G.R. No.

L-22734

September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.
BENGZON, J.P., J.:
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom
is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of Manila (Case No. 71129)
wherein the surviving widow was appointed administratrix. The estate was divided among and awarded to the heirs
and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax liability of the
estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income tax returns were not
filed. Thereupon, the representative of the Collector of Internal Revenue filed said returns for the estate on the basis
of information and data obtained from the aforesaid estate proceedings and issued an assessment for the following:
1. Deficiency income tax
194
P135.83
5
194
436.95
6
194
1,206.91
P1,779.69
7
Add: 5% surcharge
88.98
1%
monthly
interest
from
November 30, 1953 to April 15,
1957
720.77
Compromise for late filing
80.00
Compromise for late payment
40.00
P2,707.44
=======
====
P14.50
2. Additional residence tax for 1945
=======
====
3. Real Estate dealer's tax for the fourth P207.50
quarter of 1946 and the whole year of =======
1947
====
Total amount due

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the Court of
Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the
heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the Commissioner
on the ground that his right to assess and collect the tax has prescribed. The Commissioner appealed and this Court
affirmed the findings of the Tax Court in respect to the assessment for income tax for the year 1947 but held that
the right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were
filed on August 24, 1953; assessments for both taxable years were made within five years therefrom or on October
19, 1953; and the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For
taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made on October 19, 1953,

more than five years from the date the return was filed; hence, the right to assess income tax for 1947 had
prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate proceedings. 1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for the
payment corresponding to his share of the following taxes:
Deficiency income tax

1945
1946

P135.8
3
436.9
5

Real estate dealer's fixed

tax 4th quarter of 1946 and P187.5
whole year of 1947
0
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the
payment of all the taxes found by the Tax Court to be due from the estate in the total amount of P760.28 instead of
only for the amount of taxes corresponding to his share in the estate.1awphl.nt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the
estate only up to the extent of and in proportion to any share he received. He relies on Government of the
Philippine Islands v. Pamintuan 2 where We held that "after the partition of an estate, heirs and distributees are liable
individually for the payment of all lawful outstanding claims against the estate in proportion to the amount or value
of the property they have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share he
received from the inheritance.3 His liability, however, cannot exceed the amount of his share. 4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his
possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his
share in the inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to the last paragraph of
Section 315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance
company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall
be a lien in favor of the Government of the Philippines from the time when the assessment was made by
the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in
addition thereto upon all property and rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the
P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a right
of contribution from his co-heirs, 5 to achieve an adjustment of the proper share of each heir in the distributable
estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and
collecting from each one of them the amount of the tax proportionate to the inheritance received. This remedy was
adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the Government filed an action
against all the heirs for the collection of the tax. This action rests on the concept that hereditary property consists
only of that part which remains after the settlement of all lawful claims against the estate, for the settlement of
which the entire estate is first liable.6 The reason why in case suit is filed against all the heirs the tax due from the

estate is levied proportionately against them is to achieve thereby two results: first, payment of the tax; and
second, adjustment of the shares of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to
property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in
the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue
the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances
like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government
and their prompt and certain availability is an imperious need. 7 And as afore-stated in this case the suit seeks to
achieve only one objective: payment of the tax. The adjustment of the respective shares due to the heirs from the
inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government
recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and real estate
dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice to his right of
contribution for his co-heirs. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the petitioner assessing it in the total amount of
P83,183.85 as delinquency income taxes for the years 1958 and 1959. 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

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," 9being "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. 21After 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 worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it
was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to must contribute his share in the running
of the government. The government for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain 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.
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate
Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to
recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's
name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio
San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is
described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the
Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree
No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was
the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship
bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his
name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January
24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint
and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho
Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances
appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING
PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF
P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING
THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE
PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III. RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17,
20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property
was sold at public auction without notice to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon
himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant
of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims
that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence,
his tax obligation had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the
other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting
of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not
be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of
set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S.,
7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are
the positive acts of the government to the making and enforcing of which, the personal consent of individual
taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim
against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue
taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while
the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before
the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received
by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the
P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he
pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions
of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law
on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this
issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition
for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof
to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and thegeneral rule is that
the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings
leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This
is actually an exception to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with,
the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the
lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction
sale. Surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977

(Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As long as there was substantial
compliance with the requirements of the notice, the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in question
shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you
tell the Court whether you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not read
the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice.
By his very own admission that he received the notice, his now coming to court assailing the validity of the auction
sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289;
Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we
held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to
effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering
the wide divergence between their assessed values and the amounts for which they had been actually sold.
However, while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to interfere, such
does not follow when the law gives to the owner the right to redeem, as when a sale is made at public auction,
upon the theory that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor
may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by
reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash.
162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner
would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the sale, it
would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367,
369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which we would be glad to
relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of
taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely
because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas,
real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny
the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the
date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act
of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine
National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice
sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The
petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the
annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent
court is affirmed.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.
G.R. No. L-36081 April 24, 1989
PROGRESSIVE DEVELOPMENT CORPORATION, petitioner
vs.
QUEZON CITY, respondent.
Jalandoni, Herrera, Del Castillo & Associates for petitioner.
FELICIANO, J.:
On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No. 7997, Series of 1969,
otherwise known as the Market Code of Quezon City, Section 3 of which provided:
Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit monthly to the Treasurer's
Office, a certified list of stallholders showing the amount of stall fees or rentals paid daily by each stallholder, ...
and shall pay 10% of the gross receipts from stall rentals to the City, ... , as supervision fee. Failure to submit said
list and to pay the corresponding amount within the period herein prescribed shall subject the operator to the
penalties provided in this Code ... includingrevocation of permit to operate. ... .1
The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March 1972, which reads:
SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on rentals or lease of space in
privately-owned public markets in Quezon City.
xxx xxx xxx

SECTION 3. For the effective implementation of this Ordinance, owners of privately owned public markets shall
submit ... a monthly certified list of stallholders of lessees of space in their markets showing ... :
a. name of stallholder or lessee;
b. amount of rental;
c. period of lease, indicating therein whether the same is on a daily, monthly or yearly basis.
xxx xxx xxx
SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3) consecutive months, the City shall
revoke the permit of the privately-owned market to operate and/or take any other appropriate action or remedy
allowed by law for the collection of the overdue percentage tax and surcharge.
xxx xxx xxx 2
On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public market known as
the "Farmers Market & Shopping Center" filed a Petition for Prohibition with Preliminary Injunction against
respondent before the then Court of First Instance of Rizal on the ground that the supervision fee or license tax
imposed by the above-mentioned ordinances is in reality a tax on income which respondent may not impose, the
same being expressly prohibited by Republic Act No. 2264, as amended.
In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the questioned
ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on income. The Solicitor General
also filed an Answer arguing that petitioner, not having paid the ten percent (10%) supervision fee prescribed by
Ordinance No. 7997, had no personality to question, and was estopped from questioning, its validity; that the tax on
gross receipts was not a tax on income but one imposed for the enjoyment of the privilege to engage in a particular
trade or business which was within the power of respondent to impose.
In its Supplemental Petition of 23 September 1972, petitioner alleged having paid under protest the five percent
(5%) tax under Ordinance No. 9236 for the months of June to September 1972. Two (2) days later, on 25 September
1972, petitioner moved for judgment on the pleadings, alleging that the material facts had been admitted by the
parties.
On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax on
income, but rather a privilege tax or license fee which local governments, like respondent, are empowered to
impose and collect.
Having failed to obtain reconsideration of said decision, petitioner came to us on the present Petition for Review.
The only issue to be resolved here is whether the tax imposed by respondent on gross receipts of stall rentals is
properly characterized as partaking of the nature of an income tax or, alternatively, of a license fee.
We begin with the fact that Section 12, Article III of Republic Act No. 537, otherwise known as the Revised Charter of
Quezon City, authorizes the City Council:
xxx xxx xxx
(b) To provide for the levy and collection of taxes and other city revenues and apply the same to the payment of city
expenses in accordance with appropriations.
(c) To tax, fix the license fee, and regulate the business of the following:
... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables, bread and other provisions. 4

