Tax 1 Cases

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. Nos. 167274-75
July 21, 2008
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.
DECISION
TINGA, J.:
Simple and uncomplicated is the central issue involved, yet whopping is
the amount at stake in this case.
After much wrangling in the Court of Tax Appeals (CTA) and the Court of
Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was granted a
tax refund or tax credit representing specific taxes erroneously collected
from its tobacco products. The tax refund is being re-claimed by the
Commissioner of Internal Revenue (Commissioner) in this petition.
The following undisputed facts, summarized by the Court of Appeals, are
quoted in the assailed Decision1 dated 28 September 2004:
Salem M 100P1.00
Salem M King
P1.00
Camel F King
P1.00
Camel Lights Box 20s
P1.00
Camel Filters Box 20s
P1.00
Winston F Kings
P5.00
Winston Lights
P5.00
Immediately prior to January 1, 1997, the above-mentioned cigarette
brands were subject to ad valorem tax pursuant to then Section 142 of the
Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No.
8240 took effect whereby a shift from the ad valorem tax (AVT) system to
the specific tax system was made and subjecting the aforesaid cigarette
brands to specific tax under [S]ection 142 thereof, now renumbered as
Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted
thus:
Section 145. Cigars and Cigarettes(A) Cigars. There shall be levied, assessed and collected on cigars a tax
of One peso (P1.00) per cigar.
"(B) Cigarettes packed by hand. There shall be levied, assessesed and
collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per
pack.
(C) Cigarettes packed by machine. There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
CAG.R. SP No. 80675

(1) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve (P12.00)
per pack;
xxxx
Petitioner2 is a domestic corporation duly organized and existing under
and by virtue of the laws of the Republic of the Philippines, with principal
address at Fortune Avenue, Parang, Marikina City.
Petitioner is the manufacturer/producer of, among others, the following
cigarette brands, with tax rate classification based on net retail price
prescribed by Annex "D" to R.A. No. 4280, to wit:
Brand Tax Rate
Champion M 100
P1.00
(2) If the net retail price (excluding the excise tax and the value added
tax) exceeds Six pesos and Fifty centavos (P6.50) but does not exceed Ten
pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00) per pack.
tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty centavos
(P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
tax) is below Five pesos (P5.00) per pack, the tax shall be One peso
(P1.00) per pack;
Variant of a brand shall refer to a brand on which a modifier is prefixed

and/or suffixed to the root name of the brand and/or a different brand
which carries the same logo or design of the existing brand.
"Variants of existing brands of cigarettes which are introduced in the

domestic market after the effectivity of R.A. No. 8240 shall be taxed under
the highest classification of any variant of that brand.
To implement the provisions for a twelve percent (12%) increase of excise

tax on, among others, cigars and cigarettes packed by machines by
January 1, 2000, the Secretary of Finance, upon recommendation of the
respondent Commissioner of Internal Revenue, issued Revenue
Regulations No. 17-99, dated December 16, 1999, which provides the
increase on the applicable tax rates on cigar and cigarettes as follows:
The excise tax from any brand of cigarettes within the next three (3) years
from the effectivity of R.A. No. 8240 shall not be lower than the tax, which
is due from each brand on October 1, 1996. Provided, however, that in
cases were (sic) the excise tax rate imposed in paragraphs (1), (2), (3) and
(4) hereinabove will result in an increase in excise tax of more than
seventy percent (70%), for a brand of cigarette, the increase shall take
effect in two tranches: fifty percent (50%) of the increase shall be
effective in 1997 and one hundred percent (100%) of the increase shall be
effective in 1998.
Duly registered or existing brands of cigarettes or new brands thereof
packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under paragraphs (1), (2)
(3) and (4) hereof, shall be increased by twelve percent (12%) on January
1, 2000. (Emphasis supplied)
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the
cigarette is sold on retail in twenty (20) major supermarkets in Metro
Manila (for brands of cigarettes marketed nationally), excluding the
amount intended to cover the applicable excise tax and value-added tax.
For brands which are marketed only outside Metro [M]anila, the net retail
price shall mean the price at which the cigarette is sold in five (5) major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average retail
price as of October 1, 1996, as set forth in Annex "D," shall remain in force
until revised by Congress.
SECTION
ARTICLES
PRESENT SPECIFIC TAX RATE PRIOR TO JAN. 1,
2000 NEW SPECIFIC TAX RATE EFFECTIVE JAN. 1, 2000
145 (A)
P1.00/cigar P1.12/cigar
(B)Cigarettes packed by machine
(1) Net retail price (excluding VAT and excise) exceeds P10.00 per pack
P12.00/pack P13.44/ pack
(2) Exceeds P10.00 per pack
P8.00/pack P8.96/pack
(3) Net retail price (excluding VAT and excise) is P5.00 to P6.50 per pack
(4) Net Retail Price (excluding VAT and excise) is below P5.00 per pack
Revenue Regulations No. 17-99 likewise provides in the last paragraph of
Section 1 thereof, "(t)hat the new specific tax rate for any existing brand
of cigars, cigarettes packed by machine, distilled spirits, wines and
fermented liquor shall not be lower than the excise tax that is actually
being paid prior to January 1, 2000."
For the period covering January 1-31, 2000, petitioner allegedly paid
specific taxes on all brands manufactured and removed in the total
amounts of P585,705,250.00.
On February 7, 2000, petitioner filed with respondents Appellate Division
a claim for refund or tax credit of its purportedly overpaid excise tax for
the month of January 2000 in the amount of P35,651,410.00
On June 21, 2001, petitioner filed with respondents Legal Service a letter
dated June 20, 2001 reiterating all the claims for refund/tax credit of its
overpaid excise taxes filed on various dates, including the present claim
for the month of January 2000 in the amount of P35,651,410.00.
As there was no action on the part of the respondent, petitioner filed the
instant petition for review with this Court on December 11, 2001, in order
to comply with the two-year period for filing a claim for refund.
In his answer filed on January 16, 2002, respondent raised the following
Special and Affirmative Defenses;
Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent

provisions of Republic Act [No.] 8240, now incorporated in Section 145 of
the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a
refund of P35,651,410.00 as alleged overpaid excise tax for the month of
January 2000.
xxxx
4. Petitioners alleged claim for refund is subject to administrative

routinary investigation/examination by the Bureau;
5. The amount of P35,651,410 being claimed by petitioner as alleged
overpaid excise tax for the month of January 2000 was not properly
documented.
6. In an action for tax refund, the burden of proof is on the taxpayer to
establish its right to refund, and failure to sustain the burden is fatal to its
claim for refund/credit.
Hence, the respondent CTA in its assailed October 21, 2002 [twin]
Decisions[s] disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the instant petition
meritorious and in accordance with law. Accordingly, respondent is hereby
ORDERED to REFUND to petitioner the amount of P35,651.410.00
representing erroneously paid excise taxes for the period January 1 to
January 31, 2000.
SO ORDERED.
7. Petitioner must show that it has complied with the provisions of Section
204(C) in relation [to] Section 229 of the Tax Code on the prescriptive
period for claiming tax refund/credit;
8. Claims for refund are construed strictly against the claimant for the
same partake of tax exemption from taxation; and
9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is
a valid implementing regulation which has the force and effect of law."
CA G.R. SP No. 83165
Herein petitioner sought reconsideration of the above-quoted decision. In

[twin] resolution[s] [both] dated July 15, 2003, the Tax Court, in an
apparent change of heart, granted the petitioners consolidated motions
for reconsideration, thereby denying the respondents claim for refund.
However, on consolidated motions for reconsideration filed by the
respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002 resolution
was set aside, and the Tax Court ruled, this time with a semblance of
finality, that the respondent is entitled to the refund claimed. Hence, in a
resolution dated November 4, 2003, the tax court reinstated its December
21, 2002 Decision and disposed as follows:
The petition contains essentially similar facts, except that the said case
questions the CTAs December 4, 2003 decision in CTA Case No. 6612
granting respondents3 claim for refund of the amount of P355,385,920.00
representing erroneously or illegally collected specific taxes covering the
period January 1, 2002 to December 31, 2002, as well as its March 17,
2004 Resolution denying a reconsideration thereof.
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby
REINSTATED. Accordingly, respondent is hereby ORDERED to REFUND
petitioner the total amount of P680,387,025.00 representing erroneously
paid excise taxes for the period January 1, 2000 to January 31, 2000 and
February 1, 2000 to December 31, 2001.
xxxx
SO ORDERED.
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax
Appeals reduced the issues to be resolved into two as stipulated by the
parties, to wit: (1) Whether or not the last paragraph of Section 1 of
Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered

decision in CTA Case No. 6612 granting the prayer for the refund of the
amount of P355,385,920.00 representing overpaid excise tax for the
period covering January 1, 2002 to December 31, 2002. The tax court
disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED.
Accordingly, respondent is hereby ORDERED to REFUND to petitioner the
amount of P355,385,920.00 representing overpaid excise tax for the
period covering January 1, 2002 to December 31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the same was denied
in a Resolution dated March 17, 2004.4 (Emphasis supplied) (Citations
omitted)
The Commissioner appealed the aforesaid decisions of the CTA. The
petition questioning the grant of refund in the amount of P680,387,025.00
was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of
refund in the amount of P355,385,920.00 was docketed as CA-G.R. SP No.
83165. The petitions were consolidated and eventually denied by the
Court of Appeals. The appellate court also denied reconsideration in its
Resolution5 dated 1 March 2005.
In its Memorandum6 22 dated November 2006, filed on behalf of the
Commissioner, the Office of the Solicitor General (OSG) seeks to convince
the Court that the literal interpretation given by the CTA and the Court of
Appeals of Section 145 of the Tax Code of 1997 (Tax Code) would lead to a
lower tax imposable on 1 January 2000 than that imposable during the
transition period. Instead of an increase of 12% in the tax rate effective on
1 January 2000 as allegedly mandated by the Tax Code, the appellate
courts ruling would result in a significant decrease in the tax rate by as
much as 66%.
The OSG argues that Section 145 of the Tax Code admits of several
interpretations, such as:
1. That by January 1, 2000, the excise tax on cigarettes should be the
higher tax imposed under the specific tax system and the tax imposed
under the ad valorem tax system plus the 12% increase imposed by par.
5, Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not apply to the
brands of cigarettes listed under Annex "D" referred to in par. 8, Sec. 145
of the Tax Code;
3. The 12% increment shall be computed based on the net retail price as
indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code even if the
resulting figure will be lower than the amount already being paid at the
end of the transition period. This is the interpretation followed by both the
CTA and the Court of Appeals.7
This being so, the interpretation which will give life to the legislative intent
to raise revenue should govern, the OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a tax
exemption and must, therefore, be construed strictly against the taxpayer,
such as Fortune Tobacco.
In its Memorandum8 dated 10 November 2006, Fortune Tobacco argues
that the CTA and the Court of Appeals merely followed the letter of the law
when they ruled that the basis for the 12% increase in the tax rate should
be the net retail price of the cigarettes in the market as outlined in
paragraph C, sub paragraphs (1)-(4), Section 145 of the Tax Code. The
Commissioner allegedly has gone beyond his delegated rule-making
power when he promulgated, enforced and implemented Revenue
Regulation No. 17-99, which effectively created a separate classification
for cigarettes based on the excise tax "actually being paid prior to January
1, 2000."9
It should be mentioned at the outset that there is no dispute between the
fact of payment of the taxes sought to be refunded and the receipt thereof
by the Bureau of Internal Revenue (BIR). There is also no question about
the mathematical accuracy of Fortune Tobaccos claim since the
documentary evidence in support of the refund has not been controverted
by the revenue agency. Likewise, the claims have been made and the
actions have been filed within the two (2)-year prescriptive period
provided under Section 229 of the Tax Code.
The power to tax is inherent in the State, such power being inherently
legislative, based on the principle that taxes are a grant of the people who
are taxed, and the grant must be made by the immediate representatives
of the people; and where the people have laid the power, there it must
remain and be exercised.10
This entire controversy revolves around the interplay between Section 145
of the Tax Code and Revenue Regulation 17-99. The main issue is an
inquiry into whether the revenue regulation has exceeded the allowable
limits of legislative delegation.
For ease of reference, Section 145 of the Tax Code is again reproduced in
full as follows:
The excise tax from any brand of cigarettes within the next three (3) years
from the effectivity of R.A. No. 8240 shall not be lower than the tax, which
is due from each brand on October 1, 1996. Provided, however, That in
cases where the excise tax rates imposed in paragraphs (1), (2), (3) and
(4) hereinabove will result in an increase in excise tax of more than
seventy percent (70%), for a brand of cigarette, the increase shall take
effect in two tranches: fifty percent (50%) of the increase shall be
effective in 1997 and one hundred percent (100%) of the increase shall be
effective in 1998.
Section 145. Cigars and Cigarettes(A) Cigars.There shall be levied, assessed and collected on cigars a tax
of One peso (P1.00) per cigar.
(B). Cigarettes packed by hand.There shall be levied, assessed and
collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per
pack.
Duly registered or existing brands of cigarettes or new brands thereof

packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under paragraphs (1), (2)
(3) and (4) hereof, shall be increased by twelve percent (12%) on January
1, 2000.
New brands shall be classified according to their current net retail price.
(C) Cigarettes packed by machine.There shall be levied, assessed and

collected on cigarettes packed by machine a tax at the rates prescribed
below:
tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos
(P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value added
tax) exceeds Six pesos and Fifty centavos (P6.50) but does not exceed Ten
pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00) per pack.
tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty centavos
(P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
tax) is below Five pesos (P5.00) per pack, the tax shall be One peso
(P1.00) per pack;
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of R.A. No. 8240 shall be taxed under
the highest classification of any variant of that brand.
For the above purpose, net retail price shall mean the price at which the
cigarette is sold on retail in twenty (20) major supermarkets in Metro
Manila (for brands of cigarettes marketed nationally), excluding the
amount intended to cover the applicable excise tax and value-added tax.
For brands which are marketed only outside Metro Manila, the net retail
price shall mean the price at which the cigarette is sold in five (5) major
intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average retail
price as of October 1, 1996, as set forth in Annex "D," shall remain in force
until revised by Congress.
Variant of a brand shall refer to a brand on which a modifier is prefixed
and/or suffixed to the root name of the brand and/or a different brand
which carries the same logo or design of the existing brand.11 (Emphasis
supplied)
Revenue Regulation 17-99, which was issued pursuant to the
unquestioned authority of the Secretary of Finance to promulgate rules
and regulations for the effective implementation of the Tax Code,12
interprets the above-quoted provision and reflects the 12% increase in
excise taxes in the following manner:
SECTION
DESCRIPTION OF ARTICLES
PRESENT SPECIFIC TAX
RATES PRIOR TO JAN. 1, 2000
NEW SPECIFIC TAX RATE Effective Jan.. 1,
2000
145 (A)
P1.00/cigar P1.12/cigar
(B)Cigarettes packed by Machine
(1) Net Retail Price (excluding VAT and Excise) exceeds P10.00 per pack
(2) Net Retail Price (excluding VAT and Excise) is P6.51 up to P10.00 per
pack P8.00/pack P8.96/pack
(3) Net Retail Price (excluding VAT and excise) is P5.00 to P6.50 per pack
(4) Net Retail Price (excluding VAT and excise) is below P5.00 per pack)
This table reflects Section 145 of the Tax Code insofar as it mandates a
12% increase effective on 1 January 2000 based on the taxes indicated
under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation
No. 17-99 went further and added that "[T]he new specific tax rate for any
existing brand of cigars, cigarettes packed by machine, distilled spirits,
wines and fermented liquor shall not be lower than the excise tax that is
actually being paid prior to January 1, 2000."13
Parenthetically, Section 145 states that during the transition period, i.e.,
within the next three (3) years from the effectivity of the Tax Code, the
excise tax from any brand of cigarettes shall not be lower than the tax due
from each brand on 1 October 1996. This qualification, however, is
conspicuously absent as regards the 12% increase which is to be applied
on cigars and cigarettes packed by machine, among others, effective on 1
January 2000. Clearly and unmistakably, Section 145 mandates a new rate
of excise tax for cigarettes packed by machine due to the 12% increase
effective on 1 January 2000 without regard to whether the revenue
collection starting from this period may turn out to be lower than that
collected prior to this date.
By adding the qualification that the tax due after the 12% increase
becomes effective shall not be lower than the tax actually paid prior to 1
January 2000, Revenue Regulation No. 17-99 effectively imposes a tax
which is the higher amount between the ad valorem tax being paid at the
end of the three (3)-year transition period and the specific tax under
paragraph C, sub-paragraph (1)-(4), as increased by 12%a situation not
supported by the plain wording of Section 145 of the Tax Code.
This is not the first time that national revenue officials had ventured in the
area of unauthorized administrative legislation.
In Commissioner of Internal Revenue v. Reyes,14 respondent was not
informed in writing of the law and the facts on which the assessment of
estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as
amended by Republic Act (R.A.) No. 8424. She was merely notified of the
findings by the Commissioner, who had simply relied upon the old
provisions of the law and Revenue Regulation No. 12-85 which was based
on the old provision of the law. The Court held that in case of discrepancy
between the law as amended and the implementing regulation based on
the old law, the former necessarily prevails. The law must still be followed,
even though the existing tax regulation at that time provided for a
different procedure.15
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,16
the tax authorities gave the term "tax credit" in Sections 2(i) and 4 of
Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No.
7432 provides. Their interpretation muddled up the intent of Congress to
grant a mere discount privilege and not a sales discount. The Court,
striking down the revenue regulation, held that an administrative agency
issuing regulations may not enlarge, alter or restrict the provisions of the
law it administers, and it cannot engraft additional requirements not
contemplated by the legislature. The Court emphasized that tax
administrators are not allowed to expand or contract the legislative
mandate and that the "plain meaning rule" or verba legis in statutory
construction should be applied such that where the words of a statute are
clear, plain and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation.
As we have previously declared, rule-making power must be confined to
details for regulating the mode or proceedings in order to carry into effect
the law as it has been enacted, and it cannot be extended to amend or
expand the statutory requirements or to embrace matters not covered by
the statute. Administrative regulations must always be in harmony with
the provisions of the law because any resulting discrepancy between the
two will always be resolved in favor of the basic law.17
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop,
Inc.,18 Commissioner Jose Ong issued Revenue Memorandum Order
(RMO) No. 15-91, as well as the clarificatory Revenue Memorandum
Circular (RMC) 43-91, imposing a 5% lending investors tax under the

