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FIRST DIVISION

STA. LUCIA REALTY & DEVELOPMENT, INC.,


Petitioner,

- versus -

CITY OF PASIG,
Respondent,
MUNICIPALITY OF CAINTA, PROVINCE OF RIZAL,
Intervenor.
G.R. No. 166838

Present:

VELASCO, JR .,*
Acting Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,**
DEL CASTILLO, and
PEREZ, JJ.
Promulgated:
June 15, 2011
x----------------------------------------------------x

DECISION

LEONARDO-DE CASTRO, J.:

For review is the June 30, 2004 Decision [1] and the January 27, 2005 Resolution [2] of the
Court of Appeals in CA-G.R. CV No. 69603, which affirmed with modification the August 10,
1998 Decision[3] and October 9, 1998 Order[4] of the Regional Trial Court (RTC) of Pasig City,
Branch 157, in Civil Case No. 65420.

Petitioner Sta. Lucia Realty & Development, Inc. (Sta. Lucia) is the registered owner of
several parcels of land with Transfer Certificates of Title (TCT) Nos. 39112, 39110 and 38457,
all of which indicated that the lots were located in Barrio Tatlong Kawayan, Municipality of
Pasig[5] (Pasig).

The parcel of land covered by TCT No. 39112 was consolidated with that covered by
TCT No. 518403, which was situated in Barrio Tatlong Kawayan, Municipality of Cainta,
Province of Rizal (Cainta). The two combined lots were subsequently partitioned into three, for
which TCT Nos. 532250, 598424, and 599131, now all bearing the Cainta address, were issued.

TCT No. 39110 was also divided into two lots, becoming TCT Nos. 92869 and 92870.

The lot covered by TCT No. 38457 was not segregated, but a commercial building owned
by Sta. Lucia East Commercial Center, Inc., a separate corporation, was built on it.[6]

Upon Pasigs petition to correct the location stated in TCT Nos. 532250, 598424, and
599131, the Land Registration Court, on June 9, 1995, ordered the amendment of the TCTs to

read that the lots with respect to TCT No. 39112 were located in Barrio Tatlong Kawayan, Pasig
City.[7]

On January 31, 1994, Cainta filed a petition[8] for the settlement of its land boundary
dispute with Pasig before the RTC, Branch 74 of Antipolo City (Antipolo RTC). This case,
docketed as Civil Case No. 94-3006, is still pending up to this date.

On November 28, 1995, Pasig filed a Complaint,[9] docketed as Civil Case No. 65420,
against Sta. Lucia for the collection of real estate taxes, including penalties and interests, on the
lots covered by TCT Nos. 532250, 598424, 599131, 92869, 92870 and 38457, including the
improvements thereon (the subject properties).

Sta. Lucia, in its Answer, alleged that it had been religiously paying its real estate taxes to
Cainta, just like what its predecessors-in-interest did, by virtue of the demands and assessments
made and the Tax Declarations issued by Cainta on the claim that the subject properties were
within its territorial jurisdiction. Sta. Lucia further argued that since 1913, the real estate taxes
for the lots covered by the above TCTs had been paid to Cainta.[10]

Cainta was allowed to file its own Answer-in-Intervention when it moved to intervene on
the ground that its interest would be greatly affected by the outcome of the case. It averred that it
had been collecting the real property taxes on the subject properties even before Sta. Lucia
acquired them. Cainta further asseverated that the establishment of the boundary monuments
would show that the subject properties are within its metes and bounds.[11]
3

Sta. Lucia and Cainta thereafter moved for the suspension of the proceedings, and
claimed that the pending petition in the Antipolo RTC, for the settlement of boundary dispute
between Cainta and Pasig, presented a prejudicial question to the resolution of the case.[12]

The RTC denied this in an Order dated December 4, 1996 for lack of merit. Holding that
the TCTs were conclusive evidence as to its ownership and location, [13] the RTC, on August 10,
1998, rendered a Decision in favor of Pasig:

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


[Pasig], ordering Sta. Lucia Realty and Development, Inc. to pay [Pasig]:

1)

P273,349.14 representing unpaid real estate taxes and penalties as of


1996, plus interest of 2% per month until fully paid;

2)

P50,000.00 as and by way of attorneys fees; and

3)

The costs of suit.

Judgment is likewise rendered against the intervenor Municipality of


Cainta, Rizal, ordering it to refund to Sta. Lucia Realty and Development, Inc. the
realty tax payments improperly collected and received by the former from the
latter in the aggregate amount of P358, 403.68.[14]

After Sta. Lucia and Cainta filed their Notices of Appeal, Pasig, on September 11, 1998,
filed a Motion for Reconsideration of the RTCs August 10, 1998 Decision.

The RTC, on October 9, 1998, granted Pasigs motion in an Order [15] and modified its earlier
decision to include the realty taxes due on the improvements on the subject lots:

WHEREFORE, premises considered, the plaintiffs motion for


reconsideration is hereby granted. Accordingly, the Decision, dated August 10,
1998 is hereby modified in that the defendant is hereby ordered to pay plaintiff
the amount of P5,627,757.07 representing the unpaid taxes and penalties on the
improvements on the subject parcels of land whereon real estate taxes are
adjudged as due for the year 1996.[16]

Accordingly, Sta. Lucia filed an Amended Notice of Appeal to include the RTCs October
9, 1998 Order in its protest.

On October 16, 1998, Pasig filed a Motion for Execution Pending Appeal, to which both
Sta. Lucia and Cainta filed several oppositions, on the assertion that there were no good reasons
to warrant the execution pending appeal.[17]

On April 15, 1999, the RTC ordered the issuance of a Writ of Execution against Sta.
Lucia.

On May 21, 1999, Sta. Lucia filed a Petition for Certiorari under Rule 65 of the Rules of
Court with the Court of Appeals to assail the RTCs order granting the execution. Docketed
as CA-G.R. SP No. 52874, the petition was raffled to the First Division of the Court of Appeals,
which on September 22, 2000, ruled in favor of Sta. Lucia, to wit:
5

WHEREFORE, in view of the foregoing, the instant petition is hereby GIVEN


DUE COURSE and GRANTED by this Court. The assailed Order dated April
15, 1999 in Civil Case No. 65420 granting the motion for execution pending
appeal and ordering the issuance of a writ of execution pending appeal is
hereby SET ASIDE and declared NULL andVOID.[18]

The Court of Appeals added that the boundary dispute case presented a prejudicial
question which must be decided before x x x Pasig can collect the realty taxes due over the
subject properties.[19]

Pasig sought to have this decision reversed in a Petition for Certiorari filed before this
Court on November 29, 2000, but this was denied on June 25, 2001 for being filed out of time.[20]

Meanwhile, the appeal filed by Sta. Lucia and Cainta was raffled to the (former) Seventh
Division of the Court of Appeals and docketed as CA-G.R. CV No. 69603. On June 30, 2004,
the Court of Appeals rendered its Decision, wherein it agreed with the RTCs judgment:

WHEREFORE, the
appealed
the MODIFICATION that the
is DELETED.[21]

Decision
is
hereby AFFIRMED with
award of P50,000.00 attorneys fees

In affirming the RTC, the Court of Appeals declared that there was no proper legal basis
to suspend the proceedings.[22] Elucidating on the legal meaning of a prejudicial question, it held
that there can be no prejudicial question when the cases involved are both civil. [23] The Court of
6

Appeals further held that the elements oflitis pendentia and forum shopping, as alleged by Cainta
to be present, were not met.

Sta. Lucia and Cainta filed separate Motions for Reconsideration, which the Court of
Appeals denied in a Resolution dated January 27, 2005.

Undaunted, Sta. Lucia and Cainta filed separate Petitions for Certiorari with this
Court. Caintas petition, docketed as G.R. No. 166856 was denied on April 13, 2005 for Caintas
failure to show any reversible error. Sta. Lucias own petition is the one subject of this
decision.[24]

In praying for the reversal of the June 30, 2004 judgment of the Court of Appeals, Sta.
Lucia assigned the following errors:

ASSIGNMENT OF ERRORS

THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING [WITH


MODIFICATION] THE DECISION OF THE REGIONAL TRIAL COURT IN
PASIG CITY

II.

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING


THE CASE IN VIEW OF THE PENDENCY OF THE BOUNDARY DISPUTE
WHICH WILL FINALLY DETERMINE THE SITUS OF THE SUBJECT
PROPERTIES

III.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT


THE PAYMENT OF REALTY TAXES THROUGH THE MUNICIPALITY OF
CAINTA WAS VALID PAYMENT OF REALTY TAXES

IV.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT


IN THE MEANTIME THAT THE BOUNDARY DISPUTE CASE IN
ANTIPOLO CITY REGIONAL TRIAL COURT IS BEING FINALLY
RESOLVED, THE PETITIONER STA. LUCIA SHOULD BE PAYING THE
REALTY TAXES ON THE SUBJECT PROPERTIES THROUGH THE
INTERVENOR CAINTA TO PRESERVE THE STATUS QUO.[25]

Pasig, countering each error, claims that the lower courts correctly decided the case
considering that the TCTs are clear on their faces that the subject properties are situated in its
territorial jurisdiction. Pasig contends that the principles of litis pendentia, forum shopping,
and res judicata are all inapplicable, due to the absence of their requisite elements. Pasig
maintains that the boundary dispute case before the Antipolo RTC is independent of the
complaint for collection of realty taxes which was filed before the Pasig RTC. It avers that the
8

doctrine of prejudicial question, which has a definite meaning in law, cannot be invoked where
the two cases involved are both civil. Thus, Pasig argues, since there is no legal ground to
preclude the simultaneous hearing of both cases, the suspension of the proceedings in the Pasig
RTC is baseless.

Cainta also filed its own comment reiterating its legal authority over the subject
properties, which fall within its territorial jurisdiction. Cainta claims that while it has been
collecting the realty taxes over the subject properties since way back 1913, Pasig only covered
the same for real property tax purposes in 1990, 1992, and 1993. Cainta also insists that there is a
discrepancy between the locational entries and the technical descriptions in the TCTs, which
further supports the need to await the settlement of the boundary dispute case it initiated.

The errors presented before this Court can be narrowed down into two basic issues:

1) Whether the RTC and the CA were correct in deciding Pasigs Complaint
without waiting for the resolution of the boundary dispute case between Pasig
and Cainta; and

2) Whether Sta. Lucia should continue paying its real property taxes to Cainta, as
it alleged to have always done, or to Pasig, as the location stated in Sta. Lucias
TCTs.