The scope of legislative authority conferred upon the Quezon City Council in respect of businesses like that of the
petitioner, is comprehensive: the grant of authority is not only" [to] regulate" and "fix the license fee," but also " to
tax" 5
Moreover, Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, provides
that:
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 licenses 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 service 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: ... 6
It is now settled that Republic Act No. 2264 confers upon local governments broad taxing authority extending to
almost "everything, excepting those which are mentioned therein," provided that the tax levied is "for public
purposes, just and uniform," does not transgress any constitutional provision and is not repugnant to a controlling
statute. 7 Both the Local Autonomy Act and the Charter of respondent clearly show that respondent is authorized to
fix the license fee collectible from and regulate the business of petitioner as operator of a privately-owned public
market.
Petitioner, however, insist that the "supervision fee" collected from rentals, being a return from capital invested in
the construction of the Farmers Market, practically operates as a tax on income, one of those expressly excepted
from respondent's taxing authority, and thus beyond the latter's competence. Petitioner cites the same Section 2 of
the Local Autonomy Act which goes on to state: 8
... Provided, however, That no city, municipality or municipal district may levy or impose any of the following:
xxx xxx xxx
(g) Taxes on income of any kind whatsoever;
The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often loosely
used to include levies for revenue as well as levies for regulatory purposes such that license fees are frequently
called taxes although license fee is a legal concept distinguishable from tax: the former is imposed in the exercise
of police power primarily for purposes of regulation, while the latter is imposed under the taxing power primarily for
purposes of raising revenues. 9 Thus, if the generating of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also
obtained does not make the imposition a tax. 10
To be considered a license fee, the imposition questioned must relate to an occupation or activity that so engages
the public interest in health, morals, safety and development as to require regulation for the protection and
promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of
regulation, taking into account not only the costs of direct regulation but also its incidental consequences as
well.11 When an activity, occupation or profession is of such a character that inspection or supervision by public
officials is reasonably necessary for the safeguarding and furtherance of public health, morals and safety, or the
general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be
carried out at the expense of the persons engaged in such occupation or performing such activity, and that no one
shall engage in the occupation or carry out the activity until a fee or charge sufficient to cover the cost of the
inspection or supervision has been paid. 12Accordingly, a charge of a fixed sum which bears no relation at all to the
cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. 13
In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution No. 7350 passed on 30
January 1967 by respondents's local legislative body authorizing petitioner to establish and operate a market with a
permit to sell fresh meat, fish, poultry and other foodstuffs. 14 The same resolution imposed upon petitioner, as a

