its novel theory, it compares the
use of the words "charitable institutions," "actually" and "directly" in the 1973
and the 1987 Constitutions, on the one hand; and in Article VI, Section 22, par.
3 of the 1935 Constitution, on the other hand.
26

Private respondent enunciates three points. First, the present provision is
divisible into two categories: (1) "[c]haritable institutions, churches and
parsonages or convents appurtenant thereto, mosques and non-profit
cemeteries," the incomes of which are, from whatever source, all tax-
exempt;
27
and (2) "[a]ll lands, buildings and improvements actually and
directly used for religious, charitable or educational purposes," which are
exempt only from property taxes.
28
Second, Lladoc v. Commissioner of
Internal Revenue,
29
which limited the exemption only to the payment of
property taxes, referred to the provision of the 1935 Constitution and not to its
counterparts in the 1973 and the 1987 Constitutions.
30
Third, the phrase
"actually, directly and exclusively used for religious, charitable or educational
purposes" refers not only to "all lands, buildings and improvements," but also to
the above-quoted first category which includes charitable institutions like the
private respondent.
31

The Court is not persuaded. The debates, interpellations and expressions of
opinion of the framers of the Constitution reveal their intent which, in turn, may
have guided the people in ratifying the Charter.
32
Such intent must be
effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional
commissioner, who is now a member of this Court, stressed during the
Concom debates that ". . . what is exempted is not the institution itself . . .;
those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational
purposes."
33
Father Joaquin G. Bernas, an eminent authority on the
Constitution and also a member of the Concom, adhered to the same view
that the exemption created by said provision pertained only to property
taxes.
34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he
tax exemption covers propertytaxes only."
35
Indeed, the income tax
exemption claimed by private respondent finds no basis in Article VI, Section
26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Character,
36
claiming that the YMCA "is a non-stock, non-profit educational
institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its properties
and income."
37
We reiterate that private respondent is exempt from the
payment of property tax, but not income tax on the rentals from its property.
The bare allegation alone that it is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi
juris. Hence, for the YMCA to be granted the exemption it claims under the
aforecited provision, it must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly,
and exclusively for educational purposes. However, the Court notes that not a
scintilla of evidence was submitted by private respondent to prove that it met
the said requisites.
Is the YMCA an educational institution within the purview of Article XIV,
Section 4, par. 3 of the Constitution? We rule that it is not. The term
"educational institution" or "institution of learning" has acquired a well-known
technical meaning, of which the members of the Constitutional Commission
are deemed cognizant.
38
Under the Education Act of 1982, such term refers
to schools.
39
The school system is synonymous with formal education,
40
which
"refers to the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades
or move to the higher levels."
41
The Court has examined the "Amended
Articles of Incorporation" and "By-Laws"
43
of the YMCA, but found nothing in
them that even hints that it is a school or an educational institution.
44

Furthermore, under the Education Act of 1982, even non-formal education is
understood to be school-based and "private auspices such as foundations
and civic-spirited organizations" are ruled out.
45
It is settled that the term
"educational institution," when used in laws granting tax exemptions, refers to
a ". . . school seminary, college or educational establishment . . .
."
46
Therefore, the private respondent cannot be deemed one of the
educational institutions covered by the constitutional provision under
consideration.
. . . Words used in the Constitution are to be taken in their
ordinary acceptation. While in its broadest and best sense
education embraces all forms and phases of instruction,
improvement and development of mind and body, and
as well of religious and moral sentiments, yet in the
common understanding and application it means a
place where systematic instruction in any or all of the
useful branches of learning is given by methods common
to schools and institutions of learning. That we conceive to
be the true intent and scope of the term [educational
institutions,] as used in the
Constitution.
47

Moreover, without conceding that Private Respondent YMCA is an
educational institution, the Court also notes that the former did not submit
proof of the proportionate amount of the subject income that was actually,
directly and exclusively used for educational purposes. Article XIII, Section 5 of
the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that "[t]he net income derived
from the rentals of the commercial buildings shall be apportioned to the
Federation and Member Associations as the National Board may decide."
48
In
sum, we find no basis for granting the YMCA exemption from income tax
under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases
49
relied on by private respondent do not support its cause. YMCA
of Manila v. Collector of Internal Revenue
50
and Abra Valley College, Inc. v.
Aquino
51
are not applicable, because the controversy in both cases involved
exemption from the payment of property tax, not income tax. Hospital de San
Juan de Dios, Inc. v. Pasay City
52
is not in point either, because it involves a
claim for exemption from the payment of regulatory fees, specifically
electrical inspection fees, imposed by an ordinance of Pasay City an issue
not at all related to that involved in a claimed exemption from the payment
of income taxes imposed on property leases. In Jesus Sacred Heart College v.
Com. of Internal Revenue,
53
the party therein, which claimed an exemption
from the payment of income tax, was an educational institution which
submitted substantial evidence that the income subject of the controversy
had been devoted or used solely for educational purposes. On the other
hand, the private respondent in the present case has not given any proof that
it is an educational institution, or that part of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private
respondent. It appreciates the nobility of its cause. However, the Court's
power and function are limited merely to applying the law fairly and
objectively. It cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation.
We concede that private respondent deserves the help and the
encouragement of the government. It needs laws that can facilitate, and not
frustrate, its humanitarian tasks. But the Court regrets that, given its limited
constitutional authority, it cannot rule on the wisdom or propriety of legislation.
That prerogative belongs to the political departments of government. Indeed,
some of the members of the Court may even believe in the wisdom and
prudence of granting more tax exemptions to private respondent. But such
belief, however well-meaning and sincere, cannot bestow upon the Court the
power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals
dated September 28, 1995 and February 29, 1996 are hereby REVERSED and
SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995 is
REINSTATED, insofar as it ruled that the income derived by petitioner from
rentals of its real property is subject to income tax. No pronouncement as to
costs.
SO ORDERED.

G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.
D E C I S I O N
CORONA, J.:
In this original petition for certiorari and mandamus,
1
petitioner Chamber of
Real Estate and Builders Associations, Inc. is questioning the constitutionality
of Section 27 (E) of Republic Act (RA) 8424
2
and the revenue regulations (RRs)
issued by the Bureau of Internal Revenue (BIR) to implement said provision
and those involving creditable withholding taxes.
3

Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo, then
acting Secretary of Finance Juanita D. Amatong and then Commissioner of
Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income
tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of
real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is
implemented by RR 9-98. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001)
and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of CWT on the sale of
real properties categorized as ordinary assets. Petitioner contends that these
revenue regulations are contrary to law for two reasons: first, they ignore the
different treatment by RA 8424 of ordinary assets and capital assets
and second, respondent Secretary of Finance has no authority to collect
CWT, much less, to base the CWT on the gross selling price or fair market value
of the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the
government collects income tax even when the net income has not yet been
determined. They contravene the equal protection clause as well because
the CWT is being levied upon real estate enterprises but not on other business
enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present
case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of
real properties classified as ordinary assets under RRs 2-98, 6-2001
and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of
operation, is assessed an MCIT of 2% of its gross income when such MCIT is
greater than the normal corporate income tax imposed under Section
27(A).
4
If the regular income tax is higher than the MCIT, the corporation does
not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried
forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this Title, beginning
on the fourth taxable year immediately following the year in which
such corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT]
over the normal income tax as computed under Subsection (A) of
this Section shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding
taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary
of Finance is hereby authorized to suspend the imposition of the
[MCIT] on any corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure, or because
of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulations that shall define the terms and conditions under which
he may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term gross income shall
mean gross sales less sales returns, discounts and allowances and
cost of goods sold. "Cost of goods sold" shall include all business
expenses directly incurred to produce the merchandise to bring
them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold including insurance
while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall
include all costs of production of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means
gross receipts less sales returns, allowances, discounts and cost of services.
"Cost of services" shall mean all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and
cost of supplies: Provided, however, that in the case of banks, "cost of
services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section 27(E).
5
The pertinent portions
thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as
of the end of the taxable year (whether calendar or fiscal year, depending
on the accounting period employed) is hereby imposed upon any domestic
corporation beginning the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business operations.
The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the
income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code
xxx at 32% effective January 1, 2000 and thereafter.
x x x x x x x x x
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal
income tax as computed under Sec. 27(A) of the Code shall be carried
forward on an annual basis and credited against the normal income tax for
the three (3) immediately succeeding taxable years.
x x x x x x x x x
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation
of respondent CIR, promulgated RR 2-98 implementing certain provisions of RA
8424 involving the withholding of taxes.
6
Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other
than capital assets, by persons residing in the Philippines and habitually
engaged in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
x x x x x x x x x
(J) Gross selling price or total amount of consideration or its equivalent paid to
the seller/owner for the sale, exchange or transfer of. Real property, other
than capital assets, sold by an individual, corporation, estate, trust, trust fund
or pension fund and the seller/transferor is habitually engaged in the real
estate business in accordance with the following schedule
Those which are exempt from a withholding tax
at source as prescribed in Sec. 2.57.5 of these
regulations.
Exempt
With a selling price of five hundred thousand
pesos (P500,000.00) or less.
1.5%
With a selling price of more than five hundred
thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00).
3.0%
With selling price of more than two million
pesos (P2,000,000.00)
5.0%
x x x x x x x x x
Gross selling price shall mean the consideration stated in the sales document
or the fair market value determined in accordance with Section 6 (E) of the
Code, as amended, whichever is higher. In an exchange, the fair market
value of the property received in exchange, as determined in the Income Tax
Regulations shall be used.
Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment payments
where the buyer is an individual not engaged in trade or business. In such a
case, the applicable rate of tax based on the entire consideration shall be
withheld on the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation
or otherwise, the tax shall be deducted and withheld by the buyer on every
installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
x x x x x x x x x
(J) Gross selling price or total amount of consideration or its equivalent paid to
the seller/owner for the sale, exchange or transfer of real property classified as
ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to the seller/owner for the sale,
transfer or exchange of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer, in accordance with the
following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec.
2.57.5 of these regulations.
Exempt
Upon the following values of real property, where the seller/transferor is
habitually engaged in the real estate business.

With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less. 1.5%
With a selling price of more than Five Hundred Thousand Pesos (P500,000.00)
but not more than Two Million Pesos (P2,000,000.00).
3.0%
With a selling price of more than two Million Pesos (P2,000,000.00). 5.0%
x x x x x x x x x
Gross selling price shall remain the consideration stated in the sales document
or the fair market value determined in accordance with Section 6 (E) of the
Code, as amended, whichever is higher. In an exchange, the fair market
value of the property received in exchange shall be considered as the
consideration.
x x x x x x x x x
However, if the buyer is engaged in trade or business, whether a corporation
or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in
the year of sale do not exceed 25% of the selling price), the tax shall be
deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment
sale not on the installment plan" (that is, payments in the year of sale exceed
25% of the selling price), the buyer shall withhold the tax based on the gross
selling price or fair market value of the property, whichever is higher, on the
first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the
buyer unless the [CWT] due on the sale, transfer or exchange of real property
other than capital asset has been fully paid. (Underlined amendments in the
original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that
any sale, barter or exchange subject to the CWT will not be recorded by the
Registry of Deeds until the CIR has certified that such transfers and
conveyances have been reported and the taxes thereof have been duly
paid:
7

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances
of land or land and building/improvement thereon arising from sales, barters,
or exchanges subject to the creditable expanded withholding tax shall not be
recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the documentary
stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-2003
8
was promulgated, providing for the
guidelines in determining whether a particular real property is a capital or an
ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of
real properties shall, unless otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens,
and non-resident aliens engaged in trade or business in the Philippines;
x x x x x x x x x
(ii) The sale of real property located in the Philippines, classified as ordinary
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-
98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net
taxable income.
x x x x x x x x x
c. In the case of domestic corporations.
x x x x x x x x x
(ii) The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless
of the classification thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of
the Code. In lieu of the ordinary income tax, however, domestic corporations
may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.
x x x x x x x x x
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the
following requisites are satisfied: (1) there must be an actual case calling for
the exercise of judicial review; (2) the question before the court must be ripe
for adjudication; (3) the person challenging the validity of the act must have
standing to do so; (4) the question of constitutionality must have been raised
at the earliest opportunity and (5) the issue of constitutionality must be the
very lis mota of the case.
9

Respondents aver that the first three requisites are absent in this case.
According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its
members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on
sales of real property. Neither did petitioner allege that its members have shut
down their businesses as a result of the payment of the MCIT or CWT. Petitioner
has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and
revenue regulations have actually and adversely affected it. Lacking
empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication would be
no different from the giving of advisory opinion that does not really settle legal
issues.
10

An actual case or controversy involves a conflict of legal rights or an assertion
of opposite legal claims which is susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute.
11
On the
other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it.
12

Contrary to respondents assertion, we do not have to wait until petitioners
members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio
Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:
13

By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial controversy
even without any other overt act. Indeed, even a singular violation of the
Constitution and/or the law is enough to awaken judicial duty.
14

If the assailed provisions are indeed unconstitutional, there is no better time
than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders
in the Philippines. Petitioners did not allege that [it] itself is in the real estate
business. It did not allege any material interest or any wrong that it may suffer
from the enforcement of [the assailed provisions].
15

Legal standing or locus standi is a partys personal and substantial interest in a
case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.
16
In Holy Spirit Homeowners Association,
Inc. v. Defensor,
17
we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx.
There is no dispute that the individual members of petitioner association are
residents of the NGC. As such they are covered and stand to be either
benefited or injured by the enforcement of the IRR, particularly as regards the
selection process of beneficiaries and lot allocation to qualified beneficiaries.
Thus, petitioner association may assail those provisions in the IRR which it
believes to be unfavorable to the rights of its members. xxx Certainly,
petitioner and its members have sustained direct injury arising from the
enforcement of the IRR in that they have been disqualified and eliminated
from the selection process.
18

In any event, this Court has the discretion to take cognizance of a suit which
does not satisfy the requirements of an actual case, ripeness or legal standing
when paramount public interest is involved.
19
The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in
our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance
of this petition.
20

Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424
to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations.
21
It was devised as a relatively simple and effective revenue-
raising instrument compared to the normal income tax which is more difficult
to control and enforce. It is a means to ensure that everyone will make some
minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the
payment of taxes, and thus avoid sharing in the cost of government. In this
regard, the Tax Reform Act introduces for the first time a new concept called
the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in
the country and for administrative convenience. This will go a long way in
ensuring that corporations will pay their just share in supporting our public life
and our economic advancement.
22

Domestic corporations owe their corporate existence and their privilege to do
business to the government. They also benefit from the efforts of the
government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to
make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while
having large turn-overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through under-declaration
of income or over-deduction of expenses otherwise called tax shelters.
23

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why
they have proposed the [MCIT]. Because from experience too, you have
corporations which have been losing year in and year out and paid no tax.
So, if the corporation has been losing for the past five years to ten years, then
that corporation has no business to be in business. It is dead. Why continue if
you are losing year in and year out? So, we have this provision to avoid this
type of tax shelters, Your Honor.
24