We agree with the First Division of the Court of Appeals in CA-G.R. SP No. 52874 that
the resolution of the boundary dispute between Pasig and Cainta would determine which local
government unit is entitled to collect realty taxes from Sta. Lucia.[26]

The Local Government Unit entitled


To Collect Real Property Taxes

The Former Seventh Division of the Court of Appeals held that the resolution of the
complaint lodged before the Pasig RTC did not necessitate the assessment of the parties evidence
on the metes and bounds of their respective territories. It cited our ruling in Odsigue v. Court of
Appeals[27] wherein we said that a certificate of title is conclusive evidence of both its ownership
and location.[28] The Court of Appeals even referred to specific provisions of the 1991 Local
Government Code and Act. No. 496 to support its ruling that Pasig had the right to collect the
realty taxes on the subject properties as the titles of the subject properties show on their faces
that they are situated in Pasig.[29]

Under Presidential Decree No. 464 or the Real Property Tax Code, the authority to collect
real property taxes is vested in the locality where the property is situated:
Sec. 5. Appraisal of Real Property. All real property, whether taxable or
exempt, shall be appraised at the current and fair market value prevailing in the
locality where the property is situated.
xxxx
Sec. 57. Collection of tax to be the responsibility of treasurers. The
collection of the real property tax and all penalties accruing thereto, and the
enforcement of the remedies provided for in this Code or any applicable laws,
shall be the responsibility of the treasurer of the province, city or
municipality where the property is situated.(Emphases ours.)
10

This requisite was reiterated in Republic Act No. 7160, also known as the 1991 the Local
Government Code, to wit:

Section 201. Appraisal of Real Property. All real property, whether


taxable or exempt, shall be appraised at the current and fair market value
prevailing in the localitywhere the property is situated. The Department of
Finance shall promulgate the necessary rules and regulations for the classification,
appraisal, and assessment of real property pursuant to the provisions of this Code.

Section 233. Rates of Levy. A province or city or a municipality within


the Metropolitan Manila Area shall fix a uniform rate of basic real property tax
applicable to their respective localities as follows: x x x. (Emphases ours.)

The only import of these provisions is that, while a local government unit is authorized
under several laws to collect real estate tax on properties falling under its territorial
jurisdiction, it is imperative to first show that these properties are unquestionably within its
geographical boundaries.

Accentuating on the importance of delineating territorial boundaries, this Court,


in Mariano, Jr. v. Commission on Elections[30] said:

The importance of drawing with precise strokes the territorial boundaries


of a local unit of government cannot be overemphasized. The boundaries must be
clear for they define the limits of the territorial jurisdiction of a local
government unit. It can legitimately exercise powers of government only
within the limits of its territorial jurisdiction. Beyond these limits, its acts
are ultra vires. Needless to state, any uncertainty in the boundaries of local
government units will sow costly conflicts in the exercise of governmental powers
11

which ultimately will prejudice the people's welfare. This is the evil sought to be
avoided by the Local Government Code in requiring that the land area of a local
government unit must be spelled out in metes and bounds, with technical
descriptions.[31] (Emphasis ours.)

The significance of accurately defining a local government units boundaries was stressed
in City of Pasig v. Commission on Elections,[32] which involved the consolidated petitions filed by
the parties herein, Pasig and Cainta, against two decisions of the Commission on Elections
(COMELEC) with respect to the plebiscites scheduled by Pasig for the ratification of its creation
of two new Barangays. Ruling on the contradictory reliefs sought by Pasig and Cainta, this Court
affirmed the COMELEC decision to hold in abeyance the plebiscite to ratify the creation
of Barangay Karangalan; but set aside the COMELECs other decision, and nullified the
plebiscite that ratified the creation of Barangay Napico in Pasig, until the boundary dispute
before the Antipolo RTC had been resolved. The aforementioned case held as follows:
1.

The Petition of the City of Pasig in G.R. No. 125646 is DISMISSED for
lack of merit; while

2.

The Petition of the Municipality of Cainta in G.R. No. 128663 is


GRANTED. The COMELEC Order in UND No. 97-002, dated March 21,
1997, is SET ASIDE and the plebiscite held on March 15, 1997 to ratify the
creation of Barangay Napico in the City of Pasig is declared null and void.
Plebiscite on the same is ordered held in abeyance until after the courts settle
with finality the boundary dispute between the City of Pasig and the
Municipality of Cainta, in Civil Case No. 94-3006.[33]

Clearly therefore, the local government unit entitled to collect real property taxes from
Sta. Lucia must undoubtedly show that the subject properties are situated within its territorial
jurisdiction; otherwise, it would be acting beyond the powers vested to it by law.

Certificates of Title as
Conclusive Evidence of Location
12

While we fully agree that a certificate of title is conclusive as to its ownership and
location, this does not preclude the filing of an action for the very purpose of attacking the
statements therein. In De Pedro v. Romasan Development Corporation,[34] we proclaimed that:

We agree with the petitioners that, generally, a certificate of title shall be


conclusive as to all matters contained therein and conclusive evidence of the
ownership of the land referred to therein. However, it bears stressing that while
certificates of title are indefeasible, unassailable and binding against the whole
world, including the government itself, they do not create or vest title. They
merely confirm or record title already existing and vested. They cannot be used to
protect a usurper from the true owner, nor can they be used as a shield for the
commission of fraud; neither do they permit one to enrich himself at the expense
of other.[35]

In Pioneer Insurance and Surety Corporation v. Heirs of Vicente Coronado,[36] we set


aside the lower courts ruling that the property subject of the case was not situated in the location
stated and described in the TCT, for lack of adequate basis. Our decision was in line with the
doctrine that the TCT is conclusive evidence of ownership and location. However, we refused to
simply uphold the veracity of the disputed TCT, and instead, we remanded the case back to the
trial court for the determination of the exact location of the property seeing that it was the issue
in the complaint filed before it.[37]

In City Government of Tagaytay v. Guerrero,[38] this Court reprimanded the City of


Tagaytay for levying taxes on a property that was outside its territorial jurisdiction, viz:

13

In this case, it is basic that before the City of Tagaytay may levy a certain
property for sale due to tax delinquency, the subject property should be under its
territorial jurisdiction. The city officials are expected to know such basic principle
of law. The failure of the city officials of Tagaytay to verify if the property is
within its jurisdiction before levying taxes on the same constitutes gross
negligence.[39] (Emphasis ours.)

Although it is true that Pasig is the locality stated in the TCTs of the subject properties,
both Sta. Lucia and Cainta aver that the metes and bounds of the subject properties, as they are
described in the TCTs, reveal that they are within Caintas boundaries. [40] This only means that
there may be a conflict between the location as stated and the location as technically described in
the TCTs. Mere reliance therefore on the face of the TCTs will not suffice as they can only be
conclusive evidence of the subject properties locations if both the stated and described locations
point to the same area.

The Antipolo RTC, wherein the boundary dispute case between Pasig and Cainta is
pending, would be able to best determine once and for all the precise metes and bounds of both
Pasigs and Caintas respective territorial jurisdictions. The resolution of this dispute would
necessarily ascertain the extent and reach of each local governments authority, a prerequisite in
the proper exercise of their powers, one of which is the power of taxation. This was the
conclusion reached by this Court inCity of Pasig v. Commission on Elections,[41] and by the First
Division of the Court of Appeals in CA-G.R. SP No. 52874. We do not see any reason why we
cannot adhere to the same logic and reasoning in this case.

14

The Prejudicial Question Debate

It would be unfair to hold Sta. Lucia liable again for real property taxes it already paid
simply because Pasig cannot wait for its boundary dispute with Cainta to be decided. Pasig has
consistently argued that the boundary dispute case is not a prejudicial question that would entail
the suspension of its collection case against Sta. Lucia. This was also its argument in City of
Pasig v. Commission on Elections,[42] when it sought to nullify the COMELECs ruling to hold in
abeyance (until the settlement of the boundary dispute case), the plebiscite that will ratify its
creation of Barangay Karangalan. We agreed with the COMELEC therein that the boundary
dispute case presented a prejudicial question and explained our statement in this wise:

To begin with, we agree with the position of the COMELEC that Civil
Case No. 94-3006 involving the boundary dispute between the Municipality of
Cainta and the City of Pasig presents a prejudicial question which must first be
decided before plebiscites for the creation of the proposed barangays may be
held.
The City of Pasig argues that there is no prejudicial question since the
same contemplates a civil and criminal action and does not come into play where
both cases are civil, as in the instant case. While this may be the general rule,
this Court has held in Vidad v. RTC of Negros Oriental, Br. 42, that, in the
interest of good order, we can very well suspend action on one case pending
the final outcome of another case closely interrelated or linked to the first.
In the case at bar, while the City of Pasig vigorously claims that the areas
covered by the proposed Barangays Karangalan and Napico are within its
territory, it can not deny that portions of the same area are included in the
boundary dispute case pending before the Regional Trial Court of
Antipolo. Surely, whether the areas in controversy shall be decided as within the
territorial jurisdiction of the Municipality of Cainta or the City of Pasig has
material bearing to the creation of the proposed Barangays Karangalan and
Napico. Indeed, a requisite for the creation of a barangay is for its territorial
jurisdiction to be properly identified by metes and bounds or by more or less
permanent natural boundaries. Precisely because territorial jurisdiction is an issue
raised in the pending civil case, until and unless such issue is resolved with
finality, to define the territorial jurisdiction of the proposed barangays would only
15

be an exercise in futility. Not only that, we would be paving the way for
potentially ultra vires acts of such barangays. x x x.[43](Emphases ours.)

It is obvious from the foregoing, that the term prejudicial question, as appearing in the
cases involving the parties herein, had been used loosely. Its usage had been more in reference to
its ordinary meaning, than to its strict legal meaning under the Rules of Court. [44] Nevertheless,
even without the impact of the connotation derived from the term, our own Rules of Court state
that a trial court may control its own proceedings according to its sound discretion:

POWERS AND DUTIES OF COURTS AND JUDICIAL OFFICERS


Rule 135
SEC. 5. Inherent powers of courts. Every court shall have power:
xxxx
(g) To amend and control its process and orders so as to make them comformable
to law and justice.

Furthermore, we have acknowledged and affirmed this inherent power in our own
decisions, to wit:
The court in which an action is pending may, in the exercise of a sound
discretion, upon proper application for a stay of that action, hold the action in
abeyance to abide the outcome of another pending in another court, especially
where the parties and the issues are the same, for there is power inherent in every
court to control the disposition of causes (sic) on its dockets with economy of
time and effort for itself, for counsel, and for litigants. Where the rights of parties
to the second action cannot be properly determined until the questions raised in
the first action are settled the second action should be stayed.

The power to stay proceedings is incidental to the power inherent in every


court to control the disposition of the cases on its dockets, considering its time
and effort, that of counsel and the litigants. But if proceedings must be stayed, it
must be done in order to avoid multiplicity of suits and prevent vexatious
16

litigations, conflicting judgments, confusion between litigants and courts. It bears


stressing that whether or not the RTC would suspend the proceedings in the
SECOND CASE is submitted to its sound discretion.[45]

In light of the foregoing, we hold that the Pasig RTC should have held in abeyance the
proceedings in Civil Case No. 65420, in view of the fact that the outcome of the boundary
dispute case before the Antipolo RTC will undeniably affect both Pasigs and Caintas rights. In
fact, the only reason Pasig had to file a tax collection case against Sta. Lucia was not that Sta.
Lucia refused to pay, but that Sta. Lucia had already paid, albeit to another local government
unit. Evidently, had the territorial boundaries of the contending local government units herein
been delineated with accuracy, then there would be no controversy at all.