condition for continuous operation, the obligation to "abide by and comply with the ordinances, rules and
regulations prescribed for the establishment, operation and maintenance of markets in Quezon City." 15
The "Farmers' Market and Shopping Center" being a public market in the' sense of a market open to and inviting the
patronage of the general public, even though privately owned, petitioner's operation thereof required a license
issued by the respondent City, the issuance of which, applying the standards set forth above, was done principally
in the exercise of the respondent's police power. 16 The operation of a privately owned market is, as correctly
noted by the Solicitor General, equivalent to or quite the same as the operation of a government-owned market;
both are established for the rendition of service to the general public, which warrants close supervision and control
by the respondent City, 17 for the protection of the health of the public by insuring, e.g., the maintenance of
sanitary and hygienic conditions in the market, compliance of all food stuffs sold therein with applicable food and
drug and related standards, for the prevention of fraud and imposition upon the buying public, and so forth.
We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax on
income, not a city income tax (as distinguished from the national income tax imposed by the National Internal
Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act, but rather a license tax or fee for the
regulation of the business in which the petitioner is engaged. While it is true that the amount imposed by the
questioned ordinances may be considered in determining whether the exaction is really one for revenue or
prohibition, instead of one of regulation under the police power, 18 it nevertheless will be presumed to be
reasonable. Local' governments are allowed wide discretion in determining the rates of imposable license fees even
in cases of purely police power measures, in the absence of proof as to particular municipal conditions and the
nature of the business being taxed as well as other detailed factors relevant to the issue of arbitrariness or
unreasonableness of the questioned rates. 19 Thus:
[A]n ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial
inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so excessive as to be prohibitory, arbitrary, unreasonable,
oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the
municipal conditions as a whole and the nature of the business made subject to imposition. 20
Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and excessive and so
grossly disproportionate to the costs of the regulatory service being performed by the respondent as to compel the
Court to characterize the imposition as a revenue measure exclusively. The lower court correctly held that the gross
receipts from stall rentals have been used only as a basis for computing the fees or taxes due respondent to cover
the latter's administrative expenses, i.e., for regulation and supervision of the sale of foodstuffs to the public. The
use of the gross amount of stall rentals as basis for determining the collectible amount of license tax, does not by
itself, upon the one hand, convert or render the license tax into a prohibited city tax on income. Upon the other
hand, it has not been suggested that such basis has no reasonable relationship to the probable costs of regulation
and supervision of the petitioner's kind of business. For, ordinarily, the higher the amount of stall rentals, the higher
the aggregate volume of foodstuffs and related items sold in petitioner's privately owned market; and the higher
the volume of goods sold in such private market, the greater the extent and frequency of inspection and
supervision that may be reasonably required in the interest of the buying public. Moreover, what we started with
should be recalled here: the authority conferred upon the respondent's City Council is not merely "to regulate" but
also embraces the power "to tax" the petitioner's business.
Finally, petitioner argues that respondent is without power to impose a gross receipts tax for revenue purposes
absent an express grant from the national government. As a general rule, there must be a statutory grant for a local
government unit to impose lawfully a gross receipts tax, that unit not having the inherent power of taxation. 21 The
rule, however, finds no application in the instant case where what is involved is an exercise of, principally, the
regulatory power of the respondent City and where that regulatory power is expressly accompanied by the taxing
power.
ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18, is hereby AFFIRMED
and the Court Resolved to DENY the Petition for lack of merit.
SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

G.R. No. 193007

July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief 1 assailing the
validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of
tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of Republic Act 7716
(the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or the
NIRC) at the House of Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of
the Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose
VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition of Diaz and other
sectors to such move. But, upon President Benigno C. Aquino IIIs assumption of office in 2010, the BIR revived the
idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the
meaning of "sale of services" that are subject to VAT; that a toll fee is a "users tax," not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT.
The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10 days
from notice.2 Later, the Court issued another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the governments comment. 4 The government avers
that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where
the law provides otherwise; that the Court should seek the meaning and intent of the law from the words used in
the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several
BIR rulings and circulars.5
The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since
they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and
tollway operators. At any rate, the non-impairment clause cannot limit the States sovereign taxing power which is
generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates
cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to
a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll rate. Further, the
imposition of VAT on toll fees would have very minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway operators cannot be regarded as
franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect
the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this would be
illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue
Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input
VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities
that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT
on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators
and tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the
Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on
services; b) will impair the tollway operators right to a reasonable return of investment under their TOAs;
and c) is not administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than one for
declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The government has
sought reconsideration of the Courts resolution, 7 however, arguing that petitioners allegations clearly made out a
case for declaratory relief, an action over which the Court has no original jurisdiction. The government adds,
moreover, that the petition does not meet the requirements of Rule 65 for actions for prohibition since the BIR did
not exercise judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides,
petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has farreaching implications and raises questions that need to be resolved for the public good. 8 The Court has also held
that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to
usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on the
more than half a million motorists who use the tollways everyday, but more so on the governments effort to raise
revenue for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could cause more
mischief both to the tax-paying public and the government. A belated declaration of nullity of the BIR action would