The primary purpose of any legitimate business is to earn a profit. Continued
and repeated losses after operations of a corporation or consistent reports of
minimal net income render its financial statements and its tax payments
suspect. For sure, certain tax avoidance schemes resorted to by corporations
are allowed in our jurisdiction. The MCIT serves to put a cap on such tax
shelters. As a tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful manipulations
of deductions and other stratagems. Since the tax base was broader, the tax
rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to
recoup initial major capital expenditures, the imposition of the MCIT
commences only on the fourth taxable year immediately following the year in
which the corporation commenced its operations.
25
This grace period allows a
new business to stabilize first and make its ventures viable before it is subjected
to the MCIT.
26

Second, the law allows the carrying forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal
income tax for the three immediately succeeding years.
27

Third, since certain businesses may be incurring genuine repeated losses, the
law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.
28

Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum
corporate income taxation. Our lawmakers noted that most developing
countries, particularly Latin American and Asian countries, have the same
form of safeguards as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course
quite a bit of room for underdeclaration of gross receipts have this same form
of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income
tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of
taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.
The other thing youll notice is the preponderance of Latin American countries
that employed this method. Okay, those are additional Latin American
countries.
29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama
and Hungary have their own versions of the MCIT.
30

MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the
cost of goods sold and other direct expenses; other major expenditures, such
as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account.
31
Thus, pegging the tax
base of the MCIT to a corporations gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
"realized gain."
32

We disagree.
Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. 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 the common good.
33

Taxation is an inherent attribute of sovereignty.
34
It is a power that is purely
legislative.
35
Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation.
36
It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on
persons or things within its jurisdiction. In other words, the legislature wields the
power to define what tax shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against
its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it.
37
Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no]
person shall be deprived of life, liberty or property without due process of law."
In Sison, Jr. v. Ancheta, et al.,
38
we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue
measure
39
when it amounts to a confiscation of property.
40
But in the same
case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.
41
There must be a factual
foundation to such an unconstitutional taint.
42
This merely adheres to the
authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a
need for proof of such persuasive character.
43

Petitioner is correct in saying that income is distinct from capital.
44
Income
means all the wealth which flows into the taxpayer other than a mere return
on capital. Capital is a fund or property existing at one distinct point in time
while income denotes a flow of wealth during a definite period of
time.
45
Income is gain derived and severed from capital.
46
For income to be
taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.
47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. In other words, it is income, not capital, which
is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of
goods
48
and other direct expenses from gross sales. Clearly, the capital is not
being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income
by eliminating all deductible items and at the same time reducing the
applicable tax rate.
49

Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held to
be within the power of a state to impose; or constitutional, unless it interferes
with interstate commerce or violates the requirement as to uniformity of
taxation.
50

The United States has a similar alternative minimum tax (AMT) system which is
generally characterized by a lower tax rate but a broader tax base.
51
Since
our income tax laws are of American origin, interpretations by American
courts of our parallel tax laws have persuasive effect on the interpretation of
these laws.
52
Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On
the question of the AMTs constitutionality, the United States Court of Appeals
for the Ninth Circuit stated in Okin v. Commissioner:
53

In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of taxpayers with
large incomes who were yet paying no taxes.
x x x x x x x x x
We thus join a number of other courts in upholding the constitutionality of the
[AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and
therefore is constitutional.
54

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.
55

American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive at the
net that it chooses to tax.
56
This is because deductions are a matter of
legislative grace.
57

Absent any other valid objection, the assignment of gross income, instead of
net income, as the tax base of the MCIT, taken with the reduction of the tax
rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical data to
show that the implementation of the MCIT resulted in the confiscation of their
property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation
that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law
as unconstitutional simply because of its yokes.
58
Taxation is necessarily
burdensome because, by its nature, it adversely affects property rights.
59
The
party alleging the laws unconstitutionality has the burden to demonstrate the
supposed violations in understandable terms.
60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process
of law because the MCIT is being imposed and collected even when there is
actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such corporation.
(Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation
has zero or negative taxable income, merely defines the coverage of Section
27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject
to an MCIT of 2% of its gross income. This is consistent with the law which
imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater
than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or
negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including
income taxes) are collected.
61
Under Section 57 of RA 8424, the types of
income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the
second category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary assets are
unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary
assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98
and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave
abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"
62
because they ignore such distinctions. Petitioners
conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis
for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per
transaction basis, i.e., upon consummation of the sale via the CWT, contrary
to RA 8424 which calls for the payment of the net income at the end of the
taxable period.
63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets
differently, respondents cannot disregard the distinctions set by the legislators
as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales
of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the
authority to promulgate the necessary rules and regulations for the effective
enforcement of the provisions of the law. Such authority is subject to the
limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and
implement.
64
It is well-settled that an administrative agency cannot amend an
act of Congress.
65

We have long recognized that the method of withholding tax at source is a
procedure of collecting income tax which is sanctioned by our tax laws.
66
The
withholding tax system was devised for three primary reasons: first, to provide
the taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding returns and
third, to improve the governments cash flow.
67
This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies
and reduction of governmental effort to collect taxes through more
complicated means and remedies.
68

Respondent Secretary has the authority to require the withholding of a tax on
items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which
provides:
SEC. 57. Withholding of Tax at Source.
x x x x x x x x x
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not less than
one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the
taxable year.
The questioned provisions of RR 2-98, as amended, are well within the
authority given by Section 57(B) to the Secretary, i.e., the graduated rate of
1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the
income payable and the tax is creditable against the income tax liability of
the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations
Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base
of a real estate business income tax from net income to GSP or FMV of the
property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer
in order to extinguish its possible tax obligation.
69
They are installments on the
annual tax which may be due at the end of the taxable year.
70

Under RR 2-98, the tax base of the income tax from the sale of real property
classified as ordinary assets remains to be the entitys net income imposed
under Section 24 (resident individuals) or Section 27 (domestic corporations) in
relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
The CWT is to be deducted from the net income tax payable by the taxpayer
at the end of the taxable year.
71
Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-
2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of
real properties shall unless otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
x x x x x x x x x
a. In the case of individual citizens (including estates and trusts), resident
aliens, and non-resident aliens engaged in trade or business in the Philippines;
x x x x x x x x x
(ii) The sale of real property located in the Philippines, classified as ordinary
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-
98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to theordinary income tax imposed under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the case may be, based on net taxable income.
x x x x x x x x x
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless
of the classification thereof, all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of
the Code. In lieu of the ordinary income tax, however, domestic corporations
may become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax
return and credit the taxes withheld (by the withholding agent/buyer) against
its tax due. If the tax due is greater than the tax withheld, then the taxpayer
shall pay the difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly,
the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold the tax does not know,
nor is he privy to, how much the taxpayer/seller will have as its net income at
the end of the taxable year. Instead, said withholding agents knowledge and
privity are limited only to the particular transaction in which he is a party. In
such a case, his basis can only be the GSP or FMV as these are the only
factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of
the real property categorized as ordinary assets. On the other hand, Section
27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain
presumed to be realized from the sale of a capital asset based on its GSP or
FMV. This final tax is also withheld at source.
72

The differences between the two forms of withholding tax, i.e., creditable and
final, show that ordinary assets are not treated in the same manner as capital
assets. Final withholding tax (FWT) and CWT are distinguished as follows:
FWT CWT
a) The amount of income tax
withheld by the withholding
agent is constituted as a full
and final payment of the
income tax due from the
payee on the said income.
a) Taxes withheld on certain income
payments are intended to equal or at
least approximate the tax due of the
payee on said income.
b)The liability for payment of
the tax rests primarily on the
payor as a withholding agent.
b) Payee of income is required to
report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more than
the tax due.
c) The payee is not required
to file an income tax return for
the particular income.
73

c) The income recipient is still required
to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the
NIRC, as amended.
74