In the meantime, to avoid further animosity, Sta. Lucia is directed to deposit


the succeeding real property taxes due on the subject properties, in an escrow account with the
Land Bank of the Philippines.

WHEREFORE, the instant petition is GRANTED. The June 30, 2004 Decision and the
January 27, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 69603 are SET
ASIDE. The City of Pasig and the Municipality of Cainta are both directed to await the
judgment in their boundary dispute case (Civil Case No. 94-3006), pending before Branch 74 of
the Regional Trial Court in Antipolo City, to determine which local government unit is entitled to
exercise its powers, including the collection of real property taxes, on the properties subject of
the dispute. In the meantime, Sta. Lucia Realty and Development, Inc. is directed to deposit the
succeeding real property taxes due on the lots and improvements covered by TCT Nos. 532250,

17

598424, 599131, 92869, 92870 and 38457 in an escrow account with the Land Bank of the
Philippines.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO


Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.


Associate Justice

Acting Chairperson

MARIANO C. DEL CASTILLO


LUCAS P. BERSAMIN
Associate Justice
Associate Justice

18

JOSE PORTUGAL PEREZ


Associate Justice

ATTESTATION

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

PRESBITERO J. VELASCO, JR.


Associate Justice
Acting Chairperson, First Division

CERTIFICATION

19

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

RENATO C. CORONA
Chief Justice

Per Special Order No. 1003 dated June 8, 2011.

**

Additional member per Special Order No. 1000 dated June 8, 2011.

[1]

Rollo, pp. 39-55; penned by Associate Justice Ruben T. Reyes with Associate Justices Eliezer
R. De los Santos and Arturo D. Brion (now Associate Justice of the Supreme Court),
concurring.

[2]

Id. at 57-58.

[3]

Id. at 59-70.

[4]

Id. at 71-72.

[5]

Now City of Pasig.

[6]

Rollo, pp. 12-13.

[7]

Id. at 233.

[8]

CA rollo, pp. 155-158.

[9]

Rollo, pp. 75-81.

[10]

Id. at 13.

20

[11]

Id. at 88.

[12]

Id. at 258.

[13]

Id. at 69.

[14]

Id. at 70.

[15]

Id. at 71-72.

[16]

Id. at 72.

[17]

Id. at 237.

[18]

Id. at 93.

[19]

Id.

[20]

Id. at 95.

[21]

Id. at 54.

[22]

Id. at 46.

[23]

Id. at 47.

[24]

Id. at 102.

[25]

Id. at 17.

[26]

Id. at 93.

[27]

G.R. No. 111179, July 4, 1994, 233 SCRA 626.

[28]

Id. at 631.

[29]

Rollo, pp. 47-51.

[30]

312 Phil. 259 (1995).

[31]

Id. at 265-266.

[32]

372 Phil. 864 (1999).

[33]

Id. at 872.
21

[34]

492 Phil. 643 (2005).

[35]

Id. at 655.

[36]

G.R. No. 180357, August 4, 2009, 595 SCRA 263.

[37]

Id. at 271-272.

[38]

G.R. Nos. 140743 & 140745, September 17, 2009, 600 SCRA 33.

[39]

Id. at 63.

[40]

Rollo, pp. 32-33, 191-192.

[41]

Supra note 32.

[42]

Id.

[43]

Id. at 869-870.

[44]

Revised Rules of Court , Rule 111, Section 5.

[45]

Security Bank Corporation v. Judge Victorio, 505 Phil. 682, 699-700 (2005).

22

SECOND DIVISION
[G.R. No. 171742 : June 15, 2011]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. MIRANT
(PHILIPPINES) OPERATIONS, CORPORATION, RESPONDENT.
[G.R. No. 176165]
MIRANT (PHILIPPINES) OPERATIONS CORPORATION (FORMERLY: SOUTHERN
ENERGY ASIA-PACIFIC OPERATIONS (PHILS.), INC.), PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
MENDOZA, J.:
These are two consolidated petitions for review on certiorari under Rule 45 of the Rules of
Court.
In G.R. No. 171742, petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the
January 17, 2006 Decision [1] and March 9, 2006 Resolution [2] of the Court of Tax
Appeals (CTA) En Banc in CTA E.B. Case No. 123.
In G.R. No. 176165, petitioner Mirant (Philippines) Operations, Corporation (Mirant) seeks the
reversal of the October 26, 2006 Decision [3] and January 5, 2007 Resolution [4] of the CTA En
Banc in CTA E.B. Case No. 125.
THE FACTS
Petitioner is empowered to perform the lawful duties of his office including, among others, the
duty to act on and approve claims for refund or tax credit as provided by law.
Respondent Mirant is a corporation duly organized and existing under and by virtue of the laws
of the Republic of the Philippines, with principal office at Bo. Ibabang Pulo, Pagbilao Grande
Island, Pagbilao, Quezon. [5]
Mirant also operated under the names Southern Energy Asia-Pacific Operations (Phils.), Inc.,
CEPA Operations (Philippines) Corporation; CEPA Tileman Project Management Corporation;
and Hopewell Tileman Project Management Corporation. [6]
Mirant, duly licensed to do business in the Philippines, is primarily engaged in the design,
construction, assembly, commissioning, operation, maintenance, rehabilitation and management
of gas turbine and other power generating plants and related facilities using coal, distillate, and
other fuel provided by and under contract with the Government of the Republic of the
Philippines or any subdivision, instrumentality or agency thereof, or any government-owned or
controlled corporations or other entities engaged in the development, supply or distribution of
23

energy. [7]
Mirant entered into Operating and Management Agreements with Mirant Pagbilao Corporation
(formerly Southern Energy Quezon, Inc.) and Mirant Sual Corporation (formerly Southern
Energy Pangasinan, Inc.) to provide these companies with maintenance and management
services in connection with the operation, construction and commissioning of coal-fired power
stations situated in Pagbilao, Quezon, and Sual, Pangasinan respectively. [8]
On October 15, 1999, Mirant filed with the Bureau of Internal Revenue (BIR) its income tax
return for thefiscal year ending June 30, 1999, declaring a net loss of P235,291,064.00 and
unutilized tax credits of ?32,263,388.00:
Gross Income
Less: Deductions
Net Loss

P (64,438,434.00)
170,852,630.00
P(235,291,064.00)

Income Tax Due


Less: Prior Year's Excess Credits
Creditable Tax Withheld
First Three Quarters
Fourth Quarter
Tax Overpayment

P--4,714,516.00
21,702,771.00
5,846,101.00
P32,263,388.00 [9]

On April 17, 2000, Mirant filed with the BIR an amended income tax return (ITR) for the fiscal
year ending June 30, 1999, reporting an increased net loss amount of ?379,324,340.00 but
reporting the same unutilized tax credits of ?32,263,388.00, which it opted to carry over as a tax
credit to the succeeding taxable year, thus:
Gross Income
Less: Deductions
Net Loss

P(113,113,036.00)
248,211,204.00
P(379,324,240.00)

Income Tax Due


Less: Prior Year's Excess Credits
Creditable Tax Withheld
First Three Quarters
Fourth Quarter
Tax Overpayment

P --4,714,516.00
21,702,771.00
5,846,101.00
P32,263,388.00 [10]

To synchronize its accounting period with those of its affiliates, Mirant allegedly secured the
approval of the BIR to change its accounting period from fiscal year (FY) to calendar year (CY)
effective December 31, 1999. Thus, on April 17, 2000, Mirant filed its income tax return for
the interim period July 1, 1999 to December 31, 1999, declaring a net loss in the amount of ?
381,874,076.00 and unutilized tax credits of ?48,626,793.00:
Gross Income
Less: Deductions
Net Loss

P(320,895,462.00)
60,978,614.00
P(381,874,076.00)
24

Income Tax Due


Less: Prior Year's Excess Credits
Creditable Tax Withheld
First Three Quarters
Fourth Quarter
Tax Overpayment

P --32,263,388.00
16,363,405.00
--P48,626,793.00 [11]

Mirant indicated the excess amount of ?48,626,793.00 as "To be carried over as tax credit next
year/quarter." [12]
On April 10, 2001, it filed with the BIR its income tax return for the calendar year ending
December 31, 2000, reflecting a net loss of ?56,901,850.00 and unutilized tax credits of ?
87,345,116.00, computed as follows:
Gross Income
Less: Deductions
Net Loss

P(4,080,541.00)
52,821,309.00
P(56,901,850.00)

Income Tax Due


Less: Prior Year's Excess Credits
Creditable Tax Withheld
First Three Quarters
Fourth Quarter
Tax Overpayment

P --48,626,793.00
25,336,971.00
13,381,352.00
P87,345,116.00 [13]

On September 20, 2001, Mirant wrote the BIR a letter claiming a refund of ?87,345,116.00
representing overpaid income tax for the FY ending June 30, 1999, the interim period covering
July 1, 1999 to December 31, 1999, and CY ending December 31, 2000. [14]
As the two-year prescriptive period for the filing of a judicial claim under Section 229 of the
National Internal Revenue Code (NIRC) of 1997 was about to lapse without action on the part of
the BIR, Mirant elevated its case to the CTA by way of Petition for Review on October 12, 2001.
The case was docketed asCTA Case No. 6340. [15]
The CTA First Division rendered judgment partially granting Mirant's claim for refund in the
reduced amount of P38,620,427.00, representing its duly substantiated unutilized creditable
withholding taxes for taxable year 2000 out of the total claim of ?38,718,323.00 therefor. [16] It
appears that the total claim was reduced by P97,896.00 for the following reasons: the amount of
P92,996.00 was deducted because the CTA First Division found that it was not covered by the
withholding tax certificate issued by Southern Energy Quezon, Inc. for the period October 1,
2000 to December 31, 2000. Moreover the additional amount of P4,900.00 was also deducted
because based on the reconciliation schedule for the creditable taxes of P745,290.00 withheld by
Southern Energy Quezon, Inc. for the period October 1, 2000 to December 31, 2000 on Mirant's
Philippine peso billings under Invoice No. 0015, the corresponding creditable taxes claimed by
Mirant in its 2000 income tax return amounted to P750,190.00 which was higher by ?4,900.00
than that reflected in the certificate. [17]
Additionally, Mirant's claim for the refund of its unutilized tax credits for the taxable year
1999 in the total amount of P48,626,793.00, was denied as it exercised the carry-over option
25