1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on
pawnshops. The Commissioner anchored the imposition on the definition
of lending investors provided in the 1977 Tax Code which, according to
him, was broad enough to include pawnshop operators. However, the
Court noted that pawnshops and lending investors were subjected to
different tax treatments under the Tax Code prior to its amendment by the
executive order; that Congress never intended to treat pawnshops in the
same way as lending investors; and that the particularly involved section
of the Tax Code explicitly subjected lending investors and dealers in
securities only to percentage tax. And so the Court affirmed the invalidity
of the challenged circulars, stressing that "administrative issuances must
not override, supplant or modify the law, but must remain consistent with
the law they intend to carry out."19
x x x all such issuances must not override, but must remain consistent
and in harmony with, the law they seek to apply and implement.
Administrative rules and regulations are intended to carry out, neither to
supplant nor to modify, the law.23
In Philippine Bank of Communications v. Commissioner of Internal

Revenue,20 the then acting Commissioner issued RMC 7-85, changing the
prescriptive period of two years to ten years for claims of excess quarterly
income tax payments, thereby creating a clear inconsistency with the
provision of Section 230 of the 1977 Tax Code. The Court nullified the
circular, ruling that the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by Congress. The
Court held:
In the case at bar, the OSGs argument that by 1 January 2000, the excise
tax on cigarettes should be the higher tax imposed under the specific tax
system and the tax imposed under the ad valorem tax system plus the
12% increase imposed by paragraph 5, Section 145 of the Tax Code, is an
unsuccessful attempt to justify what is clearly an impermissible incursion
into the limits of administrative legislation. Such an interpretation is not
supported by the clear language of the law and is obviously only meant to
validate the OSGs thesis that Section 145 of the Tax Code is ambiguous
and admits of several interpretations.
It bears repeating that Revenue memorandum-circulars are considered

administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty
is to enforce it, is entitled to great respect by the courts. Nevertheless,
such interpretation is not conclusive and will be ignored if judicially found
to be erroneous. Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony
with, the law they seek to apply and implement.21
In Commissioner of Internal Revenue v. CA, et al.,22 the central issue was
the validity of RMO 4-87 which had construed the amnesty coverage
under E.O. No. 41 (1986) to include only assessments issued by the BIR
after the promulgation of the executive order on 22 August 1986 and not
assessments made to that date. Resolving the issue in the negative, the
Court held:
xxx
If, as the Commissioner argues, Executive Order No. 41 had not been
intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply so
provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to be in
the nature of a general grant of tax amnesty subject only to the cases
specifically excepted by it.24
The contention that the increase of 12% starting on 1 January 2000 does
not apply to the brands of cigarettes listed under Annex "D" is likewise
unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code
simply states that, "[T]he classification of each brand of cigarettes based
on its average net retail price as of October 1, 1996, as set forth in Annex
D, shall remain in force until revised by Congress." This declaration
certainly does not lend itself to the interpretation given to it by the OSG.
As plainly worded, the average net retail prices of the listed brands under
Annex "D," which classify cigarettes according to their net retail price into
low, medium or high, obviously remain the bases for the application of the
increase in excise tax rates effective on 1 January 2000.
The foregoing leads us to conclude that Revenue Regulation No. 17-99 is
indeed indefensibly flawed. The Commissioner cannot seek refuge in his
claim that the purpose behind the passage of the Tax Code is to generate
additional revenues for the government. Revenue generation has
undoubtedly been a major consideration in the passage of the Tax Code.
However, as borne by the legislative record,25 the shift from the ad

valorem system to the specific tax system is likewise meant to promote
fair competition among the players in the industries concerned, to ensure
an equitable distribution of the tax burden and to simplify tax
administration by classifying cigarettes, among others, into high, medium
and low-priced based on their net retail price and accordingly graduating
tax rates.
At any rate, this advertence to the legislative record is merely gratuitous
because, as we have held, the meaning of the law is clear on its face and
free from the ambiguities that the Commissioner imputes. We simply
cannot disregard the letter of the law on the pretext of pursuing its
spirit.26
Finally, the Commissioners contention that a tax refund partakes the
nature of a tax exemption does not apply to the tax refund to which
Fortune Tobacco is entitled. There is parity between tax refund and tax
exemption only when the former is based either on a tax exemption
statute or a tax refund statute. Obviously, that is not the situation here.
Quite the contrary, Fortune Tobaccos claim for refund is premised on its
erroneous payment of the tax, or better still the governments exaction in
the absence of a law.
Tax exemption is a result of legislative grace. And he who claims an
exemption from the burden of taxation must justify his claim by showing
that the legislature intended to exempt him by words too plain to be
mistaken.27 The rule is that tax exemptions must be strictly construed
such that the exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that such was the
intention.28
A claim for tax refund may be based on statutes granting tax exemption
or tax refund. In such case, the rule of strict interpretation against the
taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, a legislative grace, which cannot be allowed unless granted in
the most explicit and categorical language. The taxpayer must show that
the legislature intended to exempt him from the tax by words too plain to
be mistaken.29
Tax refunds (or tax credits), on the other hand, are not founded principally
on legislative grace but on the legal principle which underlies all quasicontracts abhorring a persons unjust enrichment at the expense of
another.30 The dynamic of erroneous payment of tax fits to a tee the

prototypic quasi-contract, solutio indebiti, which covers not only mistake
in fact but also mistake in law.31
The Government is not exempt from the application of solutio indebiti.32
Indeed, the taxpayer expects fair dealing from the Government, and the
latter has the duty to refund without any unreasonable delay what it has
erroneously collected.33 If the State expects its taxpayers to observe
fairness and honesty in paying their taxes, it must hold itself against the
same standard in refunding excess (or erroneous) payments of such taxes.
It should not unjustly enrich itself at the expense of taxpayers.34 And so,
given its essence, a claim for tax refund necessitates only preponderance
of evidence for its approbation like in any other ordinary civil case.
Under the Tax Code itself, apparently in recognition of the pervasive quasicontract principle, a claim for tax refund may be based on the following:
(a) erroneously or illegally assessed or collected internal revenue taxes;
(b) penalties imposed without authority; and (c) any sum alleged to have
been excessive or in any manner wrongfully collected.35
What is controlling in this case is the well-settled doctrine of strict
interpretation in the imposition of taxes, not the similar doctrine as
applied to tax exemptions. The rule in the interpretation of tax laws is that
a statute will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously. A tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is subject to
tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed
to be imposed beyond what statutes expressly and clearly import.36 As
burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws.37
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals
in CA G.R. SP No. 80675, dated 28 September 2004, and its Resolution,
dated 1 March 2005, are AFFIRMED. No pronouncement as to costs.
SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 148512
June 26, 2006

vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
DECISION
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking
the nullification of the Decision, dated May 31, 2001, of the Court of
Appeals (CA) in CA-G.R. SP No. 60057, entitled "Central Luzon Drug
Corporation v. Commissioner of Internal Revenue," granting herein
respondent Central Luzon Drug Corporations claim for tax credit equal to
the amount of the 20% discount that it extended to senior citizens on the
latters purchase of medicines pursuant to Section 4(a) of Republic Act
(R.A.) No. 7432, entitled "An Act to Maximize the Contribution of Senior
Citizens to Nation Building, Grant Benefits and Special Privileges and for
other Purposes" otherwise known as the Senior Citizens Act.
The antecedents are as follows:
Central Luzon Drug Corporation has been a retailer of medicines and other
pharmaceutical products since December 19, 1994. In 1995, it opened
three (3) drugstores as a franchisee under the business name and style of
"Mercury Drug."
For the period January 1995 to December 1995, in conformity to the
mandate of Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount
on the sale of medicines to qualified senior citizens amounting to
P219,778.
Pursuant to Revenue Regulations No. 2-941 implementing R.A. No. 7432,
which states that the discount given to senior citizens shall be deducted
by the establishment from its gross sales for value-added tax and other
percentage tax purposes, respondent deducted the total amount of
P219,778 from its gross income for the taxable year 1995. For said taxable
period, respondent reported a net loss of P20,963 in its corporate income
tax return. As a consequence, respondent did not pay income tax for
1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a)
of R.A. No. 7432, the amount of P219,778 should be applied as a tax
credit, respondent filed a claim for refund in the amount of P150,193,
thus:
Net Sales
P 37,014,807.00
Add: Cost of 20% Discount to Senior Citizens
219,778.00
Gross Sales P 37,234,585.00
Less: Cost of Sales
Merchandise Inventory, beg
P 1,232,740.00
Purchases 41,145,138.00
Merchandise Inventory, end
8,521,557.00
33,856,621.00
Gross Profit P 3,377,964.00
Miscellaneous Income
39,014.00
Total Income 3,416,978.00
Operating Expenses
3,199,230.00
Net Income Before Tax
P 217,748.00
Income Tax (35%) 69,585.00
Less: Tax Credit
(Cost of 20% Discount to Senior Citizens)
219,778.00
Income Tax Payable
(P 150,193.00)
Income Tax Actually Paid -0Tax Refundable/Overpaid Income Tax (P 150,193.00)
As shown above, the amount of P150,193 claimed as a refund represents
the tax credit allegedly due to respondent under R.A. No. 7432. Since the
Commissioner of Internal Revenue "was not able to decide the claim for
refund on time,"2 respondent filed a Petition for Review with the Court of
Tax Appeals (CTA) on March 18, 1998.
On April 24, 2000, the CTA dismissed the petition, declaring that even if
the law treats the 20% sales discounts granted to senior citizens as a tax
credit, the same cannot apply when there is no tax liability or the amount
of the tax credit is greater than the tax due. In the latter case, the tax
credit will only be to the extent of the tax liability.3 Also, no refund can be
granted as no tax was erroneously, illegally and actually collected based

on the provisions of Section 230, now Section 229, of the Tax Code.
Furthermore, the law does not state that a refund can be claimed by the
private establishment concerned as an alternative to the tax credit.
Thus, respondent filed with the CA a Petition for Review on August 3,
2000.
On May 31, 2001, the CA rendered a Decision stating that Section 229 of
the Tax Code does not apply in this case. It concluded that the 20%
discount given to senior citizens which is treated as a tax credit pursuant
to Sec. 4(a) of R.A. No. 7432 is considered just compensation and, as such,
may be carried over to the next taxable period if there is no current tax
liability. In view of this, the CA held:
WHEREFORE, the instant petition is hereby GRANTED and the decision of
the CTA dated 24 April 2000 and its resolution dated 06 July 2000 are SET
ASIDE. A new one is entered granting petitioners claim for tax credit in
the amount of Php: 150,193.00. No costs.
SO ORDERED.4
Hence, this petition raising the sole issue of whether the 20% sales
discount granted by respondent to qualified senior citizens pursuant to
Sec. 4(a) of R.A. No. 7432 may be claimed as a tax credit or as a
deduction from gross sales in accordance with Sec. 2(1) of Revenue
Regulations No. 2-94.
Sec. 4(a) of R.A. No. 7432 provides:
Sec. 4. Privileges for the Senior citizens. The senior citizens shall be
entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments
relative to utilization of transportations services, hotels and similar lodging
establishments, restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That private establishments
may claim the cost as tax credit.
The CA and the CTA correctly ruled that based on the plain wording of the
law discounts given under R.A. No. 7432 should be treated as tax credits,
not deductions from income.
It is a fundamental rule in statutory construction that the legislative intent

must be determined from the language of the statute itself especially
when the words and phrases therein are clear and unequivocal. The
statute in such a case must be taken to mean exactly what it says.5 Its
literal meaning should be followed;6 to depart from the meaning
expressed by the words is to alter the statute.7
The above provision explicitly employed the word "tax credit." Nothing in
the provision suggests for it to mean a "deduction" from gross sales. To
construe it otherwise would be a departure from the clear mandate of the
law.
Thus, the 20% discount required by the Act to be given to senior citizens
is a tax credit, not a deduction from the gross sales of the establishment
concerned. As a corollary to this, the definition of tax credit found in
Section 2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to
tax credit as the amount representing the 20% discount that "shall be
deducted by the said establishment from their gross sales for value added
tax and other percentage tax purposes." This definition is contrary to what
our lawmakers had envisioned with regard to the treatment of the
discount granted to senior citizens.
Accordingly, when the law says that the cost of the discount may be
claimed as a tax credit, it means that the amount -- when claimed shall
be treated as a reduction from any tax liability.8 The law cannot be
amended by a mere regulation. The administrative agencies issuing these
regulations may not enlarge, alter or restrict the provisions of the law they
administer.9 In fact, a regulation that "operates to create a rule out of
harmony with the statute is a mere nullity."10
Finally, for purposes of clarity, Sec. 22911 of the Tax Code does not apply
to cases that fall under Sec. 4 of R.A. No. 7432 because the former
provision governs exclusively all kinds of refund or credit of internal
revenue taxes that were erroneously or illegally imposed and collected
pursuant to the Tax Code while the latter extends the tax credit benefit to
the private establishments concerned even before tax payments have
been made. The tax credit that is contemplated under the Act is a form of
just compensation, not a remedy for taxes that were erroneously or
illegally assessed and collected. In the same vein, prior payment of any
tax liability is not a precondition before a taxable entity can benefit from
the tax credit. The credit may be availed of upon payment of the tax due,
if any. Where there is no tax liability or where a private establishment

reports a net loss for the period, the tax credit can be availed of and
carried over to the next taxable year.
It must also be stressed that unlike in Sec. 229 of the Tax Code wherein
the remedy of refund is available to the taxpayer, Sec. 4 of the law speaks
only of a tax credit, not a refund.
As earlier mentioned, the tax credit benefit granted to the establishments
can be deemed as their just compensation for private property taken by
the State for public use. The privilege enjoyed by the senior citizens does
not come directly from the State, but rather from the private
establishments concerned.12
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals
in CA-G.R. SP No. 60057, dated May 31, 2001, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. Nos. L-49839-46
April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their
capacities as appointed and Acting Members of the CENTRAL BOARD OF
ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO,
RAUL C. FLORES, in their capacities as appointed and Acting Members of
the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his
capacity as City Assessor of Manila, respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.
PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977
decision of the Central Board of Assessment Appeals1 in CBAA Cases Nos.
72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment
Appeals of Manila and City Assessor of Manila" which affirmed the March
29, 1976 decision of the Board of Tax Assessment Appeals2 in BTAA Cases
Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of
Manila" and "Edmundo Reyes and Milagros Reyes v. City Assessor of
Manila" upholding the classification and assessments made by the City
Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of
parcels of land situated in Tondo and Sta. Cruz Districts, City of Manila,
which are leased and entirely occupied as dwelling sites by tenants. Said
tenants were paying monthly rentals not exceeding three hundred pesos
(P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted
Republic Act No. 6359 prohibiting for one year from its effectivity, an
increase in monthly rentals of dwelling units or of lands on which
another's dwelling is located, where such rentals do not exceed three
hundred pesos (P300.00) a month but allowing an increase in rent by not
more than 10% thereafter. The said Act also suspended paragraph (1) of
Article 1673 of the Civil Code for two years from its effectivity thereby
disallowing the ejectment of lessees upon the expiration of the usual legal
period of lease. On October 12, 1972, Presidential Decree No. 20 amended
R.A. No. 6359 by making absolute the prohibition to increase monthly
rentals below P300.00 and by indefinitely suspending the aforementioned
provision of the Civil Code, excepting leases with a definite period.
Consequently, the Reyeses, petitioners herein, were precluded from
raising the rentals and from ejecting the tenants. In 1973, respondent City
Assessor of Manila re-classified and reassessed the value of the subject
properties based on the schedule of market values duly reviewed by the
Secretary of Finance. The revision, as expected, entailed an increase in
the corresponding tax rates prompting petitioners to file a Memorandum
of Disagreement with the Board of Tax Assessment Appeals. They averred
that the reassessments made were "excessive, unwarranted, inequitable,
confiscatory and unconstitutional" considering that the taxes imposed
upon them greatly exceeded the annual income derived from their
properties. They argued that the income approach should have been used
in determining the land values instead of the comparable sales approach
which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax
Assessment Appeals, however, considered the assessments valid, holding

thus:
Petitioner's subsequent motion for reconsideration was denied, hence, this

petition.
WHEREFORE, and considering that the appellants have failed to submit

concrete evidence which could overcome the presumptive regularity of
the classification and assessments appear to be in accordance with the
base schedule of market values and of the base schedule of building unit
values, as approved by the Secretary of Finance, the cases should be, as
they are hereby, upheld.
The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES
APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.
The petition is impressed with merit.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p.

22).
The Reyeses appealed to the Central Board of Assessment
Appeals.1wphi1 They submitted, among others, the summary of the
yearly rentals to show the income derived from the properties.
Respondent City Assessor, on the other hand, submitted three (3) deeds
of sale showing the different market values of the real property situated in
the same vicinity where the subject properties of petitioners are located.
To better appreciate the locational and physical features of the land, the
Board of Hearing Commissioners conducted an ocular inspection with the
presence of two representatives of the City Assessor prior to the healing of
the case. Neither the owners nor their authorized representatives were
present during the said ocular inspection despite proper notices served
them. It was found that certain parcels of land were below street level and
were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its
decision, the dispositive portion of which reads:
WHEREFORE, the appealed decision insofar as the valuation and
assessment of the lots covered by Tax Declaration Nos. (5835) PD-5847,
(5839), (5831) PD-5844 and PD-3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509,
146 and (1) PD-266, the appealed Decision is modified by allowing a 20%
reduction in their respective market values and applying therein the
assessment level of 30% to arrive at the corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals,
Rollo, p. 27)
The crux of the controversy is in the method used in tax assessment of

the properties in question. Petitioners maintain that the "Income
Approach" method would have been more realistic for in disregarding the
effect of the restrictions imposed by P.D. 20 on the market value of the
properties affected, respondent Assessor of the City of Manila unlawfully
and unjustifiably set increased new assessed values at levels so high and
successive that the resulting annual real estate taxes would admittedly
exceed the sum total of the yearly rentals paid or payable by the dweller
tenants under P.D. 20. Hence, petitioners protested against the levels of
the values assigned to their properties as revised and increased on the
ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals
admits in its decision that the income approach is used in determining
land values in some vicinities, it maintains that when income is affected
by some sort of price control, the same is rejected in the consideration
and study of land values as in the case of properties affected by the Rent
Control Law for they do not project the true market value in the open
market (Rollo, p. 21). Thus, respondents opted instead for the
"Comparable Sales Approach" on the ground that the value estimate of
the properties predicated upon prices paid in actual, market transactions
would be a uniform and a more credible standards to use especially in
case of mass appraisal of properties (Ibid.). Otherwise stated, public
respondents would have this Court completely ignore the effects of the
restrictions of P.D. No. 20 on the market value of properties within its
coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable
methods of appraisal for taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988 Edition). However, it is
conceded that the propriety of one as against the other would of course
depend on several factors. Hence, as early as 1923 in the case of Army &
Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it
has been stressed that the assessors, in finding the value of the property,
have to consider all the circumstances and elements of value and must
exercise a prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the
rule of taxation must not only be uniform, but must also be equitable and
progressive.
Uniformity has been defined as that principle by which all taxable articles
or kinds of property of the same class shall be taxed at the same rate
(Churchill v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or
progressive aspects of taxation required in the 1973 Charter (Fernando
"The Constitution of the Philippines", p. 221, Second Edition). Thus, the
need to examine closely and determine the specific mandate of the
Constitution.
Taxation is said to be equitable when its burden falls on those better able
to pay. Taxation is progressive when its rate goes up depending on the
resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest
of all the powers of government. But for all its plenitude the power to tax
is not unconfined as there are restrictions. Adversely effecting as it does
property rights, both the due process and equal protection clauses of the
Constitution may properly be invoked to invalidate in appropriate cases a
revenue measure. If it were otherwise, there would be truth to the 1903
dictum of Chief Justice Marshall that "the power to tax involves the power
to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power
to tax is not the power to destroy while this Court sits. So it is in the
Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing
statute is so arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to confiscation of
property. That would be a clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural
classification for purposes of taxation but the government's act must not
be prompted by a spirit of hostility, or at the very least discrimination that
finds no support in reason. It suffices then that the laws operate equally
and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being
different both in the privileges conferred and the liabilities imposed (Ibid.,
p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is
declared that the first Fundamental Principle to guide the appraisal and
assessment of real property for taxation purposes is that the property
must be "appraised at its current and fair market value."
By no strength of the imagination can the market value of properties
covered by P.D. No. 20 be equated with the market value of properties not
so covered. The former has naturally a much lesser market value in view
of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the
assessed value of subject properties under the "comparable sales
approach" were presented by the public respondents, namely: (1) that the
sale must represent a bonafide arm's length transaction between a willing
seller and a willing buyer and (2) the property must be comparable
property (Rollo, p. 27). Nothing can justify or support their view as it is of
judicial notice that for properties covered by P.D. 20 especially during the
time in question, there were hardly any willing buyers. As a general rule,
there were no takers so that there can be no reasonable basis for the
conclusion that these properties were comparable with other residential
properties not burdened by P.D. 20. Neither can the given circumstances
be nonchalantly dismissed by public respondents as imposed under
distressed conditions clearly implying that the same were merely
temporary in character. At this point in time, the falsity of such premises
cannot be more convincingly demonstrated by the fact that the law has
existed for around twenty (20) years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. However, such collection should
be made in accordance with law as any arbitrariness will negate the very
reason for government itself It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so
that the real purpose of taxations, which is the promotion of the common
good, may be achieved (Commissioner of Internal Revenue v. Algue Inc.,

et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that
petitioners who are burdened by the government by its Rental Freezing
Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice
should not now be penalized by the same government by the imposition
of excessive taxes petitioners can ill afford and eventually result in the
forfeiture of their properties.
By the public respondents' own computation the assessment by income
approach would amount to only P10.00 per sq. meter at the time in
question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed
decisions of public respondents are REVERSED and SET ASIDE; and (e) the
respondent Board of Assessment Appeals of Manila and the City Assessor
of Manila are ordered to make a new assessment by the income approach
method to guarantee a fairer and more realistic basis of computation
(Rollo, p. 71).
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-28896
The main issue in this case is whether or not the Collector of Internal
Revenue correctly disallowed the P75,000.00 deduction claimed by private
respondent Algue as legitimate business expenses in its income tax
returns. The corollary issue is whether or not the appeal of the private
respondent from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other
allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years
1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or
request for reconsideration, which letter was stamp received on the same
day in the office of the petitioner. 2 On March 12, 1965, a warrant of
distraint and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground
of the pending protest. 3 A search of the protest in the dockets of the case
proved fruitless. Atty. Guevara produced his file copy and gave a photostat
to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April
7, 1965, Atty. Guevara was finally informed that the BIR was not taking
any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served. 5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the decision of
the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance On the other hand, such collection should
be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so
that the real purpose of taxation, which is the promotion of the common
good, may be achieved.
The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within thirty
days after receipt of the decision or ruling challenged. 7 It is true that as a
rule the warrant of distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for reconsideration," 9
being "tantamount to an outright denial thereof and makes the said
request deemed rejected." 10 But there is a special circumstance in the
case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the
petitioner's notice of assessment, it filed its letter of protest. This was
apparently not taken into account before the warrant of distraint and levy
was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the
protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be
served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by
private respondent was not pro forma and was based on strong legal
considerations. It thus had the effect of suspending on January 18, 1965,
when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was
definitely informed of the implied rejection of the said protest and the
warrant was finally served on it. Hence, when the appeal was filed on April
23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was
properly disallowed because it was not an ordinary reasonable or
necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered.
The payment was in the form of promotional fees. These were collected by
the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally
claimed these promotional fees to be personal holding company income
12 but later conformed to the decision of the respondent court rejecting
this assertion. 13 In fact, as the said court found, the amount was earned
through the joint efforts of the persons among whom it was distributed It
has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its
land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and
Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14 Ultimately, after its
incorporation largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties. 15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from this
commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares
of the fees in their income tax returns and paid the corresponding taxes
thereon. 17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of
the payees are members of the same family in control of Algue. It is
argued that no indication was made as to how such payments were made,
whether by check or in cash, and there is not enough substantiation of
such payments. In short, the petitioner suggests a tax dodge, an attempt
to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the accountant,
Cecilia V. de Jesus, testified that the payments were not made in one lump
sum but periodically and in different amounts as each payee's need arose.
19 It should be remembered that this was a family corporation where
strict business procedures were not applied and immediate issuance of
receipts was not required. Even so, at the end of the year, when the books
were to be closed, each payee made an accounting of all of the fees
received by him or her, to make up the total of P75,000.00. 20 Admittedly,
everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family
corporation.
We agree with the respondent court that the amount of the promotional
fees was not excessive. The total commission paid by the Philippine Sugar
Estate Development Co. to the private respondent was P125,000.00. 21
After deducting the said fees, Algue still had a balance of P50,000.00 as
clear profit from the transaction. The amount of P75,000.00 was 60% of
the total commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the
Sugar Estate properties. This finding of the respondent court is in accord
with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there
shall be allowed as deductions
(a) Expenses:
(1)
In general.--All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its
practical application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid
by a corporation may be a distribution of a dividend on stock. This is likely
to occur in the case of a corporation having few stockholders, Practically
all of whom draw salaries. If in such a case the salaries are in excess of
those ordinarily paid for similar services, and the excessive payment
correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for
services rendered, but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18,
325.)
It is said that taxes are what we pay for civilization society. Without taxes,
the government would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to surrender
part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government.
The government for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation,
it is a requirement in all democratic regimes that it be exercised
reasonably and in accordance with the prescribed procedure. If it is not,
then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that
the law has not been observed.
We hold that the appeal of the private respondent from the decision of the
petitioner was filed on time with the respondent court in accordance with
Rep. Act No. 1125. And we also find that the claimed deduction by the
private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is
AFFIRMED in toto, without costs.
SO ORDERED.
It is worth noting at this point that most of the payees were not in the
regular employ of Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present
case, however, we find that the onus has been discharged satisfactorily.
The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees
in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it
was, sufficiently recompensed.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 149110
April 9, 2003
NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively,
finding petitioner National Power Corporation (NPC) liable to pay franchise
tax to respondent City of Cabanatuan.
its provinces, cities, municipalities and other government agencies and

instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to
the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
Petitioner is a government-owned and controlled corporation created

under Commonwealth Act No. 120, as amended.4 It is tasked to undertake
the "development of hydroelectric generations of power and the
production of electricity from nuclear, geothermal and other sources, as
well as, the transmission of electric power on a nationwide basis."5
Concomitant to its mandated duty, petitioner has, among others, the
power to construct, operate and maintain power plants, auxiliary plants,
power stations and substations for the purpose of developing hydraulic
power and supplying such power to the inhabitants.6
(c) From all import duties, compensating taxes and advanced sales tax,
and wharfage fees on import of foreign goods required for its operations
and projects; and
For many years now, petitioner sells electric power to the residents of
Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.7
Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed
the petitioner a franchise tax amounting to P808,606.41, representing
75% of 1% of the latter's gross receipts for the preceding year.9
The respondent filed a collection suit in the Regional Trial Court of

Cabanatuan City, demanding that petitioner pay the assessed tax due,
plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13 Respondent alleged that petitioner's exemption from local
taxes has been repealed by section 193 of Rep. Act No. 7160,14 which
reads as follows:
Petitioner, whose capital stock was subscribed and paid wholly by the
Philippine Government,10 refused to pay the tax assessment. It argued
that the respondent has no authority to impose tax on government
entities. Petitioner also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes, charges, duties or
fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all
Taxes, Duties, Fees, Imposts and Other Charges by Government and
Governmental Instrumentalities.- The Corporation shall be non-profit and
shall devote all its return from its capital investment, as well as excess
revenues from its operation, for expansion. To enable the Corporation to
pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs
and service fees in any court or administrative proceedings in which it
may be a party, restrictions and duties to the Republic of the Philippines,
(d) From all taxes, duties, fees, imposts, and all other charges imposed by
the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission,
utilization, and sale of electric power."12
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including
government owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the
case. It ruled that the tax exemption privileges granted to petitioner
subsist despite the passage of Rep. Act No. 7160 for the following reasons:
(1) Rep. Act No. 6395 is a particular law and it may not be repealed by
Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No.
7160 is in the nature of an implied repeal which is not favored; and (3)
local governments have no power to tax instrumentalities of the national
government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a

subsequent law is a matter of legislative intent. The lawmakers may
expressly repeal a law by incorporating therein repealing provisions which
expressly and specifically cite(s) the particular law or laws, and portions
thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified
by its number or title is repealed is an express repeal; all others are
implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause
because it fails to identify the act or acts that are intended to be repealed.
It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored. The presumption is against inconsistency and
repugnancy for the legislative is presumed to know the existing laws on
the subject and not to have enacted inconsistent or conflicting statutes. It
is also a well-settled rule that, generally, general law does not repeal a
special law unless it clearly appears that the legislative has intended by
the latter general act to modify or repeal the earlier special law. Thus,
despite the passage of R.A. No. 7160 from which the questioned
Ordinance No. 165-92 was based, the tax exemption privileges of
defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the
Supreme Court in the case of Basco vs. Philippine Amusement and
Gaming Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation
with an original charter, PD 1869. All of its shares of stocks are owned by
the National Government. xxx Being an instrumentality of the
government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to
control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation
with an original charter and its shares of stocks owned by the National
Government, is beyond the taxing power of the Local Government.
Corollary to this, it should be noted here that in the NPC Charter's
declaration of Policy, Congress declared that: 'xxx (2) the total
electrification of the Philippines through the development of power from
all services to meet the needs of industrial development and dispersal and
needs of rural electrification are primary objectives of the nations which
shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.'
(underscoring supplied). To allow plaintiff to subject defendant to its taxordinance would be to impede the avowed goal of this government
instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation.
Its taxing power is limited to that which is provided for in its charter or
other statute. Any grant of taxing power is to be construed strictly, with
doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very
clear that the plaintiff could not impose the subject tax on the
defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the
ground that section 193, in relation to sections 137 and 151 of the LGC,
expressly withdrew the exemptions granted to the petitioner.18 It ordered
the petitioner to pay the respondent city government the following: (a) the
sum of P808,606.41 representing the franchise tax due based on gross
receipts for the year 1992, (b) the tax due every year thereafter based in
the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of
25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as
litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the
Court of Appeal's Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its
arguments reiterated therein that the taxing power of the province under
Art. 137 (sic) of the Local Government Code refers merely to private
persons or corporations in which category it (NPC) does not belong, and
that the LGC (RA 7160) which is a general law may not impliedly repeal
the NPC Charter which is a special lawfinds the answer in Section 193 of
the LGC to the effect that 'tax exemptions or incentives granted to, or
government-owned or controlled corporations except local water districts
xxx are hereby withdrawn.' The repeal is direct and unequivocal, not
implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A
PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS
IT FAILED TO CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT
CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS
OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S
EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE
PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A
LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED
TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT
AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD
PREVAIL OVER THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the
authority to issue Ordinance No. 165-92 and impose an annual tax on
"businesses enjoying a franchise," pursuant to section 151 in relation to
section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any
law or other special law, the province may impose a tax on businesses
enjoying a franchise, at a rate not exceeding fifty percent (50%) of one
percent (1%) of the gross annual receipts for the preceding calendar year
based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed onetwentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein." (emphasis
supplied)
x
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this

Code, the city, may levy the taxes, fees, and charges which the province
or municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with

the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates
allowed for the province or municipality by not more than fifty percent
(50%) except the rates of professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise
tax to the respondent city government. It contends that sections 137 and
151 of the LGC in relation to section 131, limit the taxing power of the
respondent city government to private entities that are engaged in trade
or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege,
affected with public interest which is conferred upon private persons or
corporations, under such terms and conditions as the government and its
political subdivisions may impose in the interest of the public welfare,
security and safety." From the phraseology of this provision, the petitioner
claims that the word "private" modifies the terms "persons" and
"corporations." Hence, when the LGC uses the term "franchise," petitioner
submits that it should refer specifically to franchises granted to private
natural persons and to private corporations.23 Ergo, its charter should not
be considered a "franchise" for the purpose of imposing the franchise tax
in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade
or commercial activity regularly engaged in as means of livelihood or with
a view to profit." Petitioner claims that it is not engaged in an activity for
profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of
profit is merely incidental to its operation; all these profits are required by
law to be channeled for expansion and improvement of its facilities and
services.24
Petitioner also alleges that it is an instrumentality of the National
Government,25 and as such, may not be taxed by the respondent city
government. It cites the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation26 where this Court held that local governments have
no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National
Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The
latter role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to
control by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede,
burden or in any manner control the operation of constitutional laws
enacted by Congress to carry into execution the powers vested in the
federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government
over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to
prevent it from consummating its federal responsibilities, or even
seriously burden it from accomplishment of them.' (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as ' a tool regulation' (U.S.
v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to
destroy' (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power
to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the
tax privileges of government-owned or controlled corporations, is in the
nature of an implied repeal. A special law, its charter cannot be amended
or modified impliedly by the local government code which is a general law.
Consequently, petitioner claims that its exemption from all taxes, fees or
charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes

by implication are not favored and as much as possible, effect must be
given to all enactments of the legislature. Moreover, it has to be conceded
that the charter of the NPC constitutes a special law. Republic Act No.
7160, is a general law. It is a basic rule in statutory construction that the
enactment of a later legislation which is a general law cannot be
construed to have repealed a special law. Where there is a conflict
between a general law and a special statute, the special statute should
prevail since it evinces the legislative intent more clearly than the general
statute."28
Finally, petitioner submits that the charter of the NPC, being a valid
exercise of police power, should prevail over the LGC. It alleges that the
power of the local government to impose franchise tax is subordinate to
petitioner's exemption from taxation; "police power being the most
pervasive, the least limitable and most demanding of all powers, including
the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from the
very existence of the state whose social contract with its citizens obliges it
to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity;32 without taxes,
government cannot fulfill its mandate of promoting the general welfare
and well-being of the people.
In recent years, the increasing social challenges of the times expanded
the scope of state activity, and taxation has become a tool to realize
social justice and the equitable distribution of wealth, economic progress
and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the
ratification of the 1987 Constitution. Thenceforth, the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its
own sources of revenue, to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with
the basic policy of local autonomy. Such taxes, fees and charges shall
accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development
can be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country's highly
centralized government structure has bred a culture of dependence
among local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders."35
The only way to shatter this culture of dependence is to give the LGUs a
wider role in the delivery of basic services, and confer them sufficient
powers to generate their own sources for the purpose. To achieve this
goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of
local autonomy, set the guidelines and limitations to this grant of taxing
powers, viz:
"Section 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization with effective mechanisms
of recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and
provide for the qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials, and all other
matters relating to the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as
the Local Government Code of 1991 (LGC), various measures have been
enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these
initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same
problems that hamper their capabilities to participate effectively in the
national development efforts, among which are: (a) inadequate tax base,
(b) lack of fiscal control over external sources of income, (c) limited
authority to prioritize and approve development projects, (d) heavy
dependence on external sources of income, and (e) limited supervisory
control over personnel of national line agencies.41
Considered as the most revolutionary piece of legislation on local

autonomy,42 the LGC effectively deals with the fiscal constraints faced by
LGUs. It widens the tax base of LGUs to include taxes which were
prohibited by previous laws such as the imposition of taxes on forest
products, forest concessionaires, mineral products, mining operations, and
the like. The LGC likewise provides enough flexibility to impose tax rates in
accordance with their needs and capabilities. It does not prescribe
graduated fixed rates but merely specifies the minimum and maximum
tax rates and leaves the determination of the actual rates to the
respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the
blanket exclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. Although as a general
rule, LGUs cannot impose taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC authorize
the LGUs to impose taxes, fees or charges on the aforementioned entities,
viz:
"Section 133. Common Limitations on the Taxing Powers of the Local
Government Units.- Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
x
(o) Taxes, fees, or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units." (emphasis
supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation44 relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco
case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the
National Government was in effect. However, as this Court ruled in the
case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45
nothing prevents Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be
subject to tax.46 In enacting the LGC, Congress exercised its prerogative
to tax instrumentalities and agencies of government as it sees fit. Thus,
after reviewing the specific provisions of the LGC, this Court held that
MCIAA, although an instrumentality of the national government, was
subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in section 133, the taxing
power of local governments cannot extend to the levy of inter alia, 'taxes,
fees and charges of any kind on the national government, its agencies and
instrumentalities, and local government units'; however, pursuant to
section 232, provinces, cities and municipalities in the Metropolitan Manila
Area may impose the real property tax except on, inter alia, 'real property
owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted for consideration
or otherwise, to a taxable person as provided in the item (a) of the first
paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly
authorizes the respondent city government to impose on the petitioner
the franchise tax in question.
In its general signification, a franchise is a privilege conferred by
government authority, which does not belong to citizens of the country
generally as a matter of common right.48 In its specific sense, a franchise
may refer to a general or primary franchise, or to a special or secondary
franchise. The former relates to the right to exist as a corporation, by
virtue of duly approved articles of incorporation, or a charter pursuant to a
special law creating the corporation.49 The right under a primary or
general franchise is vested in the individuals who compose the
corporation and not in the corporation itself.50 On the other hand, the
latter refers to the right or privileges conferred upon an existing
corporation such as the right to use the streets of a municipality to lay
pipes of tracks, erect poles or string wires.51 The rights under a
secondary or special franchise are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary
franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise
in the sense of a secondary or special franchise. This is to avoid any
confusion when the word franchise is used in the context of taxation. As
commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the
state."53 It is not levied on the corporation simply for existing as a

corporation, upon its property54 or its income,55 but on its exercise of the
rights or privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do business and
exercise its franchise.56 It is within this context that the phrase "tax on
businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is
covered by the franchise tax in question, the following requisites should
concur: (1) that petitioner has a "franchise" in the sense of a secondary or
special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as
amended by Rep. Act No. 7395, constitutes petitioner's primary and
secondary franchises. It serves as the petitioner's charter, defining its
composition, capitalization, the appointment and the specific duties of its
corporate officers, and its corporate life span.57 As its secondary
franchise, Commonwealth Act No. 120, as amended, vests the petitioner
the following powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water
power in any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or
waterfall in the Philippines, for the purposes specified in this Act; to
intercept and divert the flow of waters from lands of riparian owners and
from persons owning or interested in waters which are or may be
necessary for said purposes, upon payment of just compensation therefor;
to alter, straighten, obstruct or increase the flow of water in streams or
water channels intersecting or connecting therewith or contiguous to its
works or any part thereof: Provided, That just compensation shall be paid
to any person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants,
dams, reservoirs, pipes, mains, transmission lines, power stations and
substations, and other works for the purpose of developing hydraulic
power from any river, creek, lake, spring and waterfall in the Philippines
and supplying such power to the inhabitants thereof; to acquire, construct,
install, maintain, operate, and improve gas, oil, or steam engines, and/or
other prime movers, generators and machinery in plants and/or auxiliary

plants for the production of electric power; to establish, develop, operate,
maintain and administer power and lighting systems for the transmission
and utilization of its power generation; to sell electric power in bulk to (1)
industrial enterprises, (2) city, municipal or provincial systems and other
government institutions, (3) electric cooperatives, (4) franchise holders,
and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage,
encumber and otherwise dispose of property incident to, or necessary,
convenient or proper to carry out the purposes for which the Corporation
was created: Provided, That in case a right of way is necessary for its
transmission lines, easement of right of way shall only be sought:
Provided, however, That in case the property itself shall be acquired by
purchase, the cost thereof shall be the fair market value at the time of the
taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse,
canal, ditch, flume, street, avenue, highway or railway of private and
public ownership, as the location of said works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in
the manner provided by law for instituting condemnation proceedings by
the national, provincial and municipal governments;
x
(m) To cooperate with, and to coordinate its operations with those of the
National Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds
surrounding the reservoirs of plants and/or projects constructed or
proposed to be constructed by the Corporation. Upon determination by
the Corporation of the areas required for watersheds for a specific project,
the Bureau of Forestry, the Reforestation Administration and the Bureau of
Lands shall, upon written advice by the Corporation, forthwith surrender
jurisdiction to the Corporation of all areas embraced within the
watersheds, subject to existing private rights, the needs of waterworks
systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation
shall adopt measures to prevent environmental pollution and promote the
conservation, development and maximum utilization of natural resources

xxx "58
With these powers, petitioner eventually had the monopoly in the
generation and distribution of electricity. This monopoly was strengthened
with the issuance of Pres. Decree No. 40,59 nationalizing the electric
power industry. Although Exec. Order No. 21560 thereafter allowed private
sector participation in the generation of electricity, the transmission of
electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the
respondent city government's territorial jurisdiction pursuant to the
powers granted to it by Commonwealth Act No. 120, as amended. From its
operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought
to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the
franchise tax simply because its stocks are wholly owned by the National
Government, and its charter characterized it as a "non-profit"
organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on
the exercise by the corporation of a privilege to do business. The taxable
entity is the corporation which exercises the franchise, and not the
individual stockholders. By virtue of its charter, petitioner was created as
a separate and distinct entity from the National Government. It can sue
and be sued under its own name,61 and can exercise all the powers of a
corporation under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital
stock does not necessarily imply that petitioner is not engaged in
business. Section 2 of Pres. Decree No. 202963 classifies governmentowned or controlled corporations (GOCCs) into those performing
governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions,
which is directly chartered by special law or if organized under the general
corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the

extent of at least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
organized, or which, from time to time, may be declared by the Board to

be necessary, useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)
Governmental functions are those pertaining to the administration of

government, and as such, are treated as absolute obligation on the part of
the state to perform while proprietary functions are those that are
undertaken only by way of advancing the general interest of society, and
are merely optional on the government.64 Included in the class of GOCCs
performing proprietary functions are "business-like" entities such as the
National Steel Corporation (NSC), the National Development Corporation
(NDC), the Social Security System (SSS), the Government Service
Insurance System (GSIS), and the National Water Sewerage Authority
(NAWASA),65 among others.
It is worthy to note that all other private franchise holders receiving at

least sixty percent (60%) of its electricity requirement from the petitioner
are likewise imposed the cap of twelve percent (12%) on profits.69 The
main difference is that the petitioner is mandated to devote "all its returns
from its capital investment, as well as excess revenues from its operation,
for expansion"70 while other franchise holders have the option to
distribute their profits to its stockholders by declaring dividends. We do
not see why this fact can be a source of difference in tax treatment. In
both instances, the taxable entity is the corporation, which exercises the
franchise, and not the individual stockholders.
Petitioner was created to "undertake the development of hydroelectric

generation of power and the production of electricity from nuclear,
geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."66 Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Certainly, these activities do
not partake of the sovereign functions of the government. They are purely
private and commercial undertakings, albeit imbued with public interest.
The public interest involved in its activities, however, does not distract
from the true nature of the petitioner as a commercial enterprise, in the
same league with similar public utilities like telephone and telegraph
companies, railroad companies, water supply and irrigation companies,
gas, coal or light companies, power plants, ice plant among others; all of
which are declared by this Court as ministrant or proprietary functions of
government aimed at advancing the general interest of society.67
We also do not find merit in the petitioner's contention that its tax
exemptions under its charter subsist despite the passage of the LGC.
A closer reading of its charter reveals that even the legislature treats the
character of the petitioner's enterprise as a "business," although it limits
petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or
necessary for the proper transaction of its business or to carry out the
purposes for which it was organized, to contract indebtedness and issue
bonds subject to approval of the President upon recommendation of the
Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably
necessary to carry out the business and purposes for which it was
As a rule, tax exemptions are construed strongly against the claimant.

Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions.71 In the case at bar, the petitioner's
sole refuge is section 13 of Rep. Act No. 6395 exempting from, among
others, "all income taxes, franchise taxes and realty taxes to be paid to
the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities." However, section 193 of the
LGC withdrew, subject to limited exceptions, the sweeping tax privileges
previously enjoyed by private and public corporations. Contrary to the
contention of petitioner, section 193 of the LGC is an express, albeit
general, repeal of all statutes granting tax exemptions from local taxes.72
It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or
government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code." (emphases supplied)
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.73 Not being a
local water district, a cooperative registered under R.A. No. 6938, or a

non-stock and non-profit hospital or educational institution, petitioner
clearly does not belong to the exception. It is therefore incumbent upon
the petitioner to point to some provisions of the LGC that expressly grant
it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly
states that the LGUs can impose franchise tax "notwithstanding any
exemption granted by any law or other special law." This particular
provision of the LGC does not admit any exception. In City Government of
San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of
franchise taxes was brought as an issue before this Court. The same issue
was involved in the subsequent case of Manila Electric Company v.
Province of Laguna.75 Ruling in favor of the local government in both
instances, we ruled that the franchise tax in question is imposable despite
any exemption enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137
and 193 of the LGC to support their position that MERALCO's tax
exemption has been withdrawn. The explicit language of section 137
which authorizes the province to impose franchise tax 'notwithstanding
any exemption granted by any law or other special law' is allencompassing and clear. The franchise tax is imposable despite any
exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges.
By stating that unless otherwise provided in this Code, tax exemptions or
incentives granted to or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations except
(1) local water districts, (2) cooperatives duly registered under R.A. 6938,
(3) non-stock and non-profit hospitals and educational institutions, are
withdrawn upon the effectivity of this code, the obvious import is to limit
the exemptions to the three enumerated entities. 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. In the absence of any provision of the
Code to the contrary, and we find no other provision in point, any existing
tax exemption or incentive enjoyed by MERALCO under existing law was
clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that
under the LGC the local government unit may now impose a local tax at a
rate not exceeding 50% of 1% of the gross annual receipts for the
preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax privileges
enjoyed under existing law or charter is clearly manifested by the
language used on (sic) Sections 137 and 193 categorically withdrawing
such exemption subject only to the exceptions enumerated. Since it would
be not only tedious and impractical to attempt to enumerate all the
existing statutes providing for special tax exemptions or privileges, the
LGC provided for an express, albeit general, withdrawal of such
exemptions or privileges. No more unequivocal language could have been
used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs,
through ordinances duly approved, to grant tax exemptions, initiatives or
reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which
imposes an annual franchise tax "notwithstanding any exemption granted
by law or other special law," the respondent city government clearly did
not intend to exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of the local
government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in the
Mactan case, "the original reasons for the withdrawal of tax exemption
privileges granted to government-owned or controlled corporations and all
other units of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly situated
enterprises."78 With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due
from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed
Decision and Resolution of the Court of Appeals dated March 12, 2001 and
July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 157264
January 31, 2008
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CARPIO MORALES, J.:
Petitioner, the Philippine Long Distance Telephone Company (PLDT),
claiming that it terminated in 1995 the employment of several rank-andfile, supervisory, and executive employees due to redundancy; that in
compliance with labor law requirements, it paid those separated
employees separation pay and other benefits; and that as employer and
withholding agent, it deducted from the separation pay withholding taxes
in the total amount of P23,707,909.20 which it remitted to the Bureau of
Internal Revenue (BIR), filed on November 20, 1997 with the BIR a claim
for tax credit or refund of the P23,707,909.20, invoking Section 28(b)(7)
(B) of the 1977 National Internal Revenue Code1 which excluded from
gross income
[a]ny amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee
from the service of the employer due to death, sickness or other physical
disability or for any cause beyond the control of the said official or
employee.2 (Underscoring supplied)
As the BIR took no action on its claim, PLDT filed a claim for judicial refund
before the Court of Tax Appeals (CTA).
PLDT thereafter retained Sycip Gorres Velayo and Company (SGV) to

conduct a special audit examination of various receipts, invoices and other
long accounts, and moved to avail of the procedure laid down in CTA
Circular No. 1-95, as amended by CTA Circular No. 10-97, allowing the
presentation of a certification of an independent certified public
accountant in lieu of voluminous documents.6 The CTA thereupon
appointed Amelia Cabal (Cabal) of SGV as Commissioner of the court.7
Cabal's audit report, which formed part of PLDT's evidence,8 adjusted
PLDT's claim to P6,679,167.72.9
By Decision10 of July 25, 2000, the CTA denied PLDT's claim on the ground
that it "failed to sufficiently prove that the terminated employees received
separation pay and that taxes were withheld therefrom and remitted to
the BIR."11
PLDT filed a Motion for New Trial/Reconsideration, praying for an
opportunity to present the receipts and quitclaims executed by the
employees and prove that they received their separation pay.12 Justifying
its motion, PLDT alleged that
x x x [t]hese Receipts and Quitclaims could not be presented during the
course of the trial despite diligent efforts, the files having been misplaced
and were only recently found. Through excusable mistake or inadvertence,
undersigned counsel relied on the audit of SGV & Co. of the voluminous
cash salary vouchers, and was thus not made wary of the fact that the
cash salary vouchers for the rank and file employees do not have
acknowledgement receipts, unlike the cash salary vouchers for the
supervisory and executive employees. If admitted in evidence, these
Receipts and Quitclaims, together with the cash salary vouchers, will
prove that the rank and file employees received their separation pay from
petitioner.13 (Underscoring supplied)
The CTA denied PLDT's motion.14
In its Answer,3 respondent, the Commissioner of Internal Revenue,

contended that PLDT failed to show proof of payment of separation pay
and remittance of the alleged withheld taxes.4
PLDT later manifested on March 19, 1998 that it was reducing its claim to
P16,439,777.61 because a number of the separated employees opted to
file their respective claims for refund of taxes erroneously withheld from
their separation pay.5
PLDT thus filed a Petition for Review15 before the Court of Appeals which,
by Decision16 of February 11, 2002, dismissed the same. PLDT's Motion
for Reconsideration17 having been denied,18 it filed the present Petition
for Review on Certiorari,19 faulting the appellate court to have committed
grave abuse of discretion
A.
. . . WHEN IT HELD THAT PROOF OF PAYMENT OF SEPARATION PAY TO THE

EMPLOYEES IS REQUIRED IN ORDER TO AVAIL OF REFUND OF TAXES
ERRONEOUSLY PAID TO THE BUREAU OF INTERNAL REVENUE.
B.
. . . WHEN IT HELD THAT PETITIONER FAILED TO ESTABLISH THAT
PETITIONER'S EMPLOYEES RECEIVED THEIR SEPARATION PAY.
C.
. . . IN DISREGARDING THE CERTIFICA-TION/REPORT OF SGV & CO., WHICH
CERTIFIED THAT PETITIONER IS ENTITLED TO A REFUND OF THE AMOUNT
OF P6,679,167.72.
D.
. . . IN NOT ORDERING A NEW TRIAL TO ALLOW PETITIONER TO PRESENT
ADDITIONAL EVIDENCE IN SUPPORT THEREOF.20
PLDT argues against the need for proof that the employees received their
separation pay and proffers the issue in the case in this wise:
It is not essential to prove that the separation pay benefits were actually
received by the terminated employees. This issue is not for the CTA, nor
the Court of Appeals to resolve, but is a matter that falls within the
competence and exclusive jurisdiction of the Department of Labor and
Employment and/or the National Labor Relations Commission. x x x
Proving, or submitting evidence to prove, receipt of separation pay would
have been material, relevant and necessary if its deductibility as a
business expense has been put in issue. But this has never been an issue
in the instant case. The issue is whether or not the withholding taxes,
which Petitioner remitted to the BIR, should be refunded for having been
erroneously withheld and paid to the latter.
For as long as there is no legal basis for the payment of taxes to the BIR,
the taxpayer is entitled to claim a refund therefore. Hence, any taxes
withheld from separation benefits and paid to the BIR constitute erroneous
payment of taxes and should therefore, be refunded/credited to the
taxpayer/withholding agent, regardless of whether or not separation pay
was actually paid to the concerned employees.21 (Emphasis in the

original; underscoring supplied)
PLDT's position does not lie. Tax refunds, like tax exemptions, are
construed strictly against the taxpayer and liberally in favor of the taxing
authority, and the taxpayer bears the burden of establishing the factual
basis of his claim for a refund.22
Under the earlier quoted portion of Section 28 (b)(7)(B) of the National
Internal Revenue Code of 1977 (now Section 32(B)6(b) of the National
Internal Revenue Code of 1997), it is incumbent on PLDT as a claimant for
refund on behalf of each of the separated employees to show that each
employee did
x x x reflect in his or its own return the income upon which any creditable
tax is required to be withheld at the source. Only when there is an excess
of the amount of tax so withheld over the tax due on the payee's return
can a refund become possible.
A taxpayer must thus do two things to be able to successfully make a
claim for the tax refund: (a) declare the income payments it received as
part of its gross income and (b) establish the fact of withholding. On this
score, the relevant revenue regulation provides as follows:
"Section 10. Claims for tax credit or refund. - Claims for tax credit or
refund of income tax deducted and withheld on income payments shall be
given due course only when it is shown on the return that the income
payment received was declared as part of the gross income and the fact
of withholding is established by a copy of the statement duly issued by
the payer to the payee (BIR Form No. 1743.1) showing the amount paid
and the amount of tax withheld therefrom."23 (Underscoring supplied)
In fine, PLDT must prove that the employees received the income
payments as part of gross income and the fact of withholding.
The CTA found that PLDT failed to establish that the redundant employees
actually received separation pay and that it withheld taxes therefrom and
remitted the same to the BIR, thus:
With respect to the redundant rank and file employees' final
payment/terminal pay x x x, the cash salary vouchers relative thereto
have no payment acknowledgement receipts. Inasmuch as these cash
vouchers were not signed by the respective employees to prove actual

receipt of payment, the same merely serves as proofs of authorization for
payment and not actual payment by the Petitioner of the redundant rank
and file employees' separation pay and other benefits. In other words,
Petitioner failed to prove that the rank and file employees were actually
paid separation pay and other benefits.
To establish that the withholding taxes deducted from the redundant
employees' separation pay/other benefits were actually remitted to the
BIR, therein petitioner submitted the following:
verified against the "Summary of Gross Compensation and Tax Withheld

for 1995" (Exhs. E-6-b to E-6-e, inclusive) due to the fact that this
summary enumerates the amounts of income taxes withheld from
Petitioner's employees on per district/area basis. The only schedule (with
names, corresponding gross compensation, and withholding taxes)
attached to the summary was for the withholding taxes on service
terminal pay (Exh. E-6-e). However, the names listed thereon were not
among the names of the redundant separated employees being claimed
by petitioner.
xxxx
Exhibit
a) Monthly Remittance Return of Income Taxes Withheld for December
1995
D
b) Revised SGV & Co. Certification
E to E-3-d
c) Annual Information Return of Income Tax Withheld on Compensation,
Expanded and Final Withholding Taxes for the year 1995
It is worthy to note that Respondent presented a witness in the person of

Atty. Rodolfo L. Salazar, Chief of the BIR Appellate Division, who testified
that a portion of the Petitioner's original claim for refund of
P23,706,908.20 had already been granted. He also testified that out of
769 claimants, who opted to file directly with the BIR, 766 had been
processed and granted. In fact, x x x three claims were not processed
because the concerned taxpayer failed to submit the income tax returns
and withholding tax certificates. Considering that no documentary
evidence was presented to bolster said testimony, We have no means of
counter checking whether the 766 alleged to have been already granted
by the Respondent pertained to the P16,439,777.61 claim for refund
withdrawn by the Petitioner from the instant petition or to the remaining
balance of P6,679,167.72 which is the subject of this claim.24 (Emphasis
and underscoring supplied)
E-6
d) Summary of Income Taxes Withheld for the calendar year ended
December 31, 1995
E-6-a
The appellate court affirmed the foregoing findings of the CTA. Apropos is
this Court's ruling in Far East Bank and Trust Company v. Court of
Appeals:25
E-6-b to E-6-e
The findings of fact of the CTA, a special court exercising particular

expertise on the subject of tax, are generally regarded as final, binding,
and conclusive upon this Court, especially if these are substantially similar
to the findings of the C[ourt of] A[ppeals] which is normally the final
arbiter of questions of fact.26 (Underscoring supplied)
However, it cannot be determined from the above documents whether or

not Petitioner actually remitted the total income taxes withheld from the
redundant employees' taxable compensation (inclusive of the separation
pay/other benefits) for the year 1995. The amounts of total taxes withheld
for each redundant employees (Exhs. E-4, E-5, E-7, inclusive) cannot be
While SGV certified that it had "been able to trace the remittance of the
withheld taxes summarized in the C[ash] S[alary] V[ouchers] to the
Monthly Remittance Return of Income Taxes Withheld for the appropriate
period covered by the final payment made to the concerned executives,
supervisors, and rank and file staff members of PLDT,"27 the same cannot
e) Summary of Gross Compensation and Tax Withheld
be appreciated in PLDT's favor as the courts cannot verify such claim.

While the records of the case contain the Alphabetical List of Employee
from Whom Taxes Were Withheld for the year 1995 and the Monthly
Remittance Returns of Income Taxes Withheld for December 1995, the
documents from which SGV "traced" the former to the latter have not
been presented. Failure to present these documents is fatal to PLDT's
case. For the relevant portions of CTA Circular 1-95 instruct:
1. The party who desires to introduce as evidence such voluminous
documents must, after motion and approval by the Court, present: (a) a
Summary containing, among others, a chronological listing of the
numbers, dates and amounts covered by the invoices or receipts and the
amount/s of tax paid; and (b) a Certification of an independent Certified
Public Accountant attesting to the correctness of the contents of the
summary after making an examination, evaluation and audit of the
voluminous receipts and invoices x x x
2. The method of individual presentation of each and every receipt,
invoice or account for marking, identification and comparison with the
originals thereof need not be done before the Court or Clerk of Court
anymore after the introduction of the summary and CPA certification. It is
enough that the receipts, invoices, vouchers or other documents covering
the said accounts or payment to be introduced in evidence must be premarked by the party concerned and submitted to the Court in order to be
made accessible to the adverse party who desires to check and verify the
correctness of the summary and CPA certification. Likewise the originals of
the voluminous receipts, invoices and accounts must be ready for
verification and comparison in case of doubt on the authenticity thereof is
raised during the hearing or resolution of the formal offer of evidence.
(Emphasis and underscoring supplied)
Atlas Consolidated Mining and Development Corporation v. Commissioner
of Internal Revenue,28 citing Commissioner of Internal Revenue v. Manila
Mining Corporation29 explains the need for the promulgation of the
immediately-cited CTA Circular and its effect:
originals. Without presenting these pre-marked documents as evidence from which the summary and schedules were based, the court cannot
verify the authenticity and veracity of the independent auditor's
conclusions. (Italics in the original; Emphasis and underscoring
supplied).30
On the denial of PLDT's motion for new trial: new trial may be granted on
either of these grounds:
a) Fraud, accident, mistake or excusable negligence which ordinary
prudence could not have guarded against and by reason of which such
aggrieved party has probably been impaired in his rights; or
b) Newly discovered evidence, which he could not, with reasonable
diligence, have discovered and produced at the trial, and which if
presented would probably alter the result.31
Newly discovered evidence as a basis of a motion for new trial should be
supported by affidavits of the witnesses by whom such evidence is
expected to be given, or by duly authenticated documents which are
proposed to be introduced in evidence.32 And the grant or denial of a new
trial is, generally speaking, addressed to the sound discretion of the court
which cannot be interfered with unless a clear abuse thereof is shown.33
PLDT has not shown any such abuse, however.
The affirmance by the appellate court of the CTA's denial of PLDT's motion
for new trial on the ground of "newly discovered evidence," viz:
xxxx
The petitioner appended to its "Motion for New Trial", etc. , unnotarized
copies of "Receipts, Release and Quitclaim" bearing the signatures
purportedly of those employees for whom the Petitioner filed the "Petition"
before the CTA, dated December 28, 1995 x x x[.]34
xxxx
x x x The circular, in the interest of speedy administration of justice, was

promulgated to avoid the time-consuming procedure of presenting,
identifying and marking of documents before the Court. It does not relieve
respondent of its imperative task of premarking photocopies of sales
receipts and invoices and submitting the same to the court after the
independent CPA shall have examined and compared them with the
Although the Rules require the appendage, by the Petitioner, of the

"Affidavits of Witnesses" it intends to present in a new trial, the Petitioner
failed to append to its "Motion for New Trial" any affidavits of said
witnesses. The "Receipts, Releases, and Quitclaims" appended to the
Petition are not authenticated. Indeed, the said deeds were not notarized,
despite their having been signed, allegedly by the employees, as early as

December 28, 1995, or approximately two (2) years before the Petitioner
filed the Petition before the CTA. It behooved the Petitioner to have
appended the Affidavits of the separated employees to authenticate the
"Receipts, Releases and Quitclaims" purportedly executed by them,
respectively. The petitioner did not.
The Petitioner wanted the CTA to believe that the employees executed the
aforesaid "Receipts, Releases and Quitclaims" as early as December 28,
1995, and kept the same in its possession and custody. However, the
petitioner divulged the existence of said Receipts, etc., only when it filed
its "Motion for New Trial, etc." on August 18, 2000, or an interregnum of
almost five (5) years. None of the responsible officers of the Petitioner,
especially the custodian of said Receipts, etc., executed an "Affidavit"
explaining why the same (a) were not notarized on or about December 28,
1995; (b) whether the said deeds were turned over to its counsel when it
filed the Petition at bench; (c) why it failed to present the said Receipts to
the SGV & Co., while the latter was conducting its examination and/or
audit of the records of the Petitioner. It is incredible that, if it is true, as
claimed by Petitioner, the employees, indeed, signed the said Receipts on
December 28, 1995, the Petitioner, one of the biggest corporations in the
Philippines and laden with competent execu-tives/officers/employees, did
not bother having the same notarized on or about December 28, 1995. For
sure, when the Petitioner endorsed the preparation and filing of the
Petition to its counsel, it should have collated all the documents necessary
to support its Petition and submit the same to its counsel. If the Petitioner
did, its counsel has not explained why it failed to present the same before
the Commissioner and/or adduce the same in evidence during the hearing
of the Petition on its merits with the CTA. We are convinced that the said
Receipts, etc. were antedated and executed only after the CTA rendered
its Decision and only in anticipation of the "Motion for New Trial, etc." filed
by the Petitioner.35 (Emphasis and underscoring in the original),
is thus in order.
Finally, on PLDT's plea for a liberal application of the rules of procedure,36
Commissioner of Internal Revenue v. A. Soriano Corporation37 furnishes a
caveat on the matter:
Perhaps realizing that under the Rules the said report cannot be admitted
as newly discovered evidence, the petitioner invokes a liberal application
of the Rules. He submits that Section 8 of the Rules of the Court of Tax
Appeals declaring that the latter shall not be governed strictly by technical
rules of evidence mandates a relaxation of the requirements of new trial
on the basis of newly discovered evidence. This is a dangerous proposition
and one which we refuse to countenance. We cannot agree more with the
Court of Appeals when it stated thus,
"To accept the contrary view of the petitioner would give rise to a
dangerous precedent in that there would be no end to a hearing before
respondent court because, every time a party is aggrieved by its decision,
he can have it set aside by asking to be allowed to present additional
evidence without having to comply with the requirements of a motion for
new trial based on newly discovered evidence. Rule 13, Section 5 of the
Rules of the Court of Tax Appeals should not be ignored at will and at
random to the prejudice of the orderly presentation of issues and their
resolution. To do so would affect, to a considerable extent, the stability of
judicial decisions."
We are left with no recourse but to conclude that this is a simple case of
negligence on the part of the petitioner. For this act of negligence, the
petitioner cannot be allowed to seek refuge in a liberal application of the
Rules. For it should not be forgotten that the first and fundamental
concern of the rules of procedure is to secure a just determination of
every action. In the case at bench, a liberal application of the rules of
procedure to suit the petitioner's purpose would clearly pave the way for
injustice as it would be rewarding an act of negligence with undeserved
tolerance.38 (Underscoring supplied)
At all events, the alleged "newly discovered evidence" that PLDT seeks to
offer does not suffice to establish its claim for refund, as it would still have
to comply with Revenue Regulation 6-85 by proving that the redundant
employees, on whose behalf it filed the claim for refund, declared the
separation pay received as part of their gross income. Furthermore, the
same Revenue Regulation requires that "the fact of withholding is
established by a copy of the statement duly issued by the payor to the
payee (BIR Form No. 1743.1) showing the amount paid and the amount of
tax withheld therefrom."
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.

SUPREME COURT
Manila
an ordinance similar to that previously declared by this Court as ultra

vires, enacted Ordinance 11, series of 1960, hereunder quoted in full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS
ENGAGED IN THE BUSINESS OF OPERATING TENEMENT HOUSES
EN BANC
G.R. No. L-26521
December 28, 1968
EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.
Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the

provisions of Republic Act No. 2264, otherwise known as the Autonomy
Law of Local Government, that:
Section 1. A municipal license tax is hereby imposed on tenement
houses in accordance with the schedule of payment herein provided.
Section 2. Tenement house as contemplated in this ordinance shall
mean any building or dwelling for renting space divided into separate
apartments or accessorias.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of
First Instance of Iloilo declaring illegal Ordinance 11, series of 1960,
entitled, "An Ordinance Imposing Municipal License Tax On Persons
Engaged In The Business Of Operating Tenement Houses," and ordering
the City to refund to the plaintiffs-appellees the sums of collected from
them under the said ordinance.
Section 3. The municipal license tax provided in Section 1 hereof shall

be as follows:
I.
Tenement houses:
(a)
Apartment house made of strong materials
P20.00 per door p.a.

On September 30, 1946 the municipal board of Iloilo City enacted
Ordinance 86, imposing license tax fees as follows: (1) tenement house
(casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly
engaged in or dedicated to business in the streets of J.M. Basa, Iznart and
Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly
engaged in business in any other streets, P12.00 per apartment. The
validity and constitutionality of this ordinance were challenged by the
spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of four
tenement houses containing 34 apartments. This Court, in City of Iloilo vs.
Remedios Sian Villanueva and Eusebio Villanueva, L-12695, March 23,
1959, declared the ordinance ultra vires, "it not appearing that the power
to tax owners of tenement houses is one among those clearly and
expressly granted to the City of Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City, believing,
obviously, that with the passage of Republic Act 2264, otherwise known as
the Local Autonomy Act, it had acquired the authority or power to enact
(b)
Apartment house made of mixed materials

II
Rooming house of strong materials

Rooming house of mixed materials
P5.00 per door p.a.
III.
Tenement house partly or wholly engaged in or dedicated to
business in the following streets: J.M. Basa, Iznart, Aldeguer, Guanco and
Ledesma from Plazoleto Gay to Valeria. St.

IV.
Tenement house partly or wholly engaged in or dedicated to
business in any other street
V.
Tenement houses at the streets surrounding the super market as
soon as said place is declared commercial
Section 4. All ordinances or parts thereof inconsistent herewith are
hereby amended.
Section 5. Any person found violating this ordinance shall be punished
with a fine note exceeding Two Hundred Pesos (P200.00) or an
imprisonment of not more than six (6) months or both at the discretion of
the Court.
Section 6 This ordinance shall take effect upon approval.
ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva
are owners of five tenement houses, aggregately containing 43
apartments, while the other appellees and the same Remedios S.
Villanueva are owners of ten apartments. Each of the appellees'
apartments has a door leading to a street and is rented by either a Filipino
or Chinese merchant. The first floor is utilized as a store, while the second
floor is used as a dwelling of the owner of the store. Eusebio Villanueva
owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City,
Baguio City and Quezon City, which cities, according to him, do not
impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from
spouses Eusebio Villanueva and Remedios S. Villanueva, for the years
1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza,
Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964,
the sum of P1,317.00. Eusebio Villanueva has likewise been paying real
estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a
complaint, and an amended complaint, respectively, against the City of
Iloilo, in the aforementioned court, praying that Ordinance 11, series of
1960, be declared "invalid for being beyond the powers of the Municipal
Council of the City of Iloilo to enact, and unconstitutional for being
violative of the rule as to uniformity of taxation and for depriving said
plaintiffs of the equal protection clause of the Constitution," and that the
City be ordered to refund the amounts collected from them under the said
ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the
ordinance illegal on the grounds that (a) "Republic Act 2264 does not
empower cities to impose apartment taxes," (b) the same is "oppressive
and unreasonable," for the reason that it penalizes owners of tenement
houses who fail to pay the tax, (c) it constitutes not only double taxation,
but treble at that and (d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it
imposes double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose
tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because
it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of
taxation?
1. The pertinent provisions of the Local Autonomy Act are hereunder
quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered
cities, municipalities and municipal districts shall have authority to impose
municipal license taxes or fees upon persons engaged in any occupation
or business, or exercising privileges in chartered cities, municipalities or
municipal districts by requiring them to secure licences at rates fixed by
the municipal board or city council of the city, the municipal council of the
municipality, or the municipal district council of the municipal district; to
collect fees and charges for services rendered by the city, municipality or
municipal district; to regulate and impose reasonable fees for services

rendered in connection with any business, profession or occupation being
conducted within the city, municipality or municipal district and otherwise
to levy for public purposes, just and uniform taxes, licenses or fees;
Provided, That municipalities and municipal districts shall, in no case,
impose any percentage tax on sales or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax, except
gasoline, under the provisions of the National Internal Revenue Code;
Provided, however, That no city, municipality or municipal district may
levy or impose any of the following:
(k) Taxes on premiums paid by owners of property who obtain insurance

directly with foreign insurance companies.
(a) Residence tax;
In such event, the municipal board or city council in the case of cities and
the municipal council or municipal district council in the case of
municipalities or municipal districts may appeal the decision of the
Secretary of Finance to the court during the pendency of which case the
tax levied shall be considered as paid under protest.
(b) Documentary stamp tax;

(c) Taxes on the business of persons engaged in the printing and
publication of any newspaper, magazine, review or bulletin appearing at
regular intervals and having fixed prices for for subscription and sale, and
which is not published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public
utilities except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions
mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance
of all kinds of licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the
national government, tonnage, and all other kinds of customs fees,
charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying
franchise tax; and
A tax ordinance shall go into effect on the fifteenth day after its passage,
unless the ordinance shall provide otherwise: Provided, however, That the
Secretary of Finance shall have authority to suspend the effectivity of any
ordinance within one hundred and twenty days after its passage, if, in his
opinion, the tax or fee therein levied or imposed is unjust, excessive,
oppressive, or confiscatory, and when the said Secretary exercises this
authority the effectivity of such ordinance shall be suspended.
It is now settled that the aforequoted provisions of Republic Act 2264

confer on local governments broad taxing authority which extends to
almost "everything, excepting those which are mentioned therein,"
provided that the tax so levied is "for public purposes, just and uniform,"
and does not transgress any constitutional provision or is not repugnant to
a controlling statute.2 Thus, when a tax, levied under the authority of a
city or municipal ordinance, is not within the exceptions and limitations
aforementioned, the same comes within the ambit of the general rule,
pursuant to the rules of expressio unius est exclusio alterius, and exceptio
firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the
exceptions provided for in section 2 of the Local Autonomy Act? For this
purpose, it is necessary to determine the true nature of the tax. The
appellees strongly maintain that it is a "property tax" or "real estate tax,"3
and not a "tax on persons engaged in any occupation or business or
exercising privileges," or a license tax, or a privilege tax, or an excise
tax.4 Indeed, the title of the ordinance designates it as a "municipal
license tax on persons engaged in the business of operating tenement
houses," while section 1 thereof states that a "municipal license tax is
hereby imposed on tenement houses." It is the phraseology of section 1
on which the appellees base their contention that the tax involved is a real
estate tax which, according to them, makes the ordinance ultra vires as it
imposes a levy "in excess of the one per centum real estate tax allowable
under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in

question is not a real estate tax. Obviously, the appellees confuse the tax
with the real estate tax within the meaning of the Assessment Law,6
which, although not applicable to the City of Iloilo, has counterpart
provisions in the Iloilo City Charter.7 A real estate tax is a direct tax on the
ownership of lands and buildings or other improvements thereon, not
specially exempted,8 and is payable regardless of whether the property is
used or not, although the value may vary in accordance with such factor.9
The tax is usually single or indivisible, although the land and building or
improvements erected thereon are assessed separately, except when the
land and building or improvements belong to separate owners.10 It is a
fixed proportion11 of the assessed value of the property taxed, and
requires, therefore, the intervention of assessors.12 It is collected or
payable at appointed times,13 and it constitutes a superior lien on and is
enforceable against the property14 subject to such taxation, and not by
imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the
aforestated attributes. It is not a tax on the land on which the tenement
houses are erected, although both land and tenement houses may belong
to the same owner. The tax is not a fixed proportion of the assessed value
of the tenement houses, and does not require the intervention of
assessors or appraisers. It is not payable at a designated time or date, and
is not enforceable against the tenement houses either by sale or distraint.
Clearly, therefore, the tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the
construction thereof, and the court looks less to its words and more to the
context, subject-matter, consequence and effect. Accordingly, what is
within the spirit is within the ordinance although it is not within the letter
thereof, while that which is in the letter, although not within the spirit, is
not within the ordinance."15 It is within neither the letter nor the spirit of
the ordinance that an additional real estate tax is being imposed,
otherwise the subject-matter would have been not merely tenement
houses. On the contrary, it is plain from the context of the ordinance that
the intention is to impose a license tax on the operation of tenement
houses, which is a form of business or calling. The ordinance, in both its
title and body, particularly sections 1 and 3 thereof, designates the tax
imposed as a "municipal license tax" which, by itself, means an
"imposition or exaction on the right to use or dispose of property, to
pursue a business, occupation, or calling, or to exercise a privilege."16.
"The character of a tax is not to be fixed by any isolated words that may
beemployed in the statute creating it, but such words must be taken in
the connection in which they are used and the true character is to be
deduced from the nature and essence of the subject."17 The subjectmatter of the ordinance is tenement houses whose nature and essence
are expressly set forth in section 2 which defines a tenement house as
"any building or dwelling for renting space divided into separate
apartments or accessorias." The Supreme Court, in City of Iloilo vs.
Remedios Sian Villanueva, et al., L-12695, March 23, 1959, adopted the
definition of a tenement house18 as "any house or building, or portion
thereof, which is rented, leased, or hired out to be occupied, or is
occupied, as the home or residence of three families or more living
independently of each other and doing their cooking in the premises or by
more than two families upon any floor, so living and cooking, but having a
common right in the halls, stairways, yards, water-closets, or privies, or
some of them." Tenement houses, being necessarily offered for rent or
lease by their very nature and essence, therefore constitute a distinct
form of business or calling, similar to the hotel or motel business, or the
operation of lodging houses or boarding houses. This is precisely one of
the reasons why this Court, in the said case of City of Iloilo vs. Remedios
Sian Villanueva, et al., supra, declared Ordinance 86 ultra vires, because,
although the municipal board of Iloilo City is empowered, under sec. 21,
par. j of its Charter, "to tax, fix the license fee for, and regulate hotels,
restaurants, refreshment parlors, cafes, lodging houses, boarding houses,
livery garages, public warehouses, pawnshops, theaters,
cinematographs," tenement houses, which constitute a different business
enterprise,19 are not mentioned in the aforestated section of the City
Charter of Iloilo. Thus, in the aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is
one among those clearly and expressly granted to the City of Iloilo by its
Charter, the exercise of such power cannot be assumed and hence the
ordinance in question is ultra vires insofar as it taxes a tenement house
such as those belonging to defendants." .
The lower court has interchangeably denominated the tax in question as a
tenement tax or an apartment tax. Called by either name, it is not among
the exceptions listed in section 2 of the Local Autonomy Act. On the other
hand, the imposition by the ordinance of a license tax on persons engaged
in the business of operating tenement houses finds authority in section 2
of the Local Autonomy Act which provides that chartered cities have the
authority to impose municipal license taxes or fees upon persons engaged

in any occupation or business, or exercising privileges within their
respective territories, and "otherwise to levy for public purposes, just and
uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only
double taxation but treble at that," because "buildings pay real estate
taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of the
National Internal Revenue Code, besides the tenement tax under the said
ordinance." Obviously, what the trial court refers to as "income taxes" are
the fixed taxes on business and occupation provided for in section 182,
Title V, of the National Internal Revenue Code, by virtue of which persons
engaged in "leasing or renting property, whether on their account as
principals or as owners of rental property or properties," are considered
"real estate dealers" and are taxed according to the amount of their
annual income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid
provisions of the National Internal Revenue Code as real estate dealers,
and still taxable under the ordinance in question, the argument against
double taxation may not be invoked. The same tax may be imposed by
the national government as well as by the local government. There is
nothing inherently obnoxious in the exaction of license fees or taxes with
respect to the same occupation, calling or activity by both the State and a
political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they
are paying the real estate taxes and the tenement tax imposed by the
ordinance in question, is also devoid of merit. It is a well-settled rule that a
license tax may be levied upon a business or occupation although the land
or property used in connection therewith is subject to property tax. The
State may collect an ad valorem tax on property used in a calling, and at
the same time impose a license tax on that calling, the imposition of the
latter kind of tax being in no sensea double tax.22.
"In order to constitute double taxation in the objectionable or prohibited
sense the same property must be taxed twice when it should be taxed but
once; both taxes must be imposed on the same property or subjectmatter, for the same purpose, by the same State, Government, or taxing
authority, within the same jurisdiction or taxing district, during the same
taxing period, and they must be the same kind or character of tax."23 It
has been shown that a real estate tax and the tenement tax imposed by
the ordinance, although imposed by the sametaxing authority, are not of

the same kind or character.
At all events, there is no constitutional prohibition against double taxation
in the Philippines.24 It is something not favored, but is permissible,
provided some other constitutional requirement is not thereby violated,
such as the requirement that taxes must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court
that the ordinance is not only oppressive because it "carries a penal
clause of a fine of P200.00 or imprisonment of 6 months or both, if the
owner or owners of the tenement buildings divided into apartments do not
pay the tenement or apartment tax fixed in said ordinance," but also
unconstitutional as it subjects the owners of tenement houses to criminal
prosecution for non-payment of an obligation which is purely sum of
money." The lower court apparently had in mind, when it made the above
ruling, the provision of the Constitution that "no person shall be
imprisoned for a debt or non-payment of a poll tax."26 It is elementary,
however, that "a tax is not a debt in the sense of an obligation incurred by
contract, express or implied, and therefore is not within the meaning of
constitutional or statutory provisions abolishing or prohibiting
imprisonment for debt, and a statute or ordinance which punishes the
non-payment thereof by fine or imprisonment is not, in conflict with that
prohibition."27 Nor is the tax in question a poll tax, for the latter is a tax of
a fixed amount upon all persons, or upon all persons of a certain class,
resident within a specified territory, without regard to their property or the
occupations in which they may be engaged.28 Therefore, the tax in
question is not oppressive in the manner the lower court puts it. On the
other hand, the charter of Iloilo City29 empowers its municipal board to
"fix penalties for violations of ordinances, which shall not exceed a fine of
two hundred pesos or six months' imprisonment, or both such fine and
imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of
Manila, supra, this Court overruled the pronouncement of the lower court
declaring illegal and void an ordinance imposing an occupation tax on
persons exercising various professions in the City of Manilabecause it
imposed a penalty of fine and imprisonment for its violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity
of taxation.
"... because while the owners of the other buildings only pay real estate
tax and income taxes the ordinance imposes aside from these two taxes
an apartment or tenement tax. It should be noted that in the assessment

of real estate tax all parts of the building or buildings are included so that
the corresponding real estate tax could be properly imposed. If aside from
the real estate tax the owner or owners of the tenement buildings should
pay apartment taxes as required in the ordinance then it will violate the
rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue
that there is "lack of uniformity" and "relative inequality," because "only
the taxpayers of the City of Iloilo are singled out to pay taxes on their
tenement houses, while citizens of other cities, where their councils do not
enact a similar tax ordinance, are permitted to escape such imposition." .
It is our view that both assertions are undeserving of extended attention.
This Court has already ruled that tenement houses constitute a distinct
class of property. It has likewise ruled that "taxes are uniform and equal
when imposed upon all property of the same class or character within the
taxing authority."31 The fact, therefore, that the owners of other classes of
buildings in the City of Iloilo do not pay the taxes imposed by the
ordinance in question is no argument at all against uniformity and equality
of the tax imposition. Neither is the rule of equality and uniformity
violated by the fact that tenement taxesare not imposed in other cities,
for the same rule does not require that taxes for the same purpose should
be imposed in different territorial subdivisions at the same time.32 So long
as the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.33 The plaintiffs-appellees, as
owners of tenement houses in the City of Iloilo, have not shown that the
tax burden is not equally or uniformly distributed among them, to
overthrow the presumption that tax statutes are intended to operate
uniformly and equally.34.
5. The last important issue posed by the appellees is that since the
ordinance in the case at bar is a mere reproduction of Ordinance 86 of the
City of Iloilo which was declared by this Court in L-12695, supra, as ultra
vires, the decision in that case should be accorded the effect of res
judicata in the present case or should constitute estoppel by judgment. To
dispose of this contention, it suffices to say that there is no identity of
subject-matter in that case andthis case because the subject-matter in L12695 was an ordinance which dealt not only with tenement houses but
also warehouses, and the said ordinance was enacted pursuant to the
provisions of the City charter, while the ordinance in the case at bar was
enacted pursuant to the provisions of the Local Autonomy Act. There is

likewise no identity of cause of action in the two cases because the main
issue in L-12695 was whether the City of Iloilo had the power under its
charter to impose the tax levied by Ordinance 11, series of 1960, under
the Local Autonomy Act which took effect on June 19, 1959, and therefore
was not available for consideration in the decision in L-12695 which was
promulgated on March 23, 1959. Moreover, under the provisions of section
2 of the Local Autonomy Act, local governments may now tax any taxable
subject-matter or object not included in the enumeration of matters
removed from the taxing power of local governments.Prior to the
enactment of the Local Autonomy Act the taxes that could be legally
levied by local governments were only those specifically authorized by
law, and their power to tax was construed in strictissimi juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in
questionbeing valid, the complaint is hereby dismissed. No
pronouncement as to costs..
OR
SUPREME COURT
Manila
EN BANC
G.R. No. L-12695
March 23, 1959
CITY OF ILOILO, plaintiff-appellee,

vs.
REMEDIOS SIAN VILLANUEVA and EUSEBIO VILLANUEVA, defendantsappellants.
City Fiscal Filemon R. Consolacion and Assistant City Fiscal Enrique I.
Soriano, Jr. for appellee.
Rodegilio M. Jalandomi, for appellant.
BAUTISTA ANGELO, J.:
Remedios Sian Villanueva and Eusebio Villanueva, spouses, are the
owners of four apartment houses for rent situated in Iloilo City, to wit: the
first house consists of 11 apartments situated at the corner of Iznart and
Aldeguer Sts.; the second consists of 14 apartments situated at Aldeguer

St.; the third consists of 7 apartments situated at the corner of Aldeguer
and J.M. Basa Sts.; and the fourth consists of 2 apartments situated at the
same place. Each apartment is occupied by one family and the food for
each is cooked therein.
On September 30, 1946, the Municipal Board of Iloilo City enacted
Ordinance No. 86, amending Ordinance No. 33, wherein the following was
provide: (1) tenement house (casa de vecindad), P25 annually; (2)
tenement house partly or wholly engaged in or dedicated to business in
the streets of J.M. Basa, Iznart and Aldeguer, P24 per apartment; (3)
tenement house partly or wholly engaged in business in any other streets,
P12.00 per apartment.
Pursuant to Ordinance No. 86, the city sought to collect from the spouses
an annual license tax fee of P24 for each of their 34 apartments, or the
total sum of P1,610 allegedly due during the period from the fourth
quarter of 1946 to the third quarter of 1948, plus the sum of P332
representing 20% penalty. The spouses having refused to pay the same,
the City of Iloilo filed in the municipal court action to recover the tax and
penalty above-mentioned.
Defendant spouses answered the complaint contending that the ordinance
under which the tax is sought to be collected infringes the powers granted
to the city by its Charter and that said ordinance is violative of the
constitutional provisions requiring uniformity of taxation upon the theory
that it is oppressive, unreasonable and discriminatory. Because of the
issue of constitutionality raised, the case was elevated to the Court of First
Instance of Iloilo.
Counsel for both parties submitted a stipulation of facts, which was
supplemented by an oral admission of other facts in open court.
Thereafter, the court rendered judgment upholding the legality of the
ordinance and ordering defendants to pay the taxes claimed, with interest
and costs. Defendants appealed from this decision to the Court of
Appeals, but this case was elevated to this Court because it involves only
questions of law.
It is clear from the Charter of Iloilo City that its municipal board is given
the power to impose a license fee upon the owner of any business or
occupation established in the city in the exercise of its police power. This
is clearly inferred from paragraph (cc), section 21, of the Charter (C.A. No.
158), which provides that the municipal board has the express power (a)
to regulate any business or occupation, and (b) to require licenses from
persons engaged in such business or occupation in the city. But in fixing
the fee that may be exacted, it becomes important to determine its nature
and purpose to ascertain whether the power thus conferred has been
properly exercised. To this effect, it becomes equally important to bear in
mind if the fee is imposed either as a police regulation or purely as a
revenue measure, for the rules that govern its validity are different. Thus,
it has been held that "License fees for revenue rest upon the taxing power
as distinguished from the police power and the power of the municipality
to exact such fees must be expressly granted by charter or statute and is
not to be implied from the conferred power to license and regulate
merely" (Cu Unjieng vs. Patstone, 42 Phil., 818).
It is therefore imperative to determine when a license fee is charged
merely for purposes of regulation and when for purposes of revenue in
order to see if the power has been exercised within the scope of the
express powers granted by the law of statute. One test formulated by the
authorities to attain this objectives is the following: "If the fee is designed
to raise substantially more than the cost of the regulation to which it
purports to be an incident, its purpose is to raise revenue. If it is a fee
attached to a particular provision for regulation, and appears to be
imposed to cover the cost of that regulation, and does substantially only
that, then it is merely for the cost-paying part of a regulatory measure"
(Carter vs. State Tax Commission, 1256 A.L.R., 1402).
This Court has also had occasion to lay down certain rules for determining
the nature of the license fees that may be imposed on the business or
occupation that may be established in a given place, and so that the same
may guide us in drawing the demarcation line in the exercise of the power
one way or the other, we will quote hereunder the portions we consider
pertinent:
(1) The first two of these classes is based on the exercise of the police
power and, though there is some conflict of authority on this point, the
better rule seems to be that the conferred power to regulate and to issue
such license carries with it the right to fix a license fee. It is well settled
that in the absence of special authority to impose a tax for revenue the
fee for this class of licenses may only be of a sufficient amount to include
the expense of issuing the license and the cost of the necessary expense
of direct regulation but also incidental consequences.
xxx
xxx
xxx
(3) The fee in the third class of cases, those for revenue purposes, is,
perhaps, not a license fee properly speaking but is generally so termed. It
rest upon the taxing power as distinguished from the police power, and
the power of the municipality to exact such fees must be expressly
granted by charter or statute and is not to be implied from the conferred
power to license and regulate merely. (Cu Unjieng vs. Patstone, supra.)
It can therefore be said that in order that a license fee may be considered
merely as a regulatory measure, it must be only "of a sufficient amount to
include the expenses of issuing the license and the cost of the necessary
inspection or police surveillance, taking into account not only the expense
of direct regulation but also incidental consequences.?' On the other hand,
if the fee charged is a revenue measure, the power to exact such fee
"must be expressly granted by charter or statute and is not to be implied
from the conferred power to license and regulate merely."
A cursory reading of the ordinance in question would at once reveal that
the license fees charged therein are not merely for regulation but for
revenue, because the fee of P24 per annum charged therein for every
apartment far exceeds "the expense of issuing the license", plus "the cost
of inspection or police surveillance", and other incidental expenses. Thus,
for the first house which consists of 11 apartments, the defendants would
have to pay a license fee of P264 annually; for the second house which
consists of 14 apartments, the fee would be P308 annually; for the third
house which consists of 14 apartments, the fee would be P308 annually;
for the third house which consists of 7 apartments, and the fourth which
consists of 2 apartments, the fee would be P2156 annually. All in all,
defendants would have to pay a license tax fee amounting to P888 per
annum. This, in addition to the fees that may be exacted from many other
residents similarly situated, would constitute a sizeable sum of revenue
which would engross the coffers of the City. These fees cannot therefore
be considered as merely for regulation purposes as contended.
It is however claimed that even if the fees exacted in the ordinance be
considered as taxes for purposes of revenue still their exaction may be
justified because the same comes within the power granted to the city by
its Charter. And in that advocacy the city invokes section 21, paragraph j,
of the Charter, which gives the city the power "To tax, fix the license fee
for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging
houses, boarding houses, livery garages, public warehouses, pawnshops,
theaters, cinematographs." The city claims that a tenement house can be

considered as one belonging to the group of hotels, lodging houses, or
boarding houses therein enumerated.
We disagree. As may be seen from the definition of each establishment
hereunder quoted, a tenement house is different from a hotel, lodging
house, or boarding house. These are different purposes. And it is
preposterous to contend that a tenement house may be considered as
included in the clause "other establishments likely to endanger public
safety or give rise to conflagration or explosions" mentioned in the
Charter, for as to them the power given to the city is merely to fix their
location to protect the safety of the public, and not to impose a license fee
or tax.
A hotel is a place for the accommodation of travelers with food and
lodging. (Judell vs. Goldfield Realty Co., 108 P. 455, 457)
"Lodging houses" is the term applied to houses containing furnished
apartments which are let out by the week or by the month, without meals,
or with breakfast simply. (Cromwell vs. Stephens, N.Y., 2 Daly, 15, 25, 3
Abb. Prac. 26, 35, Cited in Vol. 25, Words and Phrases, p. 583)
A boarding house is not in common parlance or in legal meaning, every
private house where one or more boarders are kept occasionally only and
upon special considerations. But it is a quasi-public house, where boarders
are generally and habitually kept, and which is held out and known as a
place of entertainment of that kind. (Cady vs. Mcdowell, 1 Lans. N.Y. 486,
State vs. MacRae 170 N.C. 712, 86 S.E., 1039; Friedrich Music House vs.
Harris, 200 Mich. 421, 166 N.W. 869 L.R.A. 1918D, 400.)
A tenement house is any house or building, or portion thereof, which is
rented, leased, let, or hired out to be occupied, or is occupied, as the
home or residence of three families or more living independently of each
other and doing their cooking in the premises, or by more than two
families upon any floor, so living and cooking, but having a common right
in the halls, stairways, yards, water-closets, or provides, or some of them.
(Webster's New International Dictionary, 2nd Ed., p. 2601.)
It is well-settled that a municipal corporation, unlike a sovereign state, is
clothed with no inherent power of taxation. "The charter or statute must
plainly show an intent to confer that power or the municipality cannot
assume it. And the power when granted is to be construed strictissimi
juris. Any doubt or ambiguity arising out of the term used in granting that
power must be resolved against the municipality. Inferences, implications,
deductions all these have no place in the interpretation of the taxing
power of a municipal corporation." (Icard vs. City of Baguio, 83 Phil., 870;
46 Off. Gaz. 11 Sup., 320; Medina vs. City of Baguio, 91 Phil., 854; 48 Off.
Gaz., [11] 4769; Yu vs. City of Lipa, 99 Phil., 975; 54 Off . Gaz., [13] 4055.
And it not appearing that the power to tax owners of tenement houses is
one among those clearly and expressly granted to the City of Iloilo by its
Charter, the exercise of such power cannot be assumed and hence the
ordinance in question is ultra vires insofar as its taxes a tenement house
such as those belonging to defendants.
Appeals on October 6, 1969, as involving only pure questions of law,

challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).
Wherefore, the decision appealed from is reversed. The complaint is

dismissed, without costs.
On July 23, 1963, the parties entered into a Stipulation of Facts, the
material portions of which state that, first, both Ordinances Nos. 23 and
27 embrace or cover the same subject matter and the production tax
rates imposed therein are practically the same, and second, that on
January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per
his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said
municipality, sought to enforce compliance by the latter of the provisions
of said Ordinance No. 27, series of 1962.

SUPREME COURT
Manila
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company

of the Philippines, Inc., commenced a complaint with preliminary
injunction before the Court of First Instance of Leyte for that court to
declare Section 2 of Republic Act No. 2264. 1 otherwise known as the
Local Autonomy Act, unconstitutional as an undue delegation of taxing
authority as well as to declare Ordinances Nos. 23 and 27, series of 1962,
of the municipality of Tanauan, Leyte, null and void.
EN BANC
G.R. No. L-31156
February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiffappellant,

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL.,
defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R
Matol and Assistant Solicitor General Conrado T. Limcaoco & Solicitor
Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte
in its Civil Case No. 3294, which was certified to Us by the Court of
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on

September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of
soft drink corked." 2 For the purpose of computing the taxes due, the
person, firm, company or corporation producing soft drinks shall submit to
the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on
October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax of
ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due, the person, fun
company, partnership, corporation or plant producing soft drinks shall
submit to the Municipal Treasurer a monthly report of the total number of
gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
"municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered

judgment "dismissing the complaint and upholding the constitutionality of
[Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27
legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to
the Court of Appeals, which, in turn, elevated the case to Us pursuant to
Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1.
The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of powers.
The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated to
local governments in respect of matters of local concern. 7 This is
sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local selfgovernment carries with it the power to confer on such local governmental
agencies the power to tax. 9 Under the New Constitution, local
governments are granted the autonomous authority to create their own
sources of revenue and to levy taxes. Section 5, Article XI provides: "Each
local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be provided
by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264
emanated from beyond the sphere of the legislative power to enact and
vest in local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to

plaintiff-appellant's pretense, would not suffice to invalidate the said law
as confiscatory and oppressive. In delegating the authority, the State is
not limited 6 the exact measure of that which is exercised by itself. When
it is said that the taxing power may be delegated to municipalities and the
like, it is meant that there may be delegated such measure of power to
impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of
public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction
against deprivation of property without due process of law may be passed
over under the guise of the taxing power, except when the taking of the
property is in the lawful exercise of the taxing power, as when (1) the tax
is for a public purpose; (2) the rule on uniformity of taxation is observed;
(3) either the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection of
certain kinds of taxes notice and opportunity for hearing are provided. 11
Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside
the State, i.e., extraterritorial taxation; and arbitrary or oppressive
methods are used in assessing and collecting taxes. But, a tax does not
violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a
benefit to such taxpayer. Due process does not require that the property
subject to the tax or the amount of tax to be raised should be determined
by judicial inquiry, and a notice and hearing as to the amount of the tax
and the manner in which it shall be apportioned are generally not
necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be
declared unconstitutional on the theory of double taxation. It must be
observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. 13
The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United
States and some states of the Union. 14 Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State and
the other by the city or municipality. 17
2.
The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover the same
subject matter and impose practically the same tax rate. The thesis
proceeds from its assumption that both ordinances are valid and legally
enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was
approved on September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle
used. When it was discovered that the producer or manufacturer could
increase the volume contents of the bottle and still pay the same tax rate,
the Municipality of Tanauan enacted Ordinance No. 27, approved on
October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference between the
two ordinances clearly lies in the tax rate of the soft drinks produced: in
Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in
Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The intention of the Municipal Council of
Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a
plain substitute for the prior Ordinance No. 23, and operates as a repeal of
the latter, even without words to that effect. 18 Plaintiff-appellant in its
brief admitted that defendants-appellees are only seeking to enforce
Ordinance No. 27, series of 1962. Even the stipulation of facts confirms
the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6
compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows
that only Ordinance No. 27, series of 1962 is being enforced by
defendants-appellees. Even the Provincial Fiscal, counsel for defendantsappellees admits in his brief "that Section 7 of Ordinance No. 27, series of
1962 clearly repeals Ordinance No. 23 as the provisions of the latter are
inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27
imposes a percentage or a specific tax. Undoubtedly, the taxing authority
conferred on local governments under Section 2, Republic Act No. 2264, is
broad enough as to extend to almost "everything, accepting those which
are mentioned therein." As long as the text levied under the authority of a
city or municipal ordinance is not within the exceptions and limitations in
the law, the same comes within the ambit of the general rule, pursuant to
the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition against
municipalities and municipal districts to impose "any percentage tax or
other taxes in any form based thereon nor impose taxes on articles
subject to specific tax except gasoline, under the provisions of the
National Internal Revenue Code." For purposes of this particular limitation,
a municipal ordinance which prescribes a set ratio between the amount of
the tax and the volume of sale of the taxpayer imposes a sales tax and is
null and void for being outside the power of the municipality to enact. 20
But, the imposition of "a tax of one centavo (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity" on all soft drinks produced or
manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The
tax is levied on the produce (whether sold or not) and not on the sales.
The volume capacity of the taxpayer's production of soft drinks is
considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and the
amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those
imposed on specified articles, such as distilled spirits, wines, fermented
liquors, products of tobacco other than cigars and cigarettes, matches
firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel
fuel oil, cinematographic films, playing cards, saccharine, opium and other
habit-forming drugs. 22 Soft drink is not one of those specified.
3.
The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or an
equivalent of 1- centavos per case, 23 cannot be considered unjust and
unfair. 24 an increase in the tax alone would not support the claim that
the tax is oppressive, unjust and confiscatory. Municipal corporations are
allowed much discretion in determining the reates of imposable taxes. 25
This is in line with the constutional policy of according the widest possible
autonomy to local governments in matters of local taxation, an aspect
that is given expression in the Local Tax Code (PD No. 231, July 1, 1973).
26 Unless the amount is so excessive as to be prohibitive, courts will go
slow in writing off an ordinance as unreasonable. 27 Reluctance should not
deter compliance with an ordinance such as Ordinance No. 27 if the
purpose of the law to further strengthen local autonomy were to be
realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with
five but not more than ten crowners or P2,000.00 with ten but not more
than twenty crowners imposed on manufacturers, producers, importers
and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
series of 1964, as amended by Ordinance No. 41, series of 1968, of

defendant Municipality, 29 appears not to affect the resolution of the
validity of Ordinance No. 27. Municipalities are empowered to impose, not
only municipal license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and uniform taxes.
The ordinance in question (Ordinance No. 27) comes within the second
power of a municipality.
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.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264,

otherwise known as the Local Autonomy Act, as amended, is hereby
upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan,
Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitionerappellant.
The Facts
SO ORDERED.
SUPREME COURT
Manila
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.
FIRST DIVISION
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
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, nonprofit 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.
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:
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
353.15
1980 Deficiency Contractor's Tax
1980 Deficiency Income Tax
372,578.20
3,129.23, &
but the same is AFFIRMED in all other respect. 7
1980 Deficiency Fixed Tax P353,15;
Aggrieved, the YMCA asked for reconsideration based on the following

grounds:
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.
While the following assessments are hereby sustained:

II
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
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:
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 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:
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
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
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 clearcut. 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 taxexempt; 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 property taxes 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 wellknown 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 "ByLaws" 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.
total liability is P1,731,025,403.06,3 representing deficiency real property

tax due from 1994 up to the first and second quarters of 2007.
SO ORDERED.
On August 17, 2007, Petron filed a petition4 with the LBAA (docketed as
LBAA Case No. 2007-01) contesting the revised assessment on the
grounds that the subject assessment pertained to properties that have
been previously declared; and that the assessment covered periods of
more than 10 years which is not allowed under the Local Government
Code (LGC). According to Petron, the possible valid assessment pursuant
to Section 222 of the LGC could only be for the years 1997 to 2006. Petron
further contended that the fair market value or replacement cost used by
petitioner included items which should be properly excluded; that prompt
payment of discounts were not considered in determining the fair market
value; and that the subject assessment should take effect a year after or
on January 1, 2008. In the same petition, Petron sought the approval of a
surety bond in the amount of P1,286,057,899.54.5

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 180884
June 27, 2008
EMERLINDA S. TALENTO, in her capacity as the Provincial Treasurer of the

Province of Bataan, petitioner,
vs.
HON. REMIGIO M. ESCALADA, JR., Presiding Judge of the Regional Trial
Court of Bataan, Branch 3, and PETRON CORPORATION, respondents.
DECISION
On August 22, 2007, Petron received from petitioner a final notice of

delinquent real property tax with a warning that the subject properties
would be levied and auctioned should Petron fail to settle the revised
assessment due.6
YNARES-SANTIAGO, J.:
The instant petition for certiorari under Rule 65 of the Rules of Court
assails the November 5, 2007 Order1 of the Regional Trial Court of Bataan,
Branch 3, in Civil Case No. 8801, granting the petition for the issuance of a
writ of preliminary injunction filed by private respondent Petron
Corporation (Petron) thereby enjoining petitioner Emerlinda S. Talento,
Provincial Treasurer of Bataan, and her representatives from proceeding
with the public auction of Petron's machineries and pieces of equipment
during the pendency of the latter's appeal from the revised assessment of
its properties.
The facts of the case are as follows:
On June 18, 2007, Petron received from the Provincial Assessor's Office of
Bataan a notice of revised assessment over its machineries and pieces of
equipment in Lamao, Limay, Bataan. Petron was given a period of 60 days
within which to file an appeal with the Local Board of Assessment Appeals
(LBAA).2 Based on said revised assessment, petitioner Provincial Treasurer
of Bataan issued a notice informing Petron that as of June 30, 2007, its
Consequently, Petron sent a letter7 to petitioner stating that in view of the

pendency of its appeal8 with the LBAA, any action by the Treasurer's
Office on the subject properties would be premature. However, petitioner
replied that only Petron's payment under protest shall bar the collection of
the realty taxes due,9 pursuant to Sections 231 and 252 of the LGC.
With the issuance of a Warrant of Levy10 against its machineries and
pieces of equipment, Petron filed on September 24, 2007, an urgent
motion to lift the final notice of delinquent real property tax and warrant of
levy with the LBAA. It argued that the issuance of the notice and warrant
is premature because an appeal has been filed with the LBAA, where it
posted a surety bond in the amount of P1,286,057,899.54.11
On October 3, 2007, Petron received a notice of sale of its properties
scheduled on October 17, 2007.12 Consequently, on October 8, 2007,
Petron withdrew its motion to lift the final notice of delinquent real
property tax and warrant of levy with the LBAA.13 On even date, Petron
filed with the Regional Trial Court of Bataan the instant case (docketed as
Civil Case No. 8801) for prohibition with prayer for the issuance of a
temporary restraining order (TRO) and preliminary injunction.14
On October 15, 2007, the trial court issued a TRO for 20 days enjoining
petitioner from proceeding with the public auction of Petron's
properties.15 Petitioner thereafter filed an urgent motion for the
immediate dissolution of the TRO, followed by a motion to dismiss Petron's
petition for prohibition.
On November 5, 2007, the trial court issued the assailed Order granting
Petron's petition for issuance of writ of preliminary injunction, subject to
Petron's posting of a P444,967,503.52 bond in addition to its previously
posted surety bond of P1,286,057,899.54, to complete the total amount
equivalent to the revised assessment of P1,731,025,403.06. The trial court
held that in scheduling the sale of the properties despite the pendency of
Petron's appeal and posting of the surety bond with the LBAA, petitioner
deprived Petron of the right to appeal. The dispositive portion thereof,
reads:
WHEREFORE, the writ of preliminary injunction prayed for by plaintiff is
hereby GRANTED and ISSUED, enjoining defendant Treasurer, her agents,
representatives, or anybody acting in her behalf from proceeding with the
scheduled public auction of plaintiff's real properties, or any disposition
thereof, pending the determination of the merits of the main action, to be
effective upon posting by plaintiff to the Court of an injunction bond in the
amount of Four Hundred Forty Four Million Nine Hundred Sixty Seven
Thousand Five Hundred Three and 52/100 Pesos (P444,967,503.52) and
the approval thereof by the Court.
Defendant's Urgent Motion for the Immediate Dissolution of the Temporary
Restraining Order dated October 23, 2007 is hereby DENIED.
SO ORDERED.16
From the said Order of the trial court, petitioner went directly to this Court
via the instant petition for certiorari under Rule 65 of the Rules of Court.
The question posed in this petition, i.e., whether the collection of taxes
may be suspended by reason of the filing of an appeal and posting of a
surety bond, is undoubtedly a pure question of law. Section 2(c) of Rule 41
of the Rules of Court provides:
SEC. 2. Modes of Appeal. -
(c) Appeal by certiorari. - In all cases when only questions of law are
raised or involved, the appeal shall be to the Supreme Court by petition
for review on certiorari under Rule 45. (Emphasis supplied)
Thus, petitioner resorted to the erroneous remedy when she filed a
petition for certiorari under Rule 65, when the proper mode should have
been a petition for review on certiorari under Rule 45. Moreover, under
Section 2, Rule 45 of the same Rules, the period to file a petition for
review is 15 days from notice of the order appealed from. In the instant
case, petitioner received the questioned order of the trial court on
November 6, 2007, hence, she had only up to November 21, 2007 to file
the petition. However, the same was filed only on January 4, 2008, or 43
days late. Consequently, petitioner's failure to file an appeal within the
reglementary period rendered the order of the trial court final and
executory.
The perfection of an appeal in the manner and within the period
prescribed by law is mandatory. Failure to conform to the rules regarding
appeal will render the judgment final and executory and beyond the power
of the Court's review. Jurisprudence mandates that when a decision
becomes final and executory, it becomes valid and binding upon the
parties and their successors in interest. Such decision or order can no
longer be disturbed or reopened no matter how erroneous it may have
been.17
Petitioner's resort to a petition under Rule 65 is obviously a play to make
up for the loss of the right to file an appeal via a petition under Rule 45.
However, a special civil action under Rule 65 can not cure petitioner's
failure to timely file a petition for review on certiorari under Rule 45 of the
Rules of Court. Rule 65 is an independent action that cannot be availed of
as a substitute for the lost remedy of an ordinary appeal, including that
under Rule 45, especially if such loss or lapse was occasioned by one's
own neglect or error in the choice of remedies.18
Moreover, even if we assume that a petition under Rule 65 is the proper
remedy, the petition is still dismissible.
We note that no motion for reconsideration of the November 5, 2007 order
of the trial court was filed prior to the filing of the instant petition. The
settled rule is that a motion for reconsideration is a sine qua non condition
for the filing of a petition for certiorari. The purpose is to grant the public
respondent an opportunity to correct any actual or perceived error
attributed to it by the re-examination of the legal and factual

circumstances of the case. Petitioner's failure to file a motion for
reconsideration deprived the trial court of the opportunity to rectify an
error unwittingly committed or to vindicate itself of an act unfairly
imputed. Besides, a motion for reconsideration under the present
circumstances is the plain, speedy and adequate remedy to the adverse
judgment of the trial court.19
Petitioner also blatantly disregarded the rule on hierarchy of courts.
Although the Supreme Court, Regional Trial Courts, and the Court of
Appeals have concurrent jurisdiction to issue writs of certiorari,
prohibition, mandamus, quo warranto, habeas corpus and injunction, such
concurrence does not give the petitioner unrestricted freedom of choice of
court forum. Recourse should have been made first with the Court of
Appeals and not directly to this Court.20
True, litigation is not a game of technicalities. It is equally true, however,
that every case must be presented in accordance with the prescribed
procedure to ensure an orderly and speedy administration of justice.21
The failure therefore of petitioner to comply with the settled procedural
rules justifies the dismissal of the present petition.
Finally, we find that the trial court correctly granted respondent's petition
for issuance of a writ of preliminary injunction. Section 3, Rule 58, of the
Rules of Court, provides:
SEC. 3. Grounds for issuance of preliminary injunction. - A preliminary
injunction may be granted by the court when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the acts complained of, or in the performance of an act or acts, either for
a limited period or perpetually;
The requisites for the issuance of a writ of preliminary injunction are: (1)
the existence of a clear and unmistakable right that must be protected;
and (2) an urgent and paramount necessity for the writ to prevent serious
damage.22
The urgency and paramount necessity for the issuance of a writ of
injunction becomes relevant in the instant case considering that what is
being enjoined is the sale by public auction of the properties of Petron
amounting to at least P1.7 billion and which properties are vital to its
business operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations of Petron
merit the issuance of a writ of preliminary injunction in its favor.
We are not unaware of the doctrine that taxes are the lifeblood of the
government, without which it can not properly perform its functions; and
that appeal shall not suspend the collection of realty taxes. However,
there is an exception to the foregoing rule, i.e., where the taxpayer has
shown a clear and unmistakable right to refuse or to hold in abeyance the
payment of taxes. In the instant case, we note that respondent contested
the revised assessment on the following grounds: that the subject
assessment pertained to properties that have been previously declared;
that the assessment covered periods of more than 10 years which is not
allowed under the LGC; that the fair market value or replacement cost
used by petitioner included items which should be properly excluded; that
prompt payment of discounts were not considered in determining the fair
market value; and that the subject assessment should take effect a year
after or on January 1, 2008. To our mind, the resolution of these issues
would have a direct bearing on the assessment made by petitioner.
Hence, it is necessary that the issues must first be passed upon before the
properties of respondent is sold in public auction.
(b) That the commission, continuance or non-performance of the act or

acts complained of during the litigation would probably work injustice to
the applicant; or
In addition to the fact that the issues raised by the respondent would have
a direct impact on the validity of the assessment made by the petitioner,
we also note that respondent has posted a surety bond equivalent to the
amount of the assessment due. The Rules of Procedure of the LBAA,
particularly Section 7, Rule V thereof, provides:
(c) That a party, court, or agency or a person is doing, threatening, or

attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tending to render the judgment ineffectual.
Section 7. Effect of Appeal on Collection of Taxes. - An appeal shall not

suspend the collection of the corresponding realty taxes on the real
property subject of the appeal as assessed by the Provincial, City or
Municipal Assessor, without prejudice to the subsequent adjustment
depending upon the outcome of the appeal. An appeal may be

entertained but the hearing thereof shall be deferred until the
corresponding taxes due on the real property subject of the appeal shall
have been paid under protest or the petitioner shall have given a surety
bond, subject to the following conditions:

SUPREME COURT
Manila
FIRST DIVISION
(1) the amount of the bond must not be less than the total realty taxes
and penalties due as assessed by the assessor nor more than double said
amount;
(2) the bond must be accompanied by a certification from the Insurance
Commissioner (a) that the surety is duly authorized to issue such bond; (a)
that the surety bond is approved by and registered with said Commission;
and (c) that the amount covered by the surety bond is within the writing
capacity of the surety company; and
G.R. No. 188497
February 19, 2014

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
RESOLUTION
VILLARAMA, JR., J.:
(3) the amount of the bond in excess of the surety company's writing
capacity, if any, must be covered by Reinsurance Binder, in which case, a
certification to this effect must likewise accompany the surety bond.
Corollarily, Section 11 of Republic Act No. 9282,23 which amended
Republic Act No. 1125 (The Law Creating the Court of Tax Appeals)
provides:
Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; xxxx
For resolution are the Motion for Reconsideration dated May 22, 2012 and
Supplemental Motion for Reconsideration dated December 12, 2012 filed
by Pilipinas Shell Petroleum Corporation (respondent). As directed, the
Solicitor General on behalf of petitioner Commissioner of Internal Revenue
filed their Comment, to which respondent filed its Reply.
In our Decision promulgated on April 25, 2012, we ruled that the Court of
Tax Appeals (CTA) erred in granting respondent's claim for tax refund
because the latter failed to establish a tax exemption in its favor under
Section 135(a) of the National Internal Revenue Code of 1997 (NIRC).
No appeal taken to the Court of Appeals from the Collector of Internal

Revenue x x x shall suspend the payment, levy, distraint, and/or sale of
any property for the satisfaction of his tax liability as provided by existing
law. Provided, however, That when in the opinion of the Court the
collection by the aforementioned government agencies may jeopardize
the interest of the Government and/or the taxpayer the Court at any stage
of the processing may suspend the collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more
than double the amount with the Court.
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.
WHEREFORE, in view of all the foregoing, the instant petition is

DISMISSED.
Respondent argues that a plain reading of Section 135 of the NIRC reveals
that it is the petroleum products sold to international carriers which are
exempt from excise tax for which reason no excise taxes are deemed to
have been due in the first place. It points out that excise tax being an
SO ORDERED.
No pronouncement as to costs.
SO ORDERED.1
indirect tax, Section 135 in relation to Section 148 should be interpreted

as referring to a tax exemption from the point of production and removal
from the place of production considering that it is only at that point that
an excise tax is imposed. The situation is unlike the value-added tax (VAT)
which is imposed at every point of turnover from production to
wholesale, to retail and to end-consumer. Respondent thus concludes that
exemption could only refer to the imposition of the tax on the statutory
seller, in this case the respondent. This is because when a tax paid by the
statutory seller is passed on to the buyer it is no longer in the nature of a
tax but an added cost to the purchase price of the product sold.
Respondent also contends that our ruling that Section 135 only prohibits
local petroleum manufacturers like respondent from shifting the burden of
excise tax to international carriers has adverse economic impact as it
severely curtails the domestic oil industry. Requiring local petroleum
manufacturers to absorb the tax burden in the sale of its products to
international carriers is contrary to the States policy of "protecting
gasoline dealers and distributors from unfair and onerous trade
conditions," and places them at a competitive disadvantage since foreign
oil producers, particularly those whose governments with which we have
entered into bilateral service agreements, are not subject to excise tax for
the same transaction. Respondent fears this could lead to cessation of
supply of petroleum products to international carriers, retrenchment of
employees of domestic manufacturers/producers to prevent further losses,
or worse, shutting down of their production of jet A-1 fuel and aviation gas
due to unprofitability of sustaining operations. Under this scenario,
participation of Filipino capital, management and labor in the domestic oil
industry is effectively diminished.
Lastly, respondent asserts that the imposition by the Philippine
Government of excise tax on petroleum products sold to international
carriers is in violation of the Chicago Convention on International Aviation
("Chicago Convention") to which it is a signatory, as well as other
international agreements (the Republic of the Philippines air transport
agreements with the United States of America, Netherlands, Belgium and
Japan).
In his Comment, the Solicitor General underscores the statutory basis of
this Courts ruling that the exemption under Section 135 does not attach
to the products. Citing Exxonmobil Petroleum & Chemical Holdings, Inc.Philippine Branch v. Commissioner of Internal Revenue,2 which held that
the excise tax, when passed on to the purchaser, becomes part of the
purchase price, the Solicitor General claims this refutes respondents
theory that the exemption attaches to the petroleum product itself and
not to the purchaser for it would have been erroneous for the seller to pay
the excise tax and inequitable to pass it on to the purchaser if the excise
tax exemption attaches to the product.
As to respondents reliance in the cases of Silkair (Singapore) Pte. Ltd. v.
Commissioner of Internal Revenue3 and Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal
Revenue,4 the Solicitor General points out that there was no
pronouncement in these cases that petroleum manufacturers selling
petroleum products to international carriers are exempt from paying
excise taxes. In fact, Exxonmobil even cited the case of Philippine
Acetylene Co, Inc. v. Commissioner of Internal Revenue.5 Further, the
ruling in Maceda v. Macaraig, Jr.6 which confirms that Section 135 does
not intend to exempt manufacturers or producers of petroleum products
from the payment of excise tax.
The Court will now address the principal arguments proffered by
respondent: (1) Section 135 intended the tax exemption to apply to
petroleum products at the point of production; (2) Philippine Acetylene
Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr.
are inapplicable in the light of previous rulings of the Bureau of Internal
Revenue (BIR) and the CTA that the excise tax on petroleum products sold
to international carriers for use or consumption outside the Philippines
attaches to the article when sold to said international carriers, as it is the
article which is exempt from the tax, not the international carrier; and (3)
the Decision of this Court will not only have adverse impact on the
domestic oil industry but is also in violation of international agreements on
aviation.
Under Section 129 of the NIRC, excise taxes are those applied to goods
manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to things imported. Excise
taxes as used in our Tax Code fall under two types (1) specific tax which
is based on weight or volume capacity and other physical unit of
measurement, and (2) ad valorem tax which is based on selling price or
other specified value of the goods. Aviation fuel is subject to specific tax
under Section 148 (g) which attaches to said product "as soon as they are
in existence as such."
On this point, the clarification made by our esteemed colleague, Associate

Justice Lucas P. Bersamin regarding the traditional meaning of excise tax
adopted in our Decision, is well-taken.
The transformation undergone by the term "excise tax" from its traditional
concept up to its current definition in our Tax Code was explained in the
case of Petron Corporation v. Tiangco,7 as follows:
Admittedly, the proffered definition of an excise tax as "a tax upon the
performance, carrying on, or exercise of some right, privilege, activity,
calling or occupation" derives from the compendium American
Jurisprudence, popularly referred to as Am Jur and has been cited in
previous decisions of this Court, including those cited by Petron itself.
Such a definition would not have been inconsistent with previous
incarnations of our Tax Code, such as the NIRC of 1939, as amended, or
the NIRC of 1977 because in those laws the term "excise tax" was not
used at all. In contrast, the nomenclature used in those prior laws in
referring to taxes imposed on specific articles was "specific tax." Yet
beginning with the National Internal Revenue Code of 1986, as amended,
the term "excise taxes" was used and defined as applicable "to goods
manufactured or produced in the Philippines and to things imported."
This definition was carried over into the present NIRC of 1997. Further,
these two latest codes categorize two different kinds of excise taxes:
"specific tax" which is imposed and based on weight or volume capacity or
any other physical unit of measurement; and "ad valorem tax" which is
imposed and based on the selling price or other specified value of the
goods. In other words, the meaning of "excise tax" has undergone a
transformation, morphing from the Am Jur definition to its current
signification which is a tax on certain specified goods or articles.
The change in perspective brought forth by the use of the term "excise
tax" in a different connotation was not lost on the departed author Jose
Nolledo as he accorded divergent treatments in his 1973 and 1994
commentaries on our tax laws. Writing in 1973, and essentially alluding to
the Am Jur definition of "excise tax," Nolledo observed:
Are specific taxes, taxes on property or excise taxes
In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that
specific taxes are property taxes, a ruling which seems to be erroneous.
Specific taxes are truly excise taxes for the fact that the value of the
property taxed is taken into account will not change the nature of the tax.
It is correct to say that specific taxes are taxes on the privilege to import,
manufacture and remove from storage certain articles specified by law.
In contrast, after the tax code was amended to classify specific taxes as a
subset of excise taxes, Nolledo, in his 1994 commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers to taxes applicable to
certain specified goods or articles manufactured or produced in the
Philippines for domestic sale or consumption or for any other disposition
and to things imported into the Philippines. They are either specific or ad
valorem.
2. Nature of excise taxes. They are imposed directly on certain specified
goods. (infra) They are, therefore, taxes on property. (see Medina vs. City
of Baguio, 91 Phil. 854.)
A tax is not excise where it does not subject directly the produce or goods
to tax but indirectly as an incident to, or in connection with, the business
to be taxed.
In their 2004 commentaries, De Leon and De Leon restate the Am Jur
definition of excise tax, and observe that the term is "synonymous with
privilege tax and [both terms] are often used interchangeably." At the
same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur],
is not to be confused with excise tax imposed [by the NIRC] on certain
specified articles manufactured or produced in, or imported into, the
Philippines, for domestic sale or consumption or for any other
disposition."
It is evident that Am Jur aside, the current definition of an excise tax is
that of a tax levied on a specific article, rather than one "upon the
performance, carrying on, or the exercise of an activity."
This current definition was already in place when the Code was enacted in
1991, and we can only presume that it was what the Congress had
intended as it specified that local government units could not impose
"excise taxes on articles enumerated under the [NIRC]." This prohibition
must pertain to the same kind of excise taxes as imposed by the NIRC,
and not those previously defined "excise taxes" which were not integrated
or denominated as such in our present tax law.8 (Emphasis supplied.)
That excise tax as presently understood is a tax on property has no

bearing at all on the issue of respondents entitlement to refund. Nor does
the nature of excise tax as an indirect tax supports respondents
postulation that the tax exemption provided in Sec. 135 attaches to the
petroleum products themselves and consequently the domestic petroleum
manufacturer is not liable for the payment of excise tax at the point of
production. As already discussed in our Decision, to which Justice
Bersamin concurs, "the accrual and payment of the excise tax on the
goods enumerated under Title VI of the NIRC prior to their removal at the
place of production are absolute and admit of no exception." This also
underscores the fact that the exemption from payment of excise tax is
conferred on international carriers who purchased the petroleum products
of respondent.
On the basis of Philippine Acetylene, we held that 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 Section 148 is the direct liability of the manufacturer who cannot
thus invoke the excise tax exemption granted to its buyers who are
international carriers. And following our pronouncement in Maceda v.
Macarig, Jr. we further ruled that Section 135(a) should be construed as
prohibiting the shifting of the burden of the excise tax to the international
carriers who buy petroleum products from the local manufacturers. Said
international carriers are thus allowed to purchase the petroleum products
without the excise tax component which otherwise would have been
added to the cost or price fixed by the local manufacturers or
distributors/sellers.
Excise tax on aviation fuel used for international flights is practically nil as
most countries are signatories to the 1944 Chicago Convention on
International Aviation (Chicago Convention). Article 249 of the Convention
has been interpreted to prohibit taxation of aircraft fuel consumed for
international transport. Taxation of international air travel is presently at
such low level that there has been an intensified debate on whether these
should be increased to "finance development rather than simply to
augment national tax revenue" considering the "cross-border
environmental damage" caused by aircraft emissions that contribute to
global warming, not to mention noise pollution and congestion at
airports).10 Mutual exemptions given under bilateral air service
agreements are seen as main legal obstacles to the imposition of indirect
taxes on aviation fuel. In response to present realities, the International
Civil Aviation Organization (ICAO) has adopted policies on charges and

emission-related taxes and charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax Code
represent our Governments compliance with the Chicago Convention, its
subsequent resolutions/annexes, and the air transport agreements
entered into by the Philippine Government with various countries. The
rationale for exemption of fuel from national and local taxes was
expressed by ICAO as follows:
...The Council in 1951 adopted a Resolution and Recommendation on the
taxation of fuel, a Resolution on the taxation of income and of aircraft, and
a Resolution on taxes related to the sale or use of international air
transport (cf. Doc 7145) which were further amended and amplified by the
policy statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the uniqueness
of civil aviation and the need to accord tax exempt status to certain
aspects of the operations of international air transport and were adopted
because multiple taxation on the aircraft, fuel, technical supplies and the
income of international air transport, as well as taxes on its sale and use,
were considered as major obstacles to the further development of
international air transport. Non-observance of the principle of reciprocal
exemption envisaged in these policies was also seen as risking retaliatory
action with adverse repercussions on international air transport which
plays a major role in the development and expansion of international
trade and travel.12
In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF)
held on March 18-22, 2013 at Montreal, among matters agreed upon was
that "the proliferation of various taxes and duties on air transport could
have negative impact on the sustainable development of air transport and
on consumers." Confirming that ICAOs policies on taxation remain valid,
the Conference recommended that "ICAO promote more vigorously its
policies and with industry stakeholders to develop analysis and guidance
to States on the impact of taxes and other levies on air transport."13 Even
as said conference was being held, on March 7, 2013, President Benigno
Aquino III has signed into law Republic Act (R.A.) No. 1037814 granting tax
incentives to foreign carriers which include exemption from the 12%
value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT
is a form of income tax applied to international airlines or shipping
companies. The law, based on reciprocal grant of similar tax exemptions
to Philippine carriers, is expected to increase foreign tourist arrivals in the

country.
manufacturers-sellers of their business prerogative to determine the

prices at which they can sell their products."
Indeed, the avowed purpose of a tax exemption is always "some public

benefit or interest, which the law-making body considers sufficient to
offset the monetary loss entailed in the grant of the exemption."15 The
exemption from excise tax of aviation fuel purchased by international
carriers for consumption outside the Philippines fulfills a treaty obligation
pursuant to which our Government supports the promotion and expansion
of international travel through avoidance of multiple taxation and ensuring
the viability and safety of international air travel. In recent years,
developing economies such as ours focused more serious attention to
significant gains for business and tourism sectors as well. Even without
such recent incidental benefit, States had long accepted the need for
international cooperation in maintaining a capital intensive, labor
intensive and fuel intensive airline industry, and recognized the major role
of international air transport in the development of international trade and
travel.
We maintain that Section 135 (a), in fulfillment of international agreement

and practice to exempt aviation fuel from excise tax and other
impositions, prohibits the passing of the excise tax to international carriers
who buys petroleum products from local manufacturers/sellers such as
respondent. However, we agree that there is a need to reexamine the
effect of denying the domestic manufacturers/sellers claim for refund of
the excise taxes they already paid on petroleum products sold to
international carriers, and its serious implications on our Governments
commitment to the goals and objectives of the Chicago Convention.
Under the basic international law principle of pacta sunt servanda, we

have the duty to fulfill our treaty obligations in good faith. This entails
harmonization of national legislation with treaty provisions. In this case,
Sec. 135(a) of the NIRC embodies our compliance with our undertakings
under the Chicago Convention and various bilateral air service
agreements not to impose excise tax on aviation fuel purchased by
international carriers from domestic manufacturers or suppliers. In our
Decision in this case, we interpreted Section 135 (a) as prohibiting
domestic manufacturer or producer to pass on to international carriers the
excise tax it had paid on petroleum products upon their removal from the
place of production, pursuant to Article 148 and pertinent BIR regulations.
Ruling on respondents claim for tax refund of such paid excise taxes on
petroleum products sold to tax-exempt international carriers, we found no
basis in the Tax Code and jurisprudence to grant the refund of an
"erroneously or illegally paid" tax.
Justice Bersamin argues that "(T)he shifting of the tax burden by
manufacturers-sellers is a business prerogative resulting from the
collective impact of market forces," and that it is "erroneous to construe
Section 135(a) only as a prohibition against the shifting by the
manufacturers-sellers of petroleum products of the tax burden to
international carriers, for such construction will deprive the
The Chicago Convention, which established the legal framework for

international civil aviation, did not deal comprehensively with tax matters.
Article 24 (a) of the Convention simply provides that fuel and lubricating
oils on board an aircraft of a Contracting State, on arrival in the territory of
another Contracting State and retained on board on leaving the territory
of that State, shall be exempt from customs duty, inspection fees or
similar national or local duties and charges. Subsequently, the exemption
of airlines from national taxes and customs duties on spare parts and fuel
has become a standard element of bilateral air service agreements (ASAs)
between individual countries.
The importance of exemption from aviation fuel tax was underscored in
the following observation made by a British author16 in a paper assessing
the debate on using tax to control aviation emissions and the obstacles to
introducing excise duty on aviation fuel, thus:
Without any international agreement on taxing fuel, it is highly likely that
moves to impose duty on international flights, either at a domestic or
European level, would encourage 'tankering': carriers filling their aircraft
as full as possible whenever they landed outside the EU to avoid paying
tax.1wphi1 Clearly this would be entirely counterproductive. Aircraft
would be travelling further than necessary to fill up in low-tax
jurisdictions; in addition they would be burning up more fuel when
carrying the extra weight of a full fuel tank.
With the prospect of declining sales of aviation jet fuel sales to
international carriers on account of major domestic oil companies'
unwillingness to shoulder the burden of excise tax, or of petroleum
products being sold to said carriers by local manufacturers or sellers at
still high prices , the practice of "tankering" would not be discouraged.

This scenario does not augur well for the Philippines' growing economy
and the booming tourism industry. Worse, our Government would be
risking retaliatory action under several bilateral agreements with various
countries. Evidently, construction of the tax exemption provision in
question should give primary consideration to its broad implications on
our commitment under international agreements.
In view of the foregoing reasons, we find merit in respondent's motion for
reconsideration. We therefore hold that respondent, as the statutory
taxpayer who is directly liable to pay the excise tax on its petroleum
products, is entitled to a refund or credit of the excise taxes it paid for
petroleum products sold to international carriers, the latter having been
granted exemption from the payment of said excise tax under Sec. 135 (a)
of the NIRC.
WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for reconsideration filed
by respondent Pilipinas Shell Petroleum Corporation; and
(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June
24, 2009 of the Court of Tax Appeals En Banc in CT A EB No. 415; and
DIRECT petitioner Commissioner of Internal Revenue to refund or to issue
a tax credit certificate to Pilipinas Shell Petroleum Corporation in the
amount of J195,014,283.00 representing the excise taxes it paid on
petroleum products sold to international carriers from October 2001 to
June 2002.
SO ORDERED.

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Republic of the Philippines

July 21, 2008

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

CAG.R. SP No. 80675

Variant of a brand shall refer to a brand on which a modifier is prefixed

"Variants of existing brands of cigarettes which are introduced in the

To implement the provisions for a twelve percent (12%) increase of excise

Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent

4. Petitioners alleged claim for refund is subject to administrative

Herein petitioner sought reconsideration of the above-quoted decision. In

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered

Duly registered or existing brands of cigarettes or new brands thereof

(C) Cigarettes packed by machine.There shall be levied, assessed and

Circular (RMC) 43-91, imposing a 5% lending investors tax under the

In Philippine Bank of Communications v. Commissioner of Internal

It bears repeating that Revenue memorandum-circulars are considered

However, as borne by the legislative record,25 the shift from the ad

another.30 The dynamic of erroneous payment of tax fits to a tee the

Republic of the Philippines

June 26, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

granted as no tax was erroneously, illegally and actually collected based

It is a fundamental rule in statutory construction that the legislative intent

if any. Where there is no tax liability or where a private establishment

April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

Assessment Appeals, however, considered the assessments valid, holding

Petitioner's subsequent motion for reconsideration was denied, hence, this

WHEREFORE, and considering that the appellants have failed to submit

The Reyeses assigned the following error:

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p.

The crux of the controversy is in the method used in tax assessment of

good, may be achieved (Commissioner of Internal Revenue v. Algue Inc.,

February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Republic of the Philippines

NATIONAL POWER CORPORATION, petitioner,

its provinces, cities, municipalities and other government agencies and

Petitioner is a government-owned and controlled corporation created

The respondent filed a collection suit in the Regional Trial Court of

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise

"The question of whether a particular law has been repealed or not by a

In this petition for review, petitioner raises the following issues:

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this

component cities shall accrue to them and distributed in accordance with

"It is a well-settled rule of statutory construction that repeals of statutes

Considered as the most revolutionary piece of legislation on local

state."53 It is not levied on the corporation simply for existing as a

other prime movers, generators and machinery in plants and/or auxiliary

conservation, development and maximum utilization of natural resources

indirectly through a parent corporation or subsidiary corporation, to the

organized, or which, from time to time, may be declared by the Board to

Governmental functions are those pertaining to the administration of

It is worthy to note that all other private franchise holders receiving at

Petitioner was created to "undertake the development of hydroelectric

As a rule, tax exemptions are construed strongly against the claimant.

local water district, a cooperative registered under R.A. No. 6938, or a

January 31, 2008

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,

PLDT thereafter retained Sycip Gorres Velayo and Company (SGV) to

In its Answer,3 respondent, the Commissioner of Internal Revenue,

. . . WHEN IT HELD THAT PROOF OF PAYMENT OF SEPARATION PAY TO THE

was actually paid to the concerned employees.21 (Emphasis in the