make any attempt to refund to the motorists what they paid an administrative nightmare with no solution.
Consequently, it is not only the right, but the duty of the Court to take cognizance of and resolve the issues that the
petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to
waive such technical requirements when the legal questions to be resolved are of great importance to the public.
The same may be said of the requirement of locus standi which is a mere procedural requisite. 10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected,
according to Section 108, on the gross receipts derived from the sale or exchange of services as well as from the
use or lease of properties. The third paragraph of Section 108 defines "sale or exchange of services" as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal
or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of
franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. (Underscoring
supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines for a fee,
including those specified in the list. The enumeration of affected services is not exclusive. 11 By qualifying "services"
with the words "all kinds," Congress has given the term "services" an all-encompassing meaning. The listing of
specific services are intended to illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as a form of "service" rendered for a fee
should be deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree
establishes the legal basis for the services that tollway operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the operators expense. Tollways serve as alternatives
to regular public highways that meander through populated areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-moving. In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway
facilities over which the operator enjoys private proprietary rights 12 that its contract and the law recognize. In this
sense, the tollway operator is no different from the following service providers under Section 108 who allow others
to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport goods
or cargoes for hire and other domestic common carriers by land relative to their transport of goods or
cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT "all kinds of services" rendered for a fee
"regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental
faculties." This means that "services" to be subject to VAT need not fall under the traditional concept of services,
the personal or professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they also come under the
specific class described in Section 108 as "all other franchise grantees" who are subject to VAT, "except those under
Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities)
that Section 11913 spares from the payment of VAT. The word "franchise" broadly covers government grants of a
special right to do an act or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise grantees" under Section 108
since they do not hold legislative franchises. But nothing in Section 108 indicates that the "franchise grantees" it
speaks of are those who hold legislative franchises. Petitioners give no reason, and the Court cannot surmise any,
for making a distinction between franchises granted by Congress and franchises granted by some other
government agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted
by local authorities, as agents of the state, constitute as much a legislative franchise as though the grant had been
made by Congress itself.15 The term "franchise" has been broadly construed as referring, not only to authorizations
that Congress directly issues in the form of a special law, but also to those granted by administrative agencies to
which the power to grant franchises has been delegated by Congress. 16
Tollway operators are, owing to the nature and object of their business, "franchise grantees." The construction,
operation, and maintenance of toll facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction Company, the former tollway concessionaire for the
North and South Luzon Expressways. Apart from Congress, tollway franchises may also be granted by the TRB,
pursuant to the exercise of its delegated powers under P.D. 1112. 17 The franchise in this case is evidenced by a "Toll
Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes such services from
the term "sale of services" under Section 108 of the Code. But, again, nothing in Section 108 supports this
contention. The reverse is true. In specifically including by way of example electric utilities, telephone, telegraph,
and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a public nature such as public utilities and the
collection of tolls or charges for its use or service is a franchise. 19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v. Commissioner of
Internal Revenue,20 "statements made by individual members of Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the lawmakers voted on. Consequently,
the meaning and intention of the law must first be sought "in the words of the statute itself, read and considered in