with regard to the said unutilized tax credits, which is irrevocable pursuant to the provisions of
Section 76 of the 1997 NIRC. [18]
The dispositive portion of the assailed May 18, 2005 Decision [19] of the CTA First Division
reads:
IN VIEW OF ALL THE FOREGOING, the instant Petition for Review is
hereby GRANTED but in a reduced amount of P38,620,427.00. Accordingly, respondent
is ORDERED TO REFUND, or in the alternative, ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the amount of P38,620,427.00 representing
unutilized creditable withholding taxes for taxable year 2000.
Both parties filed their respective motions for partial reconsideration of the above decision, but
these were both denied for lack of merit in a Resolution [20] dated September 22, 2005.
Both parties sought redress before the CTA En Banc in two separate petitions for
review docketed as CTA EB Case No. 123 and CTA EB Case No. 125, respectively.
According to the CTA, although arising from the same case, CTA Case No. 6340, these two cases
were not consolidated because CTA EB Case No. 125 was initially dismissed due to procedural
infirmities.
In a Resolution dated April 28, 2006, however, acting on Mirant's motion for reconsideration, the
CTA En Banc recalled its earlier resolution and reinstated the case. [21] Eventually, the CTA En
Banc in separate decisions, denied due course and dismissed the two cases. The CIR and Mirant
filed their respective motions for reconsideration but both were denied. Thus, the CIR and
Mirant filed their respective petitions for review with this Court, docketed as G.R. No. 171742
and G.R. No. 176165, respectively.
ISSUES
In G.R. No. 171742, the CIR raises the following issue:
WHETHER OR NOT THE COURT OF TAX APPEALS ERRED ON A QUESTION OF
LAW IN HOLDING RESPONDENT ENTITLED TO A REFUND OR TAX CREDIT IN
THE AMOUNT OF P38,620,427.00.
In G.R. No. 176165, Mirant raises the following issue:
WHETHER OR NOT PETITIONER IS ENTITLED TO A CLAIM FOR ADDITIONAL
REFUND OR ISSUANCE OF A TAX CREDIT CERTIFICATE IN THE AMOUNT OF
P48,626,793.00 REPRESENTING EXCESS CREDITABLE WITHHOLDING TAXES
FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND THE INTERIM PERIOD FROM
JULY 1, 1999 TO DECEMBER 31, 1999.
In essence, the issue is whether Mirant is entitled to a tax refund or to the issuance of a tax credit
certificate and, if it is, then what is the amount to which it is entitled.

26

RULING OF THE COURT


The Court finds the assailed decisions and resolutions of the CTA En Banc in CTA E.B. Case
Nos. 123 and 125 to be consistent with law and jurisprudence.
Once exercised, the option
to carry over is irrevocable.
Section 76 of the National Internal Revenue Code (Presidential Decree No. 1158, as amended)
provides:
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file
a final adjustment return covering the total taxable income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be allowed
therefor. (Underscoring and emphasis supplied.)
The last sentence of Section 76 is clear in its mandate. Once a corporation exercises the option to
carry-over and apply the excess quarterly income tax against the tax due for the taxable quarters
of the succeeding taxable years, such option is irrevocable for that taxable period. Having chosen
to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply
for a cash refund or for the issuance of a tax credit certificate for the amount representing such
overpayment.
In the recent case of Commissioner of Internal Revenue v. PL Management International
Philippines, Inc.,[22] the Court discussed the irrevocability rule of Section 76 in this wise:
The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the NIRC of 1985,
which provides:
Section 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file
a final adjustment return covering the total net income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
27

In case the corporation is entitled to a refund of the excess estimated quarterly income taxespaid, the refundable amount shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.
As can be seen, Congress added a sentence to Section 76 of the NIRC of 1997 in order to lay
down the irrevocability rule, to wit:
xxx Once the option to carry-over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for tax refund or issuance of a
tax credit certificate shall be allowed therefor
.
In Philam Asset Management, Inc. v. Commissioner of Internal Revenue, [23] the Court expounds
on the two alternative options of a corporate taxpayer whose total quarterly income tax payments
exceed its tax liability, and on how the choice of one option precludes the other, viz:
The first option is relatively simple.Any tax on income that is paid in excess of the amount due
the government may be refunded, provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as shown on the FAR of a given
taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature. The choice of one precludes
the other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal
Revenue, [24] the Court ruled that a corporation must signify its intention - whether to
request a tax refund or claim a tax credit - by marking the corresponding option box
provided in the FAR.While a taxpayer is required to mark its choice in the form provided
by the BIR, this requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same excess income
taxes paid. xxx
In Commissioner of Internal Revenue v. Bankof the Philippine Islands, [25] the Court, citing the
aforequoted pronouncement in Philam Asset Management, Inc., points out that Section 76 of the
NIRC of 1997 is clear and unequivocal in providing that the carry-over option, once actually or
constructively chosen by a corporate taxpayer, becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose
an option; and once it had already done so, it could no longer make another one. Consequently,
after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the
question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the
NIRC of 1997 is explicit in stating that once the option to carry over has been made, "no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that
taxable period and no application for tax refund or issuance of a tax credit certificate shall be
allowed therefor."The phrase "for that taxable period" merely identifies the excess income tax,
subject of the option, by referring to the taxable period when it was acquired by the taxpayer. In
28

the present case, the excess income tax credit, which BPI opted to carry over, was acquired by
the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess
income tax credit is irrevocable; it cannot later on opt to apply for a refund of the very same
1998 excess income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive
period for the irrevocability rule. This would mean that since the tax credit in this case was
acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to
carry over expired by the end of 1999, leaving BPI free to again take another option as regards
its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability
rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC
of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayer's excess tax credit. The interpretation of the Court of
Appeals only delays the flip-flopping to the end of each succeeding taxable period.
The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim
for refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment
on the part of the government. The Court addressed the very same argument in Philam, where it
elucidated that there would be no unjust enrichment in the event of denial of the claim for refund
under such circumstances, because there would be no forfeiture of any amount in favor of the
government. The amount being claimed as a refund would remain in the account of the
taxpayer until utilized in succeeding taxable years, as provided in Section 76 of the NIRC of
1997. It is worthy to note that unlike the option for refund of excess income tax, which
prescribes after two years from the filing of the FAR, there is no prescriptive period for the
carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired
in 1998 and opted to carry over, may be repeatedly carried over to succeeding taxable
years,i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited to a
tax liability of BPI.
Inasmuch as the respondent already opted to carry over its unutilized creditable withholding tax
of P1,200,000.00 to taxable year 1998, the carry-over could no longer be converted into a claim
for tax refund because of the irrevocability rule provided in Section 76 of the NIRC of 1997.
Thereby, the respondent became barred from claiming the refund. [Underscoring supplied] [26]
In this case, in its amended ITR for the year ended July 30, 1999 [27] and for the interim period
ended December 31, 1999, [28] Mirant clearly ticked the box signifying that the overpayment was
"To be carried over as tax credit next year/quarter." Item 31 of the Annual Income Tax Return
Form (BIR Form No. 1702) also clearly indicated "If overpayment, mark one box only. (once the
choice is made, the same is irrevocable)."
Applying the irrevocability rule in Section 76, Mirant having opted to carry over its tax
overpayment for the fiscal year ending July 30, 1999 and for the interim period ending December
31, 1999, it is now barred from applying for the refund of the said amount or for the issuance of a
tax credit certificate therefor, and for the unutilized tax credits carried over from the fiscal year
ended June 30, 1998.
Mirant is entitled to the refund of its unutilized creditable
withholding taxes for the taxable year 2000.

29

It is apt to restate here the time-honored doctrine that the findings and conclusions of the CTA
are accorded the highest respect and will not be lightly set aside. The CTA, by the very nature of
its functions, is dedicated exclusively to the resolution of tax problems and has accordingly
developed an expertise on the subject unless there has been an abusive or improvident exercise
of authority. [29] Citing Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v.
Commissioner of Internal Revenue, [30] this Court in Toshiba Information Equipment (Phils.), Inc.
v. Commissioner of Internal Revenue,[31] explicitly pronounced Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with
the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April
2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by
the very nature of its function is dedicated exclusively to the consideration of tax problems, has
necessarily developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such findings can only be
disturbed on appeal if they are not supported by substantial evidence or there is a showing of
gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect. [32]
In this case, having studied the applicable law and jurisprudence, the Court agrees with the
conclusion of the CTA that Mirant complied with all the requirements for the refund of its
unutilized creditable withholding taxes for taxable year 2000.
In Commissioner of Internal Revenue v. Far East Bank & Trust Company (now Bank of the
Philippine Islands), [33] the Court enumerated the requisites for claiming a tax credit or a refund
of creditable withholding tax:
1) The claim must be filed with the CIR within the two-year period from the date of payment of
the tax;
2) It must be shown on the return that the income received was declared as part of the gross
income; and
3) The fact of withholding must be established by a copy of a statement duly issued by the payor
to the payee showing the amount paid and the amount of the tax withheld. [34]
First, Mirant clearly complied with the two-year period. This requirement is based on Section
229 of the NIRC of 1997 which provides:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty,
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without a written claim therefor,
30

refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. [Underscoring supplied]
Mirant filed its income tax return for the taxable year ending December 31, 2000 on April 10,
2001. Thus, from such date of filing, petitioner had until April 10, 2003 within which to file its
claim for refund or for the issuance of a tax credit certificate in its favor. [35]
Mirant filed its administrative claim with the BIR on September 20, 2001. It thereafter filed its
Petition for Review with the CTA on October 12, 2001, [36] or clearly within the prescribed twoyear period.
Second, Mirant was also able to establish that the income, upon which the creditable withholding
taxes were paid, was declared as part of its gross income in its ITR. As the CTA En Banc
concluded:
As regards petitioner CIR's contention that respondent Mirant was not able to establish that the
income upon which the creditable withholding taxes were paid was included in respondent's
Income Tax Returns, a perusal of the records reveals otherwise. The reported creditable taxes
withheld of ?38,718,323.00 were withheld from the services fees of ?871,127,253.00 received by
respondent from its affiliates, the Southern Energy Quezon, Inc. and the Southern Energy
Pangasinan, Inc., pursuant to the Operating and Maintenance Service Agreements entered into by
respondent Mirant with said entities (Exhibits "HH", "K", and "K-1"). The gross income figure
of ?871,127,253.00 is the very same amount declared by respondent in its income tax return for
taxable year 2000 (Exhibits "O-11" & "O-12"). [37]
The CIR disagrees but merely alleges without any clear argument or basis that Mirant failed to
prove that the income from which its creditable taxes were withheld were duly declared as part
of its income in its annual ITR.
Thus, there being no cogent reason presented to reverse the findings and conclusions of the CTA,
the Court affirms its finding that the income received was declared as part of the gross income,
as shown in Mirant's tax return.
Finally, Mirant was also able to establish the fact of withholding of the creditable withholding
tax.
The CIR is of the opinion that Mirant's non-presentation of the various payors or withholding
agents to verify the Certificates of Creditable Tax Withheld at Source (CWT's), the registered
books of accounts and the audited financial statements for the various periods covered to
corroborate its other allegations, and its failure to offer other evidence to prove and corroborate
the propriety of its claim for refund and failure to establish the fact of remittance of the alleged
withheld taxes by various payors to the BIR, are all fatal to its claim. [38]
Citing the CTA First Division, Mirant argues that since the CWT's were duly signed and
prepared under pain of perjury, the figures appearing therein are presumed to be true and
correct. [39] The CWT's were presented and duly identified by its witness, Magdalena Marquez,
and further verified by the duly commissioned independent CPA, Ruben R. Rubio, on separate
hearing dates, before the CTA First Division.[40] Moreover, these certificates were found by the
duly commissioned independent CPA to be faithful reproductions of the originals, as stated in his
supplementary report dated March 24, 2003. [41]
31

The Court agrees with the conclusion of the CTA En Banc:


Contrary to petitioner CIR's contention, the fact of withholding was likewise established through
respondent's presentation of the Certificates of Creditable Tax Withheld At Source, duly issued to
it by Southern Energy Pangasinan, Inc. and Southern Energy Quezon, Inc., for the year 2000
(Exhibits "Y", "Z", "AA" to "FF"). These certificates were found by the duly commissioned
independent CPA to be faithful reproductions of the original copies, as per his Supplementary
Report dated March 24, 2003 (Exhibit "RR").
As to petitioner CIR's contention that the Report of the independent CPA dated February 21,
2003 shows several discrepancies, We sustain the findings of the First Division. On direct
examination, Mr. Ruben Rubio, the duly commissioned independent CPA, testified and explained
that the discrepancy was merely brought about by: (1) the difference in foreign exchange (forex)
rates at the time the certificates were recorded by respondent Mirant and the forex rates used at
the time the certificates were issued by its customers; and (2) the timing difference between the
point when respondent Mirant recognized or accrued its income and the time when the
corresponding creditable tax was withheld by its customers. x x x
xxx
As extensively discussed by the First Division:
"The creditable withholding taxes of P40,600,971.79 reflected in the certificates were higher by
P1,882,648.79 when compared with the creditable withholding taxes of P38,718,323.00 reported
by petitioner in its income tax return for taxable year 2000 (Exhibit O-7). As stated by SGV &
Co. in its report dated February 21, 2003 (Exhibit NN), tax credits were claimed by petitioner in
its income tax return for taxable year 2000 prior to its receipt of the certificates from the
withholding agents. At the time it recognized and accrued its income, petitioner also reported the
related creditable withholding taxes, which was prior to the receipt of the certificates from the
withholding agents. Hence, the discrepancy of P1,882,648.79 in creditable withholding taxes was
mainly brought about by the difference between the foreign exchange (forex) rates used at the
time when petitioner recorded its income and the related tax credits and the forex rates used by
the withholding agents at the time when income payments were made to petitioner in reporting
its tax credits, the same do not have a bearing on petitioner's total claim because the resulting
increase in the amounts of creditable withholding taxes reflected in the certificates were not
declared by the petitioner in its income tax return for the said year. However, for the creditable
taxes withheld by Southern Energy Quezon, Inc. for the period October 1, 2000 to December 31,
2000 totalling P7,670,746.00 (which formed part of the creditable withholding taxes of
P8,834,280.11 shown in the certificate marked as Exhibit EE), the same were based on forex
rates which were lower than those used by petitioner in recognizing the tax credits of
P7,763,742.00 for the same transactions. In other words, petitioner's claimed unutilized tax
credits of P92,996.00 (P7,763,742.00 less P7,670,746.00) were not covered by the withholding
tax certificate issued by Southern Energy, Quezon Inc. for the period October 1, 2000 to
December 31, 2000 and should therefore be deducted from the total claim of P38,718,323.00
Below is the breakdown of the amount of P92,996.00:
Creditable Withholding Taxes Overclaimed Tax
Credits
32

Exhibit
s

Period
Covered

Withholding Agent

Per
Certificate
(a)

Per ITR
(b)

(b) - (a)

EE, QQ

10/01/00 12/31/00

Southern Energy
Quezon, Inc.

P4,298,892.0
0

P4,350,327.0
0

P51,435.00

3,371,854.00

3,413,415.00

41,561.00

P7,670,746.0
0

P7,763,742.0
0

P92,996.00

The reconciliation schedule also shows that for the creditable taxes of P745,290.00 withheld by
Southern Energy Quezon Inc. for the period October 1, 2000 to December 31, 2000 on
petitioner's Philippine peso billings under Invoice No. 0015, the corresponding creditable taxes
claimed by petitioner in its 2000 income tax return amounted to P750,190.00 which were higher
by P4,900.00 than those reflected in the certificate. Accordingly, the amount of P4,900.00 shall
be deducted from petitioner's total claim.
In fine, this Court finds that of the total unutilized credits of P38,718, 323.00 declared by
petitioner in its 2000 income tax return, only the amount of P38,620,427.00 (P38,718,323.00 less
P92,996.00) was duly substantiated by withholding tax certificates."
Therefore, as the CTA ruled, Mirant complied with all the legal requirements and it is entitled, as
it opted, to a refund of its excess creditable withholding tax for the taxable year 2000 in the
amount of ?38,620,427.00.
The Court finds no abusive or improvident exercise of authority on the part of the CTA. Since
there is no showing of gross error or abuse on the part of the CTA, and its findings are supported
by substantial evidence, there is no cogent reason to disturb its findings and conclusions.
WHEREFORE, the petitions in G.R. No. 171742 and G.R. No. 176165 are DENIED.
SO ORDERED.
Carpio, (Chairperson), Leonardo-De Castro,* Peralta, and Abad, JJ., concur.
Endnotes:
*

Designated as acting member of the Second Division per Special Order No. 1006
dated June 10, 2011.
[1]

Rollo (G.R. No. 171742), pp. 48-67. Penned by Associate Justice Olga PalancaEnriquez, with Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C.
Castaeda, Jr., Lovell R. Bautista, Erlinda P. Uy, and Caesar A. Casanova,
concurring.
[2]

Id. (G.R. No. 171742), pp. 69-70. Signed by Presiding Justice Ernesto D. Acosta
and Associate Justices Juanito C. Castaeda, Jr., Lovell R. Bautista, Erlinda P. Uy,
Caesar A. Casanova, and Olga Palanca-Enriquez.
33

[3]

Id. (G.R. No. 176165), pp. 29-44. Penned by Associate Justice Erlinda P. Uy, with
Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaeda, Jr.,
Lovell R. Bautista, Caesar A. Casanova, and Olga Palanca-Enriquez, concurring.
[4]

Id. (G.R. No. 176165), pp. 45-48. Penned by Associate Justice Erlinda P. Uy, with
Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaeda, Jr.,
Lovell R. Bautista (on leave), Caesar A. Casanova, and Olga Palanca-Enriquez,
concurring.
[5]

Id. (G.R. No. 171742), p. 50.

[6]

Id.

[7]

Id. (G.R. No. 171742), p. 51.

[8]

Id. (G.R. No. 171742), pp. 51-52.

[9]

Id. (G.R. No. 171742), p. 52.

[10]

Id. (G.R. No. 171742), pp.52-53.

[11]

Id. (G.R. No. 171742), p. 53.

[12]

Id. (G.R. No. 171742), p. 54.

[13]

Id.

[14]

Id.

[15]

Id. (G.R. No. 171742), p. 55.

[16]

Id. (G.R. No. 171742), p. 151.

[17]

Id. (G.R. No. 176165), pp. 35-36.

[18]

Id. (G.R. No. 176165), p. 36.

[19]

Id. (G.R. No. 171742), pp. 137-152.

[20]

Id. (G.R. No. 171742), p. 151.

[21]

Id. (G.R. No. 176165), p. 31.

[22]

G.R. No. 160949, April 4, 2011.

[23]

514 Phil. 147, 157 (2005), cited in Commissioner of Internal Revenue v. PL


Management International Philippines, Inc., G.R. No. 160949, April 4, 2011. See
also Asiaworld Properties Philippine Corporation v. Commissioner of Internal
Revenue, G.R. No. 171766, July 29, 2010, 626 SCRA 172; and Commissioner of
Internal Revenue v. McGeorge Food Industries, Inc., G.R. No. 174157, October 20,
2010.

34

[24]

361 Phil. 916 (1999).

[25]

G.R. No. 178490, July 7, 2009, 592 SCRA 219, 231.

[26]

Commissioner of Internal Revenue v. PL Management International Philippines,


Inc., G.R. No. 160949, April 4, 2011.
[27]

Rollo (G.R. No. 171742), p. 84.

[28]

Id. (G.R. No. 171742), p. 87.

[29]

Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal Revenue,


G.R. No. 157594, March 9, 2010, 614 SCRA 526, 561, citing Commissioner of
Internal Revenue v. Cebu Toyo Corporation, 491 Phil. 625, 640 (2005).
[30]

G.R. No. 150764, August 7, 2006, 498 SCRA 126, 135-136.

[31]

Supra note 29.

[32]

Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v.


Commissioner of Internal Revenue, supra note 30, cited in Toshiba Information
Equipment (Phils.), Inc. v. Commissioner of Internal Revenue, G.R. No. 157594,
March 9, 2010, 614 SCRA 526, 561.
[33]

G.R. No. 173854, March 15, 2010, 615 SCRA 417.

[34]

Id. at 424.

[35]

See ACCRA Investments Corporation v. Court of Appeals, G.R. No. 96322,


December 20, 1991, 204 SCRA 957, where the Court ruled that the two-year
prescriptive period commences to run on the date when the final adjustment return
is filed, as that is the date when ACCRAIN could ascertain whether it made a profit
or incurred losses in its business operation. The Court therein stated that, "there is
the need to file a return first before a claim for refund can prosper inasmuch as the
respondent Commissioner by his own rules and regulations mandates that the
corporate taxpayer opting to ask for a refund must show in its final adjustment
return the income it received from all sources and the amount of withholding taxes
remitted by its withholding agents to the Bureau of Internal Revenue."
[36]

Rollo (G.R. No. 171742), p. 55.

[37]

Id. (G.R. No. 171742), p. 61.

[38]

Id. (G.R. No. 171742), p. 279.

[39]

Id. (G.R. No. 171742), p. 300.

[40]

Id. (G.R. No. 171742), pp. 299-300.

[41]

Id. (G.R. No. 171742), p. 300.

35

EN BANC
COMMISSIONER OF INTERNAL G. R. No. 163653
REVENUE,
Petitioner,

-versus-

FILINVEST
DEVELOPMENT
CORPORATION,
Respondent.
x-------------------------------------x

G. R. No. 167689

COMMISSIONER OF INTERNAL Present:


REVENUE,
Petitioner,
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
-versusPERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
FILINVEST
DEVELOPMENT VILLARAMA, JR.,
CORPORATION,
PEREZ,
Respondent.
MENDOZA, and
SERENO,* JJ.

Promulgated:
July 19, 2011
36

x----------------------------------------------------------------------------------------------- x
DECISION

PEREZ, J.:

Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997
Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the
following cases: (a) Decision dated 16 December 2003 of the then Special Fifth Division in CAG.R. SP No. 72992;[1] and, (b) Decision dated 26 January 2005 of the then Fourteenth Division in
CA-G.R. SP No. 74510.[2]
The Facts

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),
respondent Filinvest Development Corporation (FDC) is a holding company which also owned
67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and
FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of
the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which
were intended to facilitate development of medium-rise residential and commercial buildings,
463,094,301 shares of stock of FLI were issued to FDC and FAI. [3] As a result of the exchange,
FLIs ownership structure was changed to the extent reflected in the following tabular prcis, viz.:
Number and Percentage
of Shares Held After the
Exchange

FDC

Number and Percentage Number of


of Shares Held Prior to Additional
the Exchange
Shares
Issued
2,537,358,000 67.42%
42,217,000

FAI

00

420,877,000

420,877,000 9.96%

OTHERS

1,226,177,000 32.58%

1,226,177,000 29.01%

----------------- -----------

--------------

---------------

3,763,535,000 100%

463,094,301

4,226,629,000 (100%)

Stockholde
r

37

2,579,575,000 61.03%

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the
effect that no gain or loss should be recognized in the aforesaid transfer of real properties. Acting
on the request, the BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the
exchange is among those contemplated under Section 34 (c) (2) of the old National Internal
Revenue Code (NIRC)[4] which provides that (n)o gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for a stock in such corporation of which as a
result of such exchange said person, alone or together with others, not exceeding four (4)
persons, gains control of said corporation." [5] With the BIRs reiteration of the foregoing ruling
upon the 10 February 1997 request for clarification filed by FLI, [6] the latter, together with FDC
and FAI, complied with all the requirements imposed in the ruling.[7]

On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances
in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and
Filinvest Capital, Inc. (FCI).[8] Duly evidenced by instructional letters as well as cash and journal
vouchers, said cash advances amounted toP2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in
1997.[10] On 15 November 1996, FDC also entered into a Shareholders Agreement with Reco
Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture company called
Filinvest Asia Corporation (FAC), tasked to develop and manage FDCs 50% ownership of its
PBCom Office Tower Project (the Project). With their equity participation in FAC respectively
pegged at 60% and 40% in the Shareholders Agreement, FDC subscribed to P500.7 million
worth of shares in said joint venture company to RHPLs subscription worth P433.8
million. Having paid its subscription by executing a Deed of Assignment transferring to FAC a
portion of its rights and interest in the Project worth P500.7 million, FDC eventually reported a
net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.[11]

On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency
income and documentary stamp taxes, plus interests and compromise penalties, [12] covered by the
following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for
deficiency income taxes in the sum ofP150,074,066.27 for 1996; (b) Assessment Notice No. SPDST-96-00020-2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for
38

1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum
of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for
deficiency documentary stamp taxes in the sum of P5,796,699.40 for 1997.[13] The foregoing
deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of
Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders
Agreement FDC executed with RHPL as well as the arms-length interest rate and documentary
stamp taxes imposable on the advances FDC extended to its affiliates.[14]

On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for
deficiency income taxes in the sum of P1,477,494,638.23 for the year 1997.[15] Covered by
Assessment Notice No. SP-INC-97-0027-2000,[16] said deficiency tax was also assessed on the
taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC and
FLI.[17] On 26 January 2000 or within the reglementary period of thirty (30) days from notice of
the assessment, both FDC and FAI filed their respective requests for reconsideration/protest, on
the ground that the deficiency income and documentary stamp taxes assessed by the BIR were
bereft of factual and legal basis.[18] Having submitted the relevant supporting documents pursuant
to the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI filed on 11
September 2000 a letter requesting an early resolution of their request for reconsideration/protest
on the ground that the 180 days prescribed for the resolution thereof under Section 228 of the
NIRC was going to expire on 20 September 2000.[19]

In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their
request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October
2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the
1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition alleged, among other
matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have
been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further
control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to
impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule
is settled that interests cannot be demanded in the absence of a stipulation to the effect; that not
39

being promissory notes or certificates of obligations, the instructional letters as well as the cash
and journal vouchers evidencing said cash advances were not subject to documentary stamp
taxes; and, that no income tax may be imposed on the prospective gain from the supposed
appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC both prayed that
the subject assessments for deficiency income and documentary stamp taxes for the years 1996
and 1997 be cancelled and annulled.[20]

On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question
should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC
did not gain further control of said corporation. Likewise calling attention to the fact that the
cash advances FDC extended to its affiliates were interest free despite the interest bearing loans
it obtained from banking institutions, the CIR invoked Section 43 of the old NIRC which, as
implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to
allocate, distribute or apportion income or deductions between or among such organizations,
trades or business in order to prevent evasion of taxes." The CIR justified the imposition of
documentary stamp taxes on the instructional letters as well as cash and journal vouchers for said
cash advances on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94
which provide that loan transactions are subject to said tax irrespective of whether or not they are
evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC
realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders'
Agreement with RHPL.[21]

At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA. With the
further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC and
FAI[23] and the conclusion of the testimony of Susana Macabelda anent the cash advances FDC
extended in favor of its affiliates,[24] the CTA went on to render the Decision dated 10 September
2002 which, with the exception of the deficiency income tax on the interest income FDC
supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of

40

deficiency income and documentary stamp taxes assessed against FDC and FAI for the years
1996 and 1997,[25] thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly
meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing
deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax
on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SPINC-97-0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are
herebyCANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to
PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In
addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from
February 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the Tax
Code.[26]

Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered
the gain derived from the exchange tax-free, the CTA also ruled that the increase in the value of
FDC's shares in FAC did not result in economic advantage in the absence of actual sale or
conversion thereof. While likewise finding that the documents evidencing the cash advances
FDC extended to its affiliates cannot be considered as loan agreements that are subject to
documentary stamp tax, the CTA enunciated, however, that the CIR was justified in assessing
undeclared interests on the same cash advances pursuant to his authority under Section 43 of the
NIRC in order to forestall tax evasion. For persuasive effect, the CTA referred to the equivalent
provision in the Internal Revenue Code of the United States (IRC-US),i.e., Sec. 482, as
implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income
Taxation.[27]

Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review
docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil
Procedure. Calling attention to the fact that the cash advances it extended to its affiliates were
interest-free in the absence of the express stipulation on interest required under Article 1956 of
the Civil Code, FDC questioned the imposition of an arm's-length interest rate thereon on the
ground, among others, that the CIR's authority under Section 43 of the NIRC: (a) does not
include the power to impute imaginary interest on said transactions; (b) is directed only against
controlled taxpayers and not against mother or holding corporations; and, (c) can only be
41

invoked in cases of understatement of taxable net income or evident tax evasion. [28] Upholding
FDC's position, the CA's then Special Fifth Division rendered the herein assailed decision dated
16 December 2003,[29] the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The
assailed Decision dated September 10, 2002 rendered by the Court of Tax Appeals in
CTA Case No. 6182 directing petitioner Filinvest Development Corporation to pay the
amount of P5,691,972.03 representing deficiency income tax on allegedly undeclared
interest income for the taxable year 1997, plus 20% delinquency interest computed from
February 16, 2000 until full payment thereof is REVERSED and SET ASIDE and, a
new one entered annulling Assessment Notice No. SP-INC-97-00019-2000 imposing
deficiency income tax on petitioner for taxable year 1997. No pronouncement as to costs.
[30]

With the denial of its partial motion for reconsideration of the same 11 December 2002
resolution issued by the CTA,[31] the CIR also filed the petition for review docketed before the
CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly erred in
cancelling the assessment notices: (a) for deficiency income taxes on the exchange of property
between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the documents
evidencing FDC's cash advances to its affiliates; and (c) for deficiency income tax on the gain
FDC purportedly realized from the increase of the value of its shareholdings in FAC. [32]The
foregoing petition was, however, denied due course and dismissed for lack of merit in the herein
assailed decision dated 26 January 2005[33] rendered by the CA's then Fourteenth Division, upon
the following findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November
1996 Deed of Exchange resulted in the combined control by FDC and FAI of more than
51% of the outstanding shares of FLI, hence, no taxable gain can be recognized from the
transaction under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers evidencing the
advances FDC extended to its affiliates are not subject to documentary stamp taxes
pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they do not partake the
nature of loan agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No.
108-99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable on
inter-office memos evidencing cash advances similar to those extended by FDC, said
latter ruling cannot be given retroactive application if to do so would be prejudicial to the
taxpayer;
42

4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of
the Shareholders' Agreement it executed with RHPL cannot be considered taxable income
since, until actually converted thru sale or disposition of said shares, they merely
represent unrealized increase in capital.[34]
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for
review on certiorari assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26
January 2005 decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March
2006 resolution issued by this Courts Third Division.
The Issues

In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE
COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES
EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO
INCOME TAX.[35]

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK
FOR PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION
(FDC), FILINVEST ALABANG, INCORPORATED (FAI) AND FILINVEST
LAND INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE
NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE
OLD NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C)
(2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR IN HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH
VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED
LOAN AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES UNDER
SECTION 180 OF THE NIRC.
III
43

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING


THAT GAIN ON DILUTION AS A RESULT OF THE INCREASE IN THE VALUE
OF FDCS SHAREHOLDINGS IN FAC IS NOT TAXABLE.[36]

The Courts Ruling

While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in G.R. No.
167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that
theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996 and
1997 considering that, for said purpose, FDC resorted to interest-bearing fund borrowings from
commercial banks. Since considerable interest expenses were deducted by FDC when said funds
were borrowed, the CIR theorizes that interest income should likewise be declared when the
same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of
the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains
that it is vested with the power to allocate, distribute or apportion income or deductions between
or among controlled organizations, trades or businesses even in the absence of fraud, since said
power is intended to prevent evasion of taxes or clearly to reflect the income of any such
organizations, trades or businesses. In addition, the CIR asseverates that the CA should have
accorded weight and respect to the findings of the CTA which, as the specialized court dedicated
to the study and consideration of tax matters, can take judicial notice of US income tax laws and
regulations.[37]

Admittedly, Section 43 of the 1993 NIRC [38] provides that, (i)n any case of two or more
organizations, trades or businesses (whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by the same interests, the
Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income
or deductions between or among such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such organization, trade or business. In amplification of the
44

equivalent provision[39] under Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation
No. 2 states as follows:
Determination
of
the
taxable
net
income
of
controlled
taxpayer. (A) DEFINITIONS. When used in this section
(1)
The term organization includes any kind, whether it be a sole proprietorship,
a partnership, a trust, an estate, or a corporation or association, irrespective of the place
where organized, where operated, or where its trade or business is conducted, and
regardless of whether domestic or foreign, whether exempt or taxable, or whether
affiliated or not.
(2)
The terms trade or business include any trade or business activity of any
kind, regardless of whether or where organized, whether owned individually or
otherwise, and regardless of the place where carried on.
(3)
The term controlled includes any kind of control, direct or indirect, whether
legally enforceable, and however exercisable or exercised. It is the reality of the control
which is decisive, not its form or mode of exercise. A presumption of control arises if
income or deductions have been arbitrarily shifted.
(4)
The term controlled taxpayer means any one of two or more organizations,
trades, or businesses owned or controlled directly or indirectly by the same interests.
(5)
The term group and group of controlled taxpayers means the organizations,
trades or businesses owned or controlled by the same interests.
(6)
The term true net income means, in the case of a controlled taxpayer, the net
income (or as the case may be, any item or element affecting net income) which would
have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case
may be, any item or element affecting net income) which would have resulted to the
controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the
particular contract, transaction, arrangement or other act) dealt with the other members or
members of the group at arms length. It does not mean the income, the deductions, or the
item or element of either, resulting to the controlled taxpayer by reason of the particular
contract, transaction, or arrangement, the controlled taxpayer, or the interest controlling
it, chose to make (even though such contract, transaction, or arrangement be legally
binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the
property and business of a controlled taxpayer. The interests controlling a group of
controlled taxpayer are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting records truly reflect
the net income from the property and business of each of the controlled taxpayers. If,
however, this has not been done and the taxable net income are thereby understated, the
statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by
making such distributions, apportionments, or allocations as he may deem necessary of
gross income or deductions, or of any item or element affecting net income, between or
among the controlled taxpayers constituting the group, shall determine the true net
income of each controlled taxpayer. The standard to be applied in every case is that of an
uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its

45

provisions at will, nor does it grant any right to compel the Commissioner of Internal
Revenue to apply its provisions.
(C) APPLICATION Transactions between controlled taxpayer and another will be
subjected to special scrutiny to ascertain whether the common control is being used to
reduce, avoid or escape taxes. In determining the true net income of a controlled
taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper
accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a
device designed to reduce or avoid tax by shifting or distorting income or
deductions. The authority to determine true net income extends to any case in which
either by inadvertence or design the taxable net income in whole or in part, of a
controlled taxpayer, is other than it would have been had the taxpayer in the conduct of
his affairs been an uncontrolled taxpayer dealing at arms length with another uncontrolled
taxpayer.[41]

As may be gleaned from the definitions of the terms controlled and "controlled taxpayer" under
paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates
come within the purview of Section 43 of the 1993 NIRC. Aside from owning significant
portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended
substantial sums of money as cash advances to its said affiliates for the purpose of providing
them financial assistance for their operational and capital expenditures seemingly indicate that
the situation sought to be addressed by the subject provision exists. From the tenor of paragraph
(c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to
distribute, apportion or allocate gross income or deductions between or among controlled
taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under
scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that which it
would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR
can make the necessary rectifications in order to prevent evasion of taxes.

Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC
and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical
interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,
[42]

after all, the term gross income is understood to mean all income from whatever

source derived, including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from business; gains
46

derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and
winnings; pensions; and partners distributive share of the gross income of general professional
partnership.[43] While it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted to mean
"cash received or its equivalent", "the amount of money coming to a person within a specific
time" or "something distinct from principal or capital."[44] Otherwise stated, there must be proof
of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the
item of gross income sought to be distributed, apportioned or allocated by the CIR.

Our circumspect perusal of the record yielded no evidence of actual or possible showing that the
advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the
CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from
commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the
source of the advances the former provided its affiliates. While admitting that FDC obtained
interest-bearing loans from commercial banks,[45] Susan Macabelda - FDC's Funds Management
Department Manager who was the sole witness presented before the CTA - clarified that the
subject advances were sourced from the corporation's rights offering in 1995 as well as the sale
of its investment in Bonifacio Land in 1997.[46]More significantly, said witness testified that said
advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their
operational and capital expenditures; and, (b) were all temporarily in nature since they were
repaid within the duration of one week to three months and were evidenced by mere journal
entries, cash vouchers and instructional letters.[47]

Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC
had deducted substantial interest expense from its gross income, there would still be no factual
basis for the imputation of theoretical interests on the subject advances and assess deficiency
income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of
the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated
in writing. Considering that taxes, being burdens, are not to be presumed beyond what the
47

applicable statute expressly and clearly declares,[48] the rule is likewise settled that tax statutes
must be construed strictly against the government and liberally in favor of the taxpayer.
[49]

Accordingly, the general rule of requiring adherence to the letter in construing statutes applies

with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication.[50] While it is true that taxes are the lifeblood of the government, it has been held that
their assessment and collection should be in accordance with law as any arbitrariness will negate
the very reason for government itself.[51]

In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of
deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock
of FLI. With respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34
(c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or loss.xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for shares of stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four persons, gains
control of said corporation; Provided, That stocks issued for services shall not be
considered as issued in return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, [52] the
requisites for the non-recognition of gain or loss under the foregoing provision are as follows: (a)
the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of
the transferor; (c) the transfer is made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with
others, not exceeding four, gains control of the transferee.[53] Acting on the 13 January 1997
request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing
requisites in the Deed of Exchange the former executed with FDC and FAI by issuing BIR
Ruling No. S-34-046-97.[54] With the BIR's reiteration of said ruling upon the request for
clarification filed by FLI,[55] there is also no dispute that said transferee and transferors
48

subsequently complied with the requirements provided for the non-recognition of gain or loss
from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]

Then as now, the CIR argues that taxable gain should be recognized for the exchange considering
that FDC's controlling interest in FLI was actually decreased as a result thereof. For said
purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000
or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000
additional FLI shares as a consequence of the exchange and with only 42,217,000 thereof
accruing in favor of FDC for a total of 2,579,575,000 shares, said corporations controlling
interest was supposedly reduced to 61%.03 when reckoned from the transferee's aggregate
4,226,629,000 outstanding shares. Without owning a share from FLI's initial 3,763,535,000
outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of
the exchange purportedly resulted in its control of only 9.96% of said transferee corporation's
4,226,629,000 outstanding shares.On the principle that the transaction did not qualify as a taxfree exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain
in the sum of P263,386,921.00 should be recognized on the part of FDC and in the sum
of P3,088,711,367.00 on the part of FAI.[57]

The paucity of merit in the CIR's position is, however, evident from the categorical language of
Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in
case the exchange of property for stocks results in the control of the transferee by the transferor,
alone or with other transferors not exceeding four persons. Rather than isolating the same as
proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000
outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new
shares issued to FAI which represents 9.96% control of said transferee corporation. Together
FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to
3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is
clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of
the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the

49

1993 NIRC, the exchange of property for stocks between FDC FAI and FLI clearly qualify as a
tax-free transaction under paragraph 34 (c) (2) of the same provision.

Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court
Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if control is already vested in the
exchangor prior to exchange.[58] Aside from the fact that that the 10 September 2002 Decision in
CTA Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and FLI
was penned by no less than Justice Acosta himself,[59] FDC and FAI significantly point out that
said authors have acknowledged that the position taken by the BIR is to the effect that "the law
would apply even when the exchangor already has control of the corporation at the time of the
exchange."[60] This was confirmed when, apprised in FLI's request for clarification about the
change of percentage of ownership of its outstanding capital stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest
Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land,
Inc. The term 'control' shall mean ownership of stocks in a corporation by possessing at
least 51% of the total voting power of all classes of stocks entitled to vote. Control is
determined by the amount of stocks received, i.e., total subscribed, whether for property
or for services by the transferor or transferors. In determining the 51% stock ownership,
only those persons who transferred property for stocks in the same transaction may be
counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.[61]

At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the
CIR is more apparent than real. As the uncontested owner of 80% of the outstanding shares of
FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000
shares issued to its said co-transferor which, by itself, represents 7.968% of the outstanding
shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29
November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said
transferee corporation's outstanding shares of stock which is evidently still greater than the
67.42% FDC initially held prior to the exchange. This much was admitted by the parties in the
14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the CTA.
[62]

Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds
50

up to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for
deficiency income taxes the CIR assessed on the supposed gain which resulted from the subject
transfer.

On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes
are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange,
drafts, instruments and securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest and others not payable on
sight or demand. On all loan agreements signed abroad wherein the object of the
contract is located or used in the Philippines; bill of exchange (between points within the
Philippines), drafts, instruments and securities issued by the Government or any of its
instrumentalities or certificates of deposits drawing interest, or orders for the payment of
any sum of money otherwise than at sight or on demand, or on all promissory notes,
whether negotiable or non-negotiable, except bank notes issued for circulation, and on
each renewal of any such note, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face
value of any such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed on either loan
agreement, or promissory notes issued to secure such loan, whichever will yield a higher
tax: Provided however, That loan agreements or promissory notes the aggregate of
which does not exceed Two hundred fifty thousand pesos (P250,000.00) executed by an
individual for his purchase on installment for his personal use or that of his family and
not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or
furniture shall be exempt from the payment of documentary stamp tax provided under this
Section.

When read in conjunction with Section 173 of the 1993 NIRC, [63] the foregoing provision
concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines, or
abroad when the obligation or right arises from Philippine sources or the property or object of the
contract is located or used in the Philippines."Correlatively, Section 3 (b) and Section 6 of
Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the following term
shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to
another money or other consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid. The term shall include credit facilities, which
may be evidenced by credit memo, advice or drawings.
51

The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both
of the Tax Code, as amended, generally refer to distinct and separate instruments. A loan
agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed
under Section 195."
"Section 6. Stamp on all Loan Agreements. All loan agreements whether made or signed
in the Philippines, or abroad when the obligation or right arises from Philippine sources
or the property or object of the contract is located in the Philippines shall be subject to the
documentary stamp tax of thirty centavos (P0.30) on each two hundred pesos, or
fractional part thereof, of the face value of any such agreements, pursuant to Section 180
in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have been executed to cover
credit facilities, the documentary stamp tax shall be based on the amount of drawings or
availment of the facilities, which may be evidenced by credit/debit memo, advice or
drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code.

Applying the aforesaid provisions to the case at bench, we find that the instructional letters as
well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in
1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be
imposed. In keeping with the caveat attendant to every BIR Ruling to the effect that it is valid
only if the facts claimed by the taxpayer are correct, we find that the CA reversibly erred in
utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could be invoked
only by ASB Development Corporation, the taxpayer who sought the same. In said ruling, the
CIR opined that documents like those evidencing the advances FDC extended to its affiliates are
not subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the advances granted by
an affiliate company is subject to documentary stamp tax, it is informed that nothing in
Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No.
9-94 states that the same is subject to documentary stamp tax. Such being the case, said
inter-office memo evidencing the lendings or borrowings which is neither a form of
promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a
certificate of obligation, which are, more or less, categorized as 'securities', is not subject
to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of
1997, respectively. Rather, the inter-office memo is being prepared for accounting
purposes only in order to avoid the co-mingling of funds of the corporate affiliates.

52

In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR
Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos evidencing
lendings or borrowings extended by a corporation to its affiliates are akin to promissory notes,
hence, subject to documentary stamp taxes.[64] In brushing aside the foregoing argument,
however, the CA applied Section 246 of the 1993 NIRC [65] from which proceeds the settled
principle that rulings, circulars, rules and regulations promulgated by the BIR have no retroactive
application if to so apply them would be prejudicial to the taxpayers. [66] Admittedly, this rule
does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the facts
on which the ruling is based; or (c) where the taxpayer acted in bad faith. [67] Not being the
taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke
the foregoing principle on non-retroactivity of BIR rulings.

Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred
in invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes
due on the instructional letters as well as the journal and cash vouchers evidencing the advances
FDC extended to its affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-000202000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp
tax, P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total
of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR
similarly assessedP1,721,099.78 in interests and P25,000.00 as compromise penalty in
Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The imposition of
deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the
assessment of the same at the rate of twenty percent (20%), or such higher rate as may be
prescribed by regulations, from the date prescribed for the payment of the unpaid amount of tax
until full payment.[68] The imposition of the compromise penalty is, in turn, warranted under Sec.
250[69] of the NIRC which prescribes the imposition thereof in case of each failure to file an
information or return, statement or list, or keep any record or supply any information required on
the date prescribed therefor.
53

To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for
invalidating the Assessment Notice issued by the CIR for the deficiency income taxes FDC is
supposed to have incurred as a consequence of the dilution of its shares in FAC. Anent FDCs
Shareholders Agreement with RHPL, the record shows that the parties were in agreement about
the following factual antecedents narrated in the 14 February 2001 Stipulation of Facts,
Documents and Issues they submitted before the CTA,[70] viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders Agreement (SA) with
Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint venture company named
Filinvest Asia Corporation (FAC) which is based in Singapore (pars. 1.01 and 6.11,
Petition, pars. 1 and 7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop
and manage the 50% ownership interest of FDC in its PBCom Office Tower Project
(Project) with the Philippine Bank of Communications (par. 6.12, Petition; par. 7,
Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and
RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of
shares of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed
to P433.8 million worth of shares of stock of FAC representing a 40% equity
participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment
transferring to FAC a portion of FDCs right and interests in the Project to the extent
ofP500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for
the taxable year 1996.[71]

Alongside the principle that tax revenues are not intended to be liberally construed, [72] the rule is
settled that the findings and conclusions of the CTA are accorded great respect and are generally
upheld by this Court, unless there is a clear showing of a reversible error or an improvident
exercise of authority.[73] Absent showing of such error here, we find no strong and cogent reasons
to depart from said rule with respect to the CTA's finding that no deficiency income tax can be
assessed on the gain on the supposed dilution and/or increase in the value of FDC's
54

shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in mind the
meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a mere
increase or appreciation in the value of said shares cannot be considered income for taxation
purposes. Since a mere advance in the value of the property of a person or corporation in no
sense constitute the income specified in the revenue law, it has been held in the early case
of Fisher vs. Trinidad,[74] that it constitutes and can be treated merely as an increase of
capital. Hence, the CIR has no factual and legal basis in assessing income tax on the increase in
the value of FDC's shareholdings in FAC until the same is actually sold at a profit.

WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No.
163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in G.R. No.
72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689 is PARTIALLY
GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.

Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000


issued for deficiency documentary stamp taxes due on the instructional letters as well as journal
and cash vouchers evidencing the advances FDC extended to its affiliates are declared valid.

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000


and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the arms-length interest
from said advances; (b) the gain from FDCs Deed of Exchange with FAI and FLI; and (c)
income from the dilution resulting from FDCs Shareholders Agreement with RHPL is, however,
upheld.
SO ORDERED.

JOSE PORTUGAL PEREZ


Associate Justice

55

WE CONCUR:

RENATO C. CORONA
Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.


Associate Justice Associate Justice

With Separate concurring opinion:


TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION
Associate Justice Associate Justice

DIOSDADO M. PERALTA LUCAS P. BERSAMIN


Associate Justice Associate Justice

MARIANO C. DEL CASTILLO ROBERTO A. ABAD


Associate Justice Associate Justice

MARTIN S. VILLARAMA, JR. JOSE CATRAL MENDOZA


Associate Justice Associate Justice

56

(On Leave)
MARIA LOURDES P. A. SERENO
Associate Justice

C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Court.

RENATO C. CORONA
Chief Justice

* Associate Justice Maria Lourdes P. A. Sereno is on Special Leave from 16-30 July 2011 under
the Courts Wellness Program.
[1]

Rollo (G.R. No. 163653), pp. 40-57.


Rollo (G.R. No. 167689), pp. 68-88.
[3]
Id. at 219-222; 241-245.
[4]
Now Section 40 of the NIRC.
[5]
Rollo (G.R. No. 167689), pp. 246-251.
[6]
Id. at 252-253.
[7]
Id. at 222.
[8]
Rollo, (G.R. No. 163653), pp. 211-309.
[9]
FLI (P863,619,234.42), FAI (P1,216,477,700.00); and DSCC (P477,117,008.18).
[10]
FLI (P1,717,096,764.22); FAI (P1,258,792,913.26); and, FCI (P385,000,000.00).
[11]
Rollo, (G.R. No. 167689), pp. 223-224.
[12]
Id. at 284-285.
[13]
Id. at 291-294.
[14]
Id. at 286-290.
[15]
Id. at 295-296.
[16]
Id. at 299.
[2]

57

[17]

Id. at 297-298.
Id. at 300-315; 316-326.
[19]
Id. at 327.
[20]
Id. at 179-211.
[21]
Id. at 212-217.
[22]
Id. at 218-240.
[23]
Rollo (G.R. No. 163653), p. 45.
[24]
Rollo (G.R. No. 167689), pp. 412-454.
[25]
Id. at 455-477.
[26]
Id. at 477.
[27]
Id. at 463-476.
[28]
Rollo (G.R. No. 163653), pp. 81-121.
[29]
Id. at 40-57.
[30]
Id. at 56.
[31]
Rollo (G.R. No. 167689), pp. 479-480.
[32]
Id. at 30 and 76.
[33]
Id. at 68-88.
[34]
Id. at 76-88.
[35]
Rollo (G.R. No. 163653), p. 19.
[36]
Rollo, (G.R. No. 167689), pp. 31-32.
[37]
Rollo (G.R. No. 163653), pp. 20-32.
[38]
Now Section 50 of the 1997 NIRC.
[39]
Section 44.
[18]

[40]

An Act to Revise, Amend and Codify the Internal Revenue Laws of the Philippines.

[41]

As quoted in Montejo, National Internal Revenue Code Annotated, 1963 ed., pp. 164-165.

[42]

Now Section 32 of the 1997 NIRC.


CIR v. Philippine Airlines, Inc., G.R. No. 160528, 9 October 2006, 504 SCRA 90, 99.

[43]

[44]

CIR v. AIR India, 241 Phil. 689, 694-695 (1988) citing CIR v. British Overseas Airways
Corporation, G.R. No. L-65773-74, 30 April 1987, 149 SCRA 395.
[45]

Rollo (G.R. No. 167689), pp. 446-447. TSN, 25 July 2001, pp. 9-10.
Id. at 15-16.
[47]
Id. at 426. TSN, 26 June 2001, p. 15.
[46]

[48]

Republic of the Philippines v. Intermediate Appellate Court, G.R. No. 69344, 26 April 1991,
196 SCRA 335, 340.
[49]

Mactan Cebu International Airport Authority v. Hon. Ferdinand J. Marcos, 330 Phil. 392, 405
(1996).
[50]

CIR v. Court of Appeals, 338 Phil. 322, 330 (1997).

[51]

Commissioner of Internal Revenue v. Reyes, G.R. No. 159694, 27 January 2006; Azucena T.
Reyes v. Commissioner of Internal Revenue, G.R. No. 163581, 27 January 2006, 480 SCRA 382,
397.
58

[52]

Rollo (G.R. No. 167689), pp. 218-240.


Id. at 229.
[54]
Id. at 246-251.
[55]
Id. at 252-253.
[56]
Id. at 222.
[57]
Id. at 33-40.
[58]
Tax Law and Jurisprudence, 2000 Edition, p. 161.
[59]
Rollo (G.R. No. 167689), pp. 455-477.
[60]
Tax Law and Jurisprudence, 2000 Edition, pp. 161-162.
[61]
Rollo (G.R. No. 167689), p. 253.
[62]
Id. at 221.
[53]

[63]

Sec. 173. Stamp taxes upon documents, instruments, loan agreements and papers. Upon
documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales,
and transfers of the obligation, right or property incident thereto, there shall be levied, collected
and paid for, and in respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following Sections of this Title, by the person
making, signing, issuing, accepting , or transferring the same wherever the document is made,
signed, issued, accepted or transferred when the obligation or right arises from Philippine
sources or the property is situated in the Philippines, and at the same time such act is done or
transaction had: Provided, That whenever one party to the taxable document enjoys exemption
from the tax herein imposed, the other party thereto who is not exempt shall be the one directly
liable for the tax.
[64]

After a careful restudy of the aforementioned ruling, this office is of the opinion as it hereby
hold that inter-office memo covering the advances granted by a corporation affiliate company,
i.e., or inter-office memo evidencing lendings/borrowings is in the nature of a promissory note
subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997.
This modifies BIR Ruling No. 116-98 dated 30 July 1998 insofar as inter-office memo covering
the advances granted by a corporation affiliate company, i.e., inter-office memo evidencing
lendings/borrowings, is concerned which shall be subject to documentary stamp tax imposed
under Section 180 of the Tax Code of 1997.
[65]

Section 246. Non-retroactivity of Rulings. Any revocation, modification, or reversal of any of


the rules and regulations promulgated in accordance with the preceding section or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive application
if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the
following cases: (a) where the taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the facts
on which the ruling is based; or (c) where the taxpayer acted in bad faith.
[66]

CIR v. Benguet Corporation, G.R. No. 145559, 14 July 2006, 495 SCRA 59, 65-66.
Section 246, 1993 NIRC.
[68]
Sec. 248. Interest. (a) In general. There shall be assessed and collected on any unpaid tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed
by rules and regulations, from the date prescribed for payment until the amount is fully paid.
[67]

59

(b) Deficiency Interest. Any deficiency in the tax due as the term is defined in this Code, shall be
subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and
collected from the date prescribed for its payment until the full payment thereof.
[69]
Sec. 250. Failure to File Certain Information Returns. In the case of each failure to file an
information return, statement or list, or keep any record, or supply any information required by
this Code or by the Commissioner on the date prescribed therefor, unless it is shown that such
failure is due to reasonable cause and not to willful neglect, there shall, upon notice and demand
by the Commissioner, be paid by the person failing to file, keep or supply the same, One
thousand pesos (P1,000) for each such failure: Provided, however, That the aggregate amount to
be imposed for all such failures during a calendar year shall not exceed Twenty-five thousand
pesos (P25,000).
[70]
Rollo, (G.R. No. 167689), pp. 218-240.
[71]
Id. at 223-224.
[72]

Commissioner of Internal Revenue v. Acosta, G.R