As previously stated, FWT is imposed on the sale of capital assets. On the other
hand, CWT is imposed on the sale of ordinary assets. The inherent and
substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and treated
similarly as, capital assets in contravention of the pertinent provisions of RA
8424.
Petitioner insists that the levy, collection and payment of CWT at the time of
transaction are contrary to the provisions of RA 8424 on the manner and time
of filing of the return, payment and assessment of income tax involving
ordinary assets.
75

The fact that the tax is withheld at source does not automatically mean that it
is treated exactly the same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the
withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding
tax, whether final or creditable. According to petitioner, the whole of Section
57 governs the withholding of income tax on passive income. The
enumeration in Section 57(A) refers to passive income being subjected to
FWT. It follows that Section 57(B) on CWT should also be limited to passive
income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules
and regulations, the [Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by
Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B),
25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 58 of this
Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may,
upon the recommendation of the [CIR], require the withholding of
a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the
taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of
income and enumerates these as passive income. The BIR defines passive
income by stating what it is not:
if the income is generated in the active pursuit and performance of the
corporations primary purposes, the same is not passive income
76

It is income generated by the taxpayers assets. These assets can be in the
form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a
CWT on "income payable to natural or juridical persons, residing in the
Philippines." There is no requirement that this income be passive income. If that
were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while
Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than
those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard
57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or
deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a
statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to
carry out its functions.
77
Similarly, considering that the law uses the general
term "income," the Secretary and CIR may specify the kinds of income the
rules will apply to based on what is feasible. In addition, administrative rules
and regulations ordinarily deserve to be given weight and respect by the
courts
78
in view of the rule-making authority given to those who formulate
them and their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their property without due
process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from
net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the
seller of the property at the end of the taxable year. The seller will be able to
claim a tax refund if its net income is less than the taxes withheld. Nothing is
taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process
requirement applies to the power to tax.
79
The CWT does not impose new
taxes nor does it increase taxes.
80
It relates entirely to the method and time of
payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort to
litigation before they are granted a refund.
81
This argument is misleading. The
practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the
tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages, materials, cost of money and
other expenses which can then save the entity from having to obtain loans
entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge
investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front"
regulatory fees from at least 20 government agencies.
82

Petitioners lamentations will not support its attack on the constitutionality of
the CWT. Petitioners complaints are essentially matters of policy best
addressed to the executive and legislative branches of the government.
Besides, the CWT is applied only on the amounts actually received or
receivable by the real estate entity. Sales on installment are taxed on a per-
installment basis.
83
Petitioners desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be demanded
from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing enterprises
are not similarly imposed a CWT on their sales, even if their manner of doing
business is not much different from that of a real estate enterprise. Like a
manufacturing concern, a real estate business is involved in a continuous
process of production and it incurs costs and expenditures on a regular basis.
The only difference is that "goods" produced by the real estate business are
house and lot units.
84

Again, we disagree.
The equal protection clause under the Constitution means that "no person or
class of persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and in like
circumstances."
85
Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be
germane to the purpose of the law; (3) not be limited to existing conditions
only and (4) apply equally to all members of the same class.
86

The taxing power has the authority to make reasonable classifications for
purposes of taxation.
87
Inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no constitutional
limitation.
88
The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the real
estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their
goods sold and the number of transactions involved. The income from the
sale of a real property is bigger and its frequency of transaction limited,
making it less cumbersome for the parties to comply with the withholding tax
scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month
involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient
and unmanageable system of taxation and may well defeat the purpose of
the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items
are also sold infrequently, e.g.heavy equipment, jewelry, furniture, appliance
and other capital goods yet these are not similarly subjected to the CWT.
89
As
already discussed, the Secretary may adopt any reasonable method to carry
out its functions.
90
Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners
argument is not accurate. The sales of manufacturers who have clients within
the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.
91


Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the
Registry of Deeds should not effect the regisration of any document
transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike
down this rule except to rely on its contention that the CWT is unconstitutional.
We have ruled that it is not. Furthermore, this provision uses almost exactly the
same wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document
transferring real property shall be effected by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such transfer has
been reported, and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to the
penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest
thing in the world to understand is the income tax."
92
When a party questions
the constitutionality of an income tax measure, it has to contend not only with
Einsteins observation but also with the vast and well-established jurisprudence
in support of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.



G.R. No. L-45987 May 5, 1939
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
CAYAT, defendant-appellant.
Sinai Hamada y Cario for appellant.
Office of the Solicitor-General Tuason for appellee.
MORAN, J.:
Prosecuted for violation of Act No. 1639 (secs. 2 and 3), the accused, Cayat,
a native of Baguio, Benguet, Mountain Province, was sentenced by the justice
of the peace court of Baguio to pay a fine of five pesos (P5) or suffer
subsidiary imprisonment in case of insolvency. On appeal of the Court of First
Instance, the following information was filed against him:
That on or about the 25th day of January, 1937, in the City of
Baguio, Commonwealth of the Philippines, and within the jurisdiction
of this court, the above-named accused, Cayat, being a member
of the non-Christian tribes, did then and there willfully, unlawfully,
and illegally receive, acquire, and have in his possession and under
his control or custody, one bottle of A-1-1 gin, an intoxicating liquor,
other than the so-called native wines and liquors which the
members of such tribes have been accustomed themselves to
make prior to the passage of Act No. 1639.
Accused interposed a demurrer which was overruled. At the trial, he admitted
all the facts alleged in the information, but pleaded not guilty to the charge
for the reasons adduced in his demurrer and submitted the case on the
pleadings. The trial court found him guilty of the crime charged and
sentenced him to pay a fine of fifty pesos (P50) or supper subsidiary
imprisonment in case of insolvency. The case is now before this court on
appeal. Sections 2 and 3 of Act No. 1639 read:
SEC. 2. It shall be unlawful for any native of the Philippine Islands
who is a member of a non-Christian tribe within the meaning of the
Act Numbered Thirteen hundred and ninety-seven, to buy, receive,
have in his possession, or drink any ardent spirits, ale, beer, wine, or
intoxicating liquors of any kind, other than the so-called native wines
and liquors which the members of such tribes have been
accustomed themselves to make prior to the passage of this Act,
except as provided in section one hereof; and it shall be the duty of
any police officer or other duly authorized agent of the Insular or
any provincial, municipal or township government to seize and
forthwith destroy any such liquors found unlawfully in the possession
of any member of a non-Christian tribe.
SEC. 3. Any person violating the provisions of section one or section
two of this Act shall, upon conviction thereof, be punishable for
each offense by a fine of not exceeding two hundred pesos or by
imprisonment for a term not exceeding six months, in the discretion
of the court.
The accused challenges the constitutionality of the Act on the following
grounds:
(1) That it is discriminatory and denies the equal protection of the laws;
(2) That it is violative of the due process clause of the Constitution: and.
(3) That it is improper exercise of the police power of the state.
Counsel for the appellant holds out his brief as the "brief for the non-Christian
tribes." It is said that as these less civilized elements of the Filipino population
are "jealous of their rights in a democracy," any attempt to treat them with
discrimination or "mark them as inferior or less capable rate or less entitled" will
meet with their instant challenge. As the constitutionality of the Act here
involved is questioned for purposes thus mentioned, it becomes imperative to
examine and resolve the issues raised in the light of the policy of the
government towards the non-Christian tribes adopted and consistently
followed from the Spanish times to the present, more often with sacrifice and
tribulation but always with conscience and humanity.
As early as 1551, the Spanish Government had assumed an unvarying
solicitous attitude toward these inhabitants, and in the different laws of the
Indies, their concentration in so-called "reducciones" (communities) have
been persistently attempted with the end in view of according them the
"spiritual and temporal benefits" of civilized life. Throughout the Spanish
regime, it had been regarded by the Spanish Government as a sacred "duty
to conscience and humanity" to civilize these less fortunate people living "in
the obscurity of ignorance" and to accord them the "the moral and material
advantages" of community life and the "protection and vigilance afforded
them by the same laws." (Decree of the Governor-General of the Philippines,
Jan. 14, 1887.) This policy had not been deflected from during the American
period. President McKinley in his instructions to the Philippine Commission of
April 7, 1900, said:
In dealing with the uncivilized tribes of the Islands, the Commission
should adopt the same course followed by Congress in permitting
the tribes of our North American Indians to maintain their tribal
organization and government, and under which many of those
tribes are now living in peace and contentment, surrounded by
civilization to which they are unable or unwilling to conform. Such
tribal government should, however, be subjected to wise and firm
regulation; and, without undue or petty interference, constant and
active effort should be exercised to prevent barbarous practices
and introduce civilized customs.
Since then and up to the present, the government has been constantly vexed
with the problem of determining "those practicable means of bringing about
their advancement in civilization and material prosperity." (See, Act No. 253.)
"Placed in an alternative of either letting them alone or guiding them in the
path of civilization," the present government "has chosen to adopt the latter
measure as one more in accord with humanity and with the national
conscience." (Memorandum of Secretary of the Interior, quoted in
Rubi vs. Provincial Board of Mindoro, 39 Phil., 660, 714.) To this end, their homes
and firesides have been brought in contact with civilized communities through
a network of highways and communications; the benefits of public education
have to them been extended; and more lately, even the right of suffrage.
And to complement this policy of attraction and assimilation, the Legislature
has passed Act No. 1639 undoubtedly to secure for them the blessings of
peace and harmony; to facilitate, and not to mar, their rapid and steady
march to civilization and culture. It is, therefore, in this light that the Act must
be understood and applied.
It is an established principle of constitutional law that the guaranty of the
equal protection of the laws is not equal protection of the laws is not violated
by a legislation based on reasonable classification. And the classification, to
be reasonable, (1) must rest on substantial distinctions; (2) must be germane
to the purposes of the law; (3) must not be limited to existing conditions only;
and (4) must apply equally to all members of the same class. (Borgnis vs. Falk
Co., 133 N.W., 209; Lindsley vs. Natural Carbonic Gas Co., 220 U.S. 61; 55 Law.
ed., Rubi vs. Provincial Board of Mindoro, 39 Phil., 660; People and Hongkong
& Shanghai Banking Corporationvs. Vera and Cu Unjieng, 37 Off. Gaz ., 187.)
Act No. 1639 satisfies these requirements. The classification rests on real and
substantial, not merely imaginary or whimsical, distinctions. It is not based
upon "accident of birth or parentage," as counsel to the appellant asserts, but
upon the degree of civilization and culture. "The term 'non-Christian tribes'
refers, not to religious belief, but, in a way, to the geographical area, and,
more directly, to natives of the Philippine Islands of a low grade of civilization,
usually living in tribal relationship apart from settled communities."
(Rubi vs. Provincial Board of Mindoro, supra.) This distinction is unquestionably
reasonable, for the Act was intended to meet the peculiar conditions existing
in the non-Christian tribes. The exceptional cases of certain members thereof
who at present have reached a position of cultural equality with their Christian
brothers, cannot affect the reasonableness of the classification thus
established.
That it is germane to the purposes of law cannot be doubted. The prohibition
"to buy, receive, have in his possession, or drink any ardent spirits, ale, beer,
wine, or intoxicating liquors of any kind, other than the so-called native wines
and liquors which the members of such tribes have been accustomed
themselves to make prior to the passage of this Act.," is unquestionably
designed to insure peace and order in and among the non-Christian tribes. It
has been the sad experience of the past, as the observations of the lower
court disclose, that the free use of highly intoxicating liquors by the non-
Christian tribes have often resulted in lawlessness and crimes, thereby
hampering the efforts of the government to raise their standard of life and
civilization.
The law is not limited in its application to conditions existing at the time of its
enactment. It is intended to apply for all times as long as those conditions
exist. The Act was not predicated, as counsel for appellant asserts, upon the
assumption that the non-Christians are "impermeable to any civilizing
influence." On the contrary, the Legislature understood that the civilization of
a people is a slow process and that hand in hand with it must go measures of
protection and security.
Finally, that the Act applies equally to all members of the class is evident from
a perusal thereof. That it may be unfair in its operation against a certain
number non-Christians by reason of their degree of culture, is not an argument
against the equality of its application.
Appellants contends that that provision of the law empowering any police
officer or other duly authorized agent of the government to seize and
forthwith destroy any prohibited liquors found unlawfully in the possession of
any member of the non-Christian tribes is violative of the due process of law
provided in the Constitution. But this provision is not involved in the case at
bar. Besides, to constitute due process of law, notice and hearing are not
always necessary. This rule is especially true where much must be left to the
discretion of the administrative officials in applying a law to particular cases.
(McGehee, Due Process of Law p. 371, cited with approval in
Rubi vs. Provincial Board of Mindoro, supra.) Due process of law means simply:
(1) that there shall be a law prescribed in harmony with the general powers of
the legislative department of the government; (2) that it shall be reasonable in
its operation; (3) that it shall be enforced according to the regular methods of
procedure prescribed; and (4) that it shall be applicable alike to all citizens of
the state or to all of the class. (U.S. vs. Ling Su Fan, 10 Phil., 104, affirmed on
appeal by the United States Supreme Court, 218 U.S., 302: 54 Law. ed., 1049.)
Thus, a person's property may be seized by the government in payment of
taxes without judicial hearing; or property used in violation of law may be
confiscated (U.S. vs. Surla, 20 Phil., 163, 167), or when the property
constitutes corpus delicti, as in the instant case (Moreno vs. Ago Chi, 12 Phil.,
439, 442).
Neither is the Act an improper exercise of the police power of the state. It has
been said that the police power is the most insistent and least limitable of all
powers of the government. It has been aptly described as a power co-
extensive with self-protection and constitutes the law of overruling necessity.
Any measure intended to promote the health, peace, morals, education and
good order of the people or to increase the industries of the state, develop its
resources and add to its wealth and prosperity (Barbier vs. Connolly, 113 U.S.,
27), is a legitimate exercise of the police power, unless shown to be whimsical
or capricious as to unduly interfere with the rights of an individual, the same
must be upheld.
Act No. 1639, as above stated, is designed to promote peace and order in
the non-Christian tribes so as to remove all obstacles to their moral and
intellectual growth and, eventually, to hasten their equalization and
unification with the rest of their Christian brothers. Its ultimate purpose can be
no other than to unify the Filipino people with a view to a greater Philippines.
The law, then, does not seek to mark the non-Christian tribes as "an inferior or
less capable race." On the contrary, all measures thus far adopted in the
promotion of the public policy towards them rest upon a recognition of their
inherent right to equality in tht enjoyment of those privileges now enjoyed by
their Christian brothers. But as there can be no true equality before the law, if
there is, in fact, no equality in education, the government has endeavored,
by appropriate measures, to raise their culture and civilization and secure for
them the benefits of their progress, with the ultimate end in view of placing
them with their Christian brothers on the basis of true equality. It is indeed
gratifying that the non-Christian tribes "far from retrograding, are definitely
asserting themselves in a competitive world," as appellant's attorney
impressively avers, and that they are "a virile, up-and -coming people eager
to take their place in the world's social scheme." As a matter of fact, there are
now lawyers, doctors and other professionals educated in the best institutions
here and in America. Their active participation in the multifarious welfare
activities of community life or in the delicate duties of government is certainly
a source of pride and gratification to people of the Philippines. But whether
conditions have so changed as to warrant a partial or complete abrogation
of the law, is a matter which rests exclusively within the prerogative of the
National Assembly to determine. In the constitutional scheme of our
government, this court can go no farther than to inquire whether the
Legislature had the power to enact the law. If the power exists, and we hold it
does exist, the wisdom of the policy adopted, and the adequacy under
existing conditions of the measures enacted to forward it, are matters which
this court has no authority to pass upon. And, if in the application of the law,
the educated non-Christians shall incidentally suffer, the justification still exists
in the all-comprehending principle of salus populi suprema est lex. When the
public safety or the public morals require the discontinuance of a certain
practice by certain class of persons, the hand of the Legislature cannot be
stayed from providing for its discontinuance by any incidental inconvenience
which some members of the class may suffer. The private interests of such
members must yield to the paramount interests of the nation (Cf. Boston Beer
Co. vs. Mass., 97 U.S., 25; 24 law. ed., 989).
Judgment is affirmed, with costs against appellant.

G.R. No. L-23794 February 17, 1968
ORMOC SUGAR COMPANY, INC., plaintiff-appellant,
vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY,
HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC
CITY, defendants-appellees.
Ponce Enrile, Siguion Reyna, Montecillo & Belo and Teehankee, Carreon &
Taada for plaintiff-appellant.
Ramon O. de Veyra for defendants-appellees.
BENGZON, J.P., J.:
On January 29, 1964, the Municipal Board of Ormoc City
passed
1
Ordinance No. 4, Series of 1964, imposing "on any and all productions
of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in Ormoc City
a municipal tax equivalent to one per centum (1%) per export sale to the
United States of America and other foreign countries."
2

Payments for said tax were made, under protest, by Ormoc Sugar
Company, Inc. on March 20, 1964 for P7,087.50 and on April 20, 1964 for
P5,000, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of
First Instance of Leyte, with service of a copy upon the Solicitor General, a
complaint
3
against the City of Ormoc as well as its Treasurer, Municipal Board
and Mayor, alleging that the afore-stated ordinance is unconstitutional for
being violative of the equal protection clause (Sec. 1[1], Art. III, Constitution)
and the rule of uniformity of taxation (Sec. 22[1]), Art. VI, Constitution), aside
from being an export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor
a license tax which Ormoc City under Section 15-kk of its charter and under
Section 2 of Republic Act 2264, otherwise known as the Local Autonomy Act,
is authorized to impose; and that the tax amounts to a customs duty, fee or
charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because
the tax is on both the sale and export of sugar.
Answering, the defendants asserted that the tax ordinance was within
defendant city's power to enact under the Local Autonomy Act and that the
same did not violate the afore-cited constitutional limitations. After pre-trial
and submission of the case on memoranda, the Court of First Instance, on
August 6, 1964, rendered a decision that upheld the constitutionality of the
ordinance and declared the taxing power of defendant chartered city
broadened by the Local Autonomy Act to include all other forms of taxes,
licenses or fees not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar
Company, Inc. Appellant alleges the same statutory and constitutional
violations in the aforesaid taxing ordinance mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City
Treasurer on any and all productions of centrifugal sugar milled at the Ormoc
Sugar Company, Incorporated, in Ormoc City, a municipal tax equivalent to
one per centum (1%) per export sale to the United States of America and
other foreign countries." Though referred to as a tax on the export of
centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of
sugar alone is not taxable; the only time the tax applies is when the sugar
produced is exported.
Appellant questions the authority of the defendant Municipal Board to
levy such an export tax, in view of Section 2287 of the Revised Administrative
Code which denies from municipal councils the power to impose an export
tax. Section 2287 in part states: "It shall not be in the power of the municipal
council to impose a tax in any form whatever, upon goods and merchandise
carried into the municipality, or out of the same, and any attempt to impose
an import or export tax upon such goods in the guise of an unreasonable
charge for wharfage use of bridges or otherwise, shall be void."
Subsequently, however, Section 2 of Republic Act 2264 effective June
19, 1959, gave chartered cities, municipalities and municipal districts authority
to levy for public purposes just and uniform taxes, licenses or fees. Anent the
inconsistency between Section 2287 of the Revised Administrative Code and
Section 2 of Republic Act 2264, this Court, in Nin Bay Mining Co. v. Municipality
of Roxas
4
held the former to have been repealed by the latter. And
expressing Our awareness of the transcendental effects that municipal export
or import taxes or licenses will have on the national economy, due to Section
2 of Republic Act 2264, We stated that there was no other alternative until
Congress acts to provide remedial measures to forestall any unfavorable
results.
The point remains to be determined, however, whether constitutional
limits on the power of taxation, specifically the equal protection clause and
rule of uniformity of taxation, were infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be
denied the equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs.
Salas,
5
We ruled that the equal protection clause applies only to persons or
things identically situated and does not bar a reasonable classification of the
subject of legislation, and a classification is reasonable where (1) it is based on
substantial distinctions which make real differences; (2) these are germane to
the purpose of the law; (3) the classification applies not only to present
conditions but also to future conditions which are substantially identical to
those of the present; (4) the classification applies only to those who belong to
the same class.
A perusal of the requisites instantly shows that the questioned ordinance
does not meet them, for it taxes only centrifugal sugar produced and
exported by the Ormoc Sugar Company, Inc. and none other. At the time of
the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was
the only sugar central in the city of Ormoc. Still, the classification, to be
reasonable, should be in terms applicable to future conditions as well. The
taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central, of the same class as plaintiff, for the
coverage of the tax. As it is now, even if later a similar company is set up, it
cannot be subject to the tax because the ordinance expressly points only to
Ormoc City Sugar Company, Inc. as the entity to be levied upon.
Appellant, however, is not entitled to interest; on the refund because
the taxes were not arbitrarily collected (Collector of Internal Revenue v.
Binalbagan).
6
At the time of collection, the ordinance provided a sufficient
basis to preclude arbitrariness, the same being then presumed constitutional
until declared otherwise.
WHEREFORE, the decision appealed from is hereby reversed, the
challenged ordinance is declared unconstitutional and the defendants-
appellees are hereby ordered to refund the P12,087.50 plaintiff-appellant paid
under protest. No costs. So ordered.

G.R. No. 127410 January 20, 1999
CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.
JUNGCO, petitioners,
vs.
COURT OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION
AND DEVELOPMENT AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY, BUREAU
OF INTERNAL REVENUE, CITY TREASURER OF OLONGAPO and MUNICIPAL
TREASURER OF SUBIC, ZAMBALES, respondents.

PANGANIBAN, J.:
The constituttional rights to equal protection of the law is not violated by an
executive order, issued pursuant to law, granting tax and duty incentives only
to the bussiness and residents within the "secured area" of the Subic Special
Econimic Zone and denying them to those who live within the Zone but
outside such "fenced-in" territory. The Constitution does not require absolute
equality among residents. It is enough that all persons under like
circumstances or conditions are given the same privileges and required to
follow the same obligations. In short, a classification based on valid and
reasonable standards does not violate the equal protection clause.
The Case
Before us is a petition for review under Rule 45 of the Rules of Court, seeking
the reversal of the Court of Appeals' Decision
1
promulgated on August 29,
1996, and Resolution
2
dated November 13, 1996, in CA-GR SP No. 37788.
3
The
challenged Decision upheld the constitutionality and validity of Executive
Order No. 97-A (EO 97-A), according to which the grant and enjoyment of the
tax and duty incentives authorized under Republic Act No. 7227 (RA 7227)
were limited to the business enterprises and residents within the fenced-in
area of the Subic Special Economic Zone (SSEZ).
The assailed Resolution denied the petitioners' motion for reconsideration.
On March 13, 1992, Congress, with the approval of the President, passed into
law RA 7227 entitled "An Act Accelerating the Conversion of Military
Reservations Into Other Productive Uses, Creating the Bases Conversion and
Development Authority for this Purpose, Providing Funds Therefor and for Other
Purposes." Section 12 thereof created the Subic Special Economic Zone and
granted there to special privileges, as follows:
Sec. 12. Subic Special Economic Zone. Subject to the concurrence by
resolution of thesangguniang panlungsod of the City of Olongapo and
the sangguniang bayan of the Municipalities of Subic, Morong and
Hermosa, there is hereby created a Special Economic and Free-port
Zone consisting of the City of Olongapo and the Municipality of Subic,
Province of Zambales, the lands occupied by the Subic Naval Base and
its contiguous extensions as embraced, covered, and defined by the
1947 Military Bases Agreement between the Philippines and the United
States of America as amended, and within the territorial jurisdiction of the
Municipalities of Morong and Hermosa, Province of Bataan, hereinafter
referred to as the Subic Special Economic Zone whose metes and
bounds shall be delineated in a proclamation to be issued by the
President of the Philippines. Within thirty (30) days after the approval of
this Act, each local government unit shall submit its resolution of
concurrence to join the Subic Special Economic Zone to the Office of
the President. Thereafter, the President of the Philippines shall issue a
proclamation defining the metes and bounds of the zone as provided
herein.
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of
the Constitution and the pertinent provisions of the Local Government
Code, the Subic Special Economic Zone shall be developed into a self-
sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to
attract and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed
as a separate customs territory ensuring free flow or movement of goods
and capital within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be
subject to customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;
(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying taxes, three percent (3%)
of the gross income earned by all businesses and enterprises within the
Subic Special Economic Zone shall be remitted to the National
Government, one percent (1%) each to the local government units
affected by the declaration of the zone in proportion to their population
area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by
all businesses and enterprises within the Subic Special Economic Zone to
be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities
contiguous to the base areas.
In case of conflict between national and local laws with respect to tax
exemption privileges in the Subic Special Economic Zone, the same shall
be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for
foreign exchange, gold, securities and future shall be allowed and
maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and
regulate the operations of banks and other financial institutions within the
Subic Special Economic Zone;
(f) Banking and finance shall be liberalized with the establishment of
foreign currency depository units of local commercial banks and offshore
banking units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose
continuing investment shall not be less than two hundred fifty thousand
dollars ($250,000), his/her spouse and dependent children under twenty-
one (21) years of age, shall be granted permanent resident status within
the Subic Special Economic Zone. They shall have the freedom of ingress
and egress to and from the Subic Special Economic Zone without any
need of special authorization form the Bureau of Immigration and
Deportation. The Subic Bay Metropolitan Authority referred to in Section
13 of this Act may also issue working visas renewable every two (2) years
to foreign executives and other aliens possessing highly technical skills
which no Filipino within the Subic Special Economic Zone possesses, as
certified by the Department of Labor and Employment. The names of
aliens granted permanent residence status and working visas by the
Subic Bay Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after issuance
thereof;
(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic
Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shall
provide and establish its own security and fire-fighting forces; and
(i) Except as herein provided, the local government units comprising the
Subic Special Economic Zone shall retain their basic autonomy and
identity. The cities shall be governed by their respective charters and the
municipalities shall operate and function in accordance with Republic
Act No. 7160, otherwise known as the Local Government Code of 1991.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97
(EO 97), clarifying the application of the tax and duty incentives thus:
Sec. 1. On Import Taxes and Duties. Tax and duty-free
importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises
into the SSEZ. Except for these items, importations of other
goods into the SSEZ, whether by business enterprises or
resident individuals, are subject to taxes and duties under
relevant Philippine laws.
The exportation or removal of tax and duty-free goods
from the territory of the SSEZ to other parts of the Philippine
territory shall be subject to duties and taxes under relevant
Philippine laws.
Sec. 2. On All Other Taxes. In lieu of all local and
national taxes (except import taxes and duties), all
business enterprises in the SSEZ shall be required to pay the
tax specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President issued Executive Order No. 97-
A (EO 97-A), specifying the area within which the tax-and-duty-free privilege
was operative, viz.:
Sec. 1.1. The Secured Area consisting of the presently
fenced-in former Subic Naval Base shall be the only
completely tax and duty-free area in the SSEFPZ [Subic
Special Economic and Free Port Zone]. Business
enterprises and individuals (Filipinos and foreigners)
residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items
tax and duty-free. Consumption items, however, must be
consumed within the Secured Area. Removal of raw
materials, capital goods, equipment and consumer items
out of the Secured Area for sale to non-SSEFPZ registered
enterprises shall be subject to the usual taxes and duties,
except as may be provided herein.
On October 26, 1994, the petitioners challenged before this Court the
constitutionality of EO 97-A for allegedly being violative of their right to equal
protection of the laws. In a Resolution dated June 27, 1995, this Court referred
the matter to the Court of Appeals, pursuant to Revised Administrative
Circular No. 1-95.
Incidentally, on February 1, 1995, Proclamation No. 532 was issued by
President Ramos. It delineated the exact metes and bounds of the Subic
Special Economic and Free Port Zone, pursuant to Section 12 of RA 7227.
Ruling of the Court of Appeals
Respondent Court held that "there is no substantial difference between the
provisions of EO 97-A and Section 12 of RA 7227. In both, the 'Secured Area' is
precise and well-defined as '. . . the lands occupied by the Subic Naval Base
and its contiguous extensions as embraced, covered and defined by the 1947
Military Bases Agreement between the Philippines and the United States of
America, as amended . . .'" The appellate court concluded that such being
the case, petitioners could not claim that EO 97-A is unconstitutional, while at
the same time maintaining the validity of RA 7227.
The court a quo also explained that the intention of Congress was to confine
the coverage of the SSEZ to the "secured area" and not to include the "entire
Olongapo City and other areas mentioned in Section 12 of the law." It relied
on the following deliberarions in the Senate:
Senator Paterno. Thank you, Mr. President. My first question
is the extent of the economic zone. Since this will be a free
port, in effect, I believe that it is important to delineate or
make sure that the delineation will be quite precise[. M]y
question is: Is it the intention that the entire of Olongapo
City, the Municipality of Subic and the Municipality of
Dinalupihan will be covered by the special economic
zone or only portions thereof?
Senator Shahani. Only portions, Mr. President. In other
words, where the actual operations of the free port will
take place.
Senator Paterno. I see. So, we should say, "COVERING THE
DESIGNATED PORTIONS OR CERTAIN PORTIONS OF
OLONGAPO CITY, SUBIC AND DINALUPIHAN" to make it
clear that it is not supposed to cover the entire area of all
of these territories.
Senator Shahani. So, the Gentleman is proposing that the
words "CERTAIN AREAS". . .
The President. The Chair would want to invite the attention
of the Sponsor and Senator Paterno to letter "C," which
says: "THE PRESIDENT OF THE PHILIPPINES IS HEREBY
AUTHORIZED TO PROCLAIM, DELINEATE AND SPECIFY THE
METES AND BOUNDS OF OTHER SPECIAL ECONOMIC
ZONES WHICH MAY BE CREATED IN THE CLARK MILITARY
RESERVATIONS AND ITS EXTENSIONS."
Probably, this provision can be expanded since,
apparently, the intention is that what is referred to in
Olongapo as Metro Olongapo is not by itself ipso
jure already a special economic zone.
Senator Paterno. That is correct.
The President. Someone, some authority must declare
which portions of the same shall be the economic zone. Is
it the intention of the author that it is the President of the
Philippines who will make such delineation?
Senator Shahani. Yes Mr. President.
The Court of Appeals further justified the limited application of the tax
incentives as being within the prerogative of the legislature, pursuant to its
"avowed purpose [of serving] some public benefit or interest." It ruled that "EO
97-A merely implements the legislative purpose of [RA 7227]."
Disagreeing, petitioners now seek before us a review of the aforecited Court
of Appeals Decision and Resolution.
The Issue
Petitioners submit the following issue for the resolution of the Court:
[W]hether or not Executive Order No. 97-A violates the
equal protection clause of the Constitution. Specifically
the issue is whether the provisions of Executive Order No.
97-A confining the application of R.A. 7227 within the
secured area and excluding the residents of the zone
outside of the secured area is discriminatory or not.
4

The Court's Ruling
The petition
5
is bereft of merit.
Main Issue:
The Constitionality of EO 37-A
Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses
(1) the City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the
area formerly occupied by the Subic Naval Base. However, EO 97-A,
according to them, narrowed down the area within which the special
privileges granted to the entire zone would apply to the present "fenced-in
former Subic Naval Base" only. It has thereby excluded the residents of the first
two components of the zone from enjoying the benefits granted by the law. It
has effectively discriminated against them without reasonable or valid
standards, in contravention of the equal protection guarantee.
On the other hand, the solicitor general defends, on behalf of respondents,
the validity of EO 97-A, arguing that Section 12 of RA 7227 clearly vests in the
President the authority to delineate the metes and bounds of the SSEZ. He
adds that the issuance fully complies with the requiretnents of a valid
classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said
Order is not violative of the equal protection clause; neither is it discriminatory.
Rather, than we find real and substantive distinctions between the
circumstances obtain;ng inside and those outside the Subic Naval Base,
thereby justifying a valid and reasonable classification.
The fundamental right of equal protection of the laws is not absolute, but is
subject to reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be treated
and regulated differently from another.
6
The classification must also be
germane to the purpose of the law and must apply to all those belonging to
the same class. Explaining the nature of the equal protection guarantee, the
Court in Ichong v. Hernandez
8
said:
The equal protection of the law clause is against undue
favor and individual or class privilege, as well as hostile
discrimination or the oppression of inequality. It is not
intended to prohibit legislation which is limited either [by]
the object to which it is directed or by [the] territory within
which it is to operate. It does not demand absolute
equality among residents; it merely requires that all
persons shall be treated alike, under like circumstances
and conditions both as to privileges conferred and
liabilities enforced. The equal protection clause is not
infringed by legislation which applies only to those persons
falling within a specified class, if it applies alike to all
persons within such class, and reasonable. grounds exist
for making a distinction between those who fall within
such class and those who do not.
Classification, to be valid, must (1) rest on substantial distinctions, (2) be
germane to the purpose of the law, (3) not be limited to existing conditions
only, and (4) apply equally to all members of the same class.
9

We first determine the purpose of the law. From the very title itself, it is clear
that RA 7227 aims primarily toaccelerate the conversion of military
reservations into productive uses. Obviously, the "lands covered under the
1947 Military Bases Agreement" are its object. Thus, the law avows this policy:
Sec. 2. Declaration of Policies. It is hereby declared the
policy of the Government to accelerate the sound and
balanced conversion into alternative productive uses of
the Clark and Subic military reservations and their
extensions (John Hay Station, Wallace Air Station,
O'Donnell Transmitter Station, San Miguel Naval
Communications Station and Capas Relay Station), to
raise funds by the sale of portions of Metro Manila military
camps, and to apply said funds as provided herein for the
development and conversion to productive civilian use of
the lands covered under the 1947 Military Bases
Agreement between the Philippines and the United States
of America, as amended.
To undertake the above objectives, the same law created the Bases
Conversion and Development Authority, some of whose relevant defined
purposes are:
(b) To adopt, prepare and implement a comprehensive
and detailed development plan embodying a list of
projects including but not limited to those provided in the
Legislative-Executive Bases Council (LEBC) framework plan
for the sound and balanced conversion of the Clark and
Subic military reservations and their extensions consistent
with ecological and environmental standards, into other
productive uses to promote the economic and social
development of Central Luzon in particular and the
country in general;
(c). To encourage the active participation of the private
sector in transforming the Clark and Subic military
reservations and their extensions into other productive
uses;
Further, in creating the SSEZ, the law declared it a policy to develop the zone
into a "self-sustaining, industrial, commercial, financial and investment
center."
10

From the above provisions of the law, it can easily be deduced that the real
concern of RA 7227 is to convert the lands formerly occupied by the US
military bases into economic or industrial areas. In furtherance of such
objective, Congress deemed it necessary to extend economic incentives to
attract and encourage investors, both local and foreign. Among such
enticements are:
11
(1) a separate customs territory within the zone, (2) tax-
and-duty-free importation's, (3) restructured income tax rates on business
enterprises within the zone, (4) no foreign exchange control, (5) liberalized
regulations on banking and finance, and (6) the grant of resident status to
certain investors and of working visas to certain foreign executives and
workers .
We believe it was reasonable for the President to have delimited the
application of some incentives to the confines of the former Subic military
base. It is this specific area which the government intends to transform and
develop from its status quo ante as an abandoned naval facility into a self-
sustaining industrial and commercial zone, particularly for big foreign and
local investors to use as operational bases for their businesses and industries.
Why the seeming bias for the big investors? Undeniably, they are the ones
who can pour huge investments to spur economic growth in the country and
to generate employment opportunities for the Filipinos, the ultimate goals of
the government for such conversion. The classification is, therefore, germane
to the purposes of the law. And as the legal maxim goes, "The intent of a
statute is the law."
12

Certainly, there are substantial differences between the big investors who are
being lured to establish and operate their industries in the so-called "secured
area" and the present business operators outside the area. On the one hand,
we are talking of billion-peso investments and thousands of new, jobs. On the
other hand, definitely none of such magnitude. In the first, the economic
impact will be national; in the second, only local. Even more important, at this
time the business activities outside the "secured area" are not likely to have
any impact in achieving the purpose of the law, which is to turn the former
military base to productive use for the benefit of the Philippine economy.
There is, then, hardly any reasonable basis to extend to them the benefits and
incentives accorded in RA 7227. Additionally, as the Court of Appeals pointed
out, it will be easier to manage and monitor the activities within the "secured
area," which is already fenced off, to prevent "fraudulent importation of
merchandise" or smuggling.
It is well-settled that the equal-protection guarantee does not require
territorial uniformity of laws.
13
As long as there are actual and material
differences between territories, there is no violation of the constitutional
clause. And of course, anyone, including the petitioners, possessing the
requisite investment capital can always avail of the same benefits by
channeling his or her resources or business operations into the fenced-off free
port zone.
We believe that the classification set forth by the executive issuance does not
apply merely to existing conditions. As laid down in RA 7227, the objective is to
establish a "self-sustaining, industrial, commercial, financial and investment
center" in the area. There will, therefore, be a long-term difference between
such investment center and the areas outside it.
Lastly, the classification applies equally to all the resident individuals and
businesses within the "secured area." The residents, being in like circumstances
or contributing directly to the achievement of the end purpose of the law, are
not categorized further. Instead, they are all similarly treated, both in privileges
granted and in obligations required.
All told, the Court holds that no undue favor or privilege was extended. The
classification occasioned by EO 97-A was not unreasonable, capricious or
unfounded. To repeat, it was based, rather, on fair and substantive
considerations that were germane to the legislative purpose.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and
Resolution are hereby AFFIRMED. Costs against petitioners.1wphi1.nt
SO ORDERED.