their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is tantamount to taxing a
tax.21 Actually, petitioners base this argument on the following discussion in Manila International Airport Authority
(MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like "roads, canals,
rivers, torrents, ports and bridges constructed by the State," are owned by the State. The term "ports" includes
seaports and airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by the State. Under
Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the
government, or only those among the public who actually use the road through the toll fees they pay upon using
the road. The tollway system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for public dominion
or not. Article 420 of the Civil Code defines property of public dominion as "one intended for public use."Even if the
government collects toll fees, the road is still "intended for public use" if anyone can use the road under the same
terms and conditions as the rest of the public. The charging of fees, the limitation on the kind of vehicles that can
use the road, the speed restrictions and other conditions for the use of the road do not affect the public character of
the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the
bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the character
of MIAA as an airport for public use. Such fees are often termed users tax. This means taxing those among the
public who actually use a public facility instead of taxing all the public including those who never use the particular
public facility. A users tax is more equitable a principle of taxation mandated in the 1987
Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "users tax" must also pertain to
tollway fees. But the main issue in the MIAA case was whether or not Paraaque City could sell airport lands and
buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since local governments
have no power to tax the national government, the Court held that the City could not proceed with the auction sale.
MIAA forms part of the national government although not integrated in the department framework." 24 Thus, its
airport lands and buildings are properties of public dominion beyond the commerce of man under Article 420(1) 25 of
the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that
tollway fees are users tax, but to make the point that airport lands and buildings are properties of public dominion
and that the collection of terminal fees for their use does not make them private properties. Tollway fees are not
taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the
government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible from motorists, for
the construction and maintenance of certain roadways. The tax in such a case goes directly to the government for
the replenishment of resources it spends for the roadways. This is not the case here. What the government seeks to
tax here are fees collected from tollways that are constructed, maintained, and operated by private tollway
operators at their own expense under the build, operate, and transfer scheme that the government has adopted for
expressways.26 Except for a fraction given to the government, the toll fees essentially end up as earnings of the
tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is
imposed under the taxing power of the government principally for the purpose of raising revenues to fund public

expenditures.27 Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the
costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they
are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government
under its sovereign authority, toll fees may be demanded by either the government or private individuals or
entities, as an attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect
tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who
is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In
such a case, what is transferred is not the sellers liability but merely the burden of the VAT. 29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the
amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax 30and simply
becomes part of the cost that the buyer must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under
Section 105 of the Code, 31 VAT is imposed on any person who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable
for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a "users tax."
VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT.
The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways. 32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private
investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged diminution in
return of investments that may result from the VAT imposition. She has no interest at all in the profits to be earned
under the TOAs. The interest in and right to recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by imposing VAT on
tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation in the TOAs known
as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule on matters
that are manifestly conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based on
uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway
operations impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the
name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The
manner by which the BIR intends to implement the VAT by rounding off the toll rate and putting any excess
collection in an escrow account is also illegal, while the alternative of giving "change" to thousands of motorists in
order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway
operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be
capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Nonobservance of the canon, however, will not render a tax imposition invalid "except to the extent that specific
constitutional or statutory limitations are impaired." 34 Thus, even if the imposition of VAT on tollway operations may
seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or
the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any
declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to go
about it,35 the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will be enforced must first be addressed to the BIR

on whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIRs
discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs toll companies
to record an accumulated input VAT of zero balance in their books as of August 16, 2010, the date when the VAT
imposition was supposed to take effect. The issuance allegedly violates Section 111(A) 36 of the Code which grants
first time VAT payers a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with tollway
operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now
can no longer be collected. The tollway operators agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the
tollway operators who have not questioned the circulars validity. They are thus the ones who have a right to
challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT laws
coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code clearly states that
services of all other franchise grantees are subject to VAT, except as may be provided under Section 119 of the
Code. Tollway operators are not among the franchise grantees subject to franchise tax under the latter provision.
Neither are their services among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would
have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on
language in the law too plain to be mistaken. 37 But as the law is written, no such exemption obtains for tollway
operators. The Court is thus duty-bound to simply apply the law as it is found.1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of
Congress. The Courts role is to merely uphold this legislative policy, as reflected first and foremost in the language
of the tax statute. Thus, any unwarranted burden that may be perceived to result from enforcing such policy must
be properly referred to Congress. The Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded ValueAdded Tax law was passed. It is only now, however, that the executive has earnestly pursued the VAT imposition
against tollway operators. The executive exercises exclusive discretion in matters pertaining to the implementation
and execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal Revenues motion
for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F.
Timbols petition for lack of merit, and SETS ASIDE the Courts temporary restraining order dated August 13, 2010.
SO ORDERED.
ROBERTO A. ABAD
Associate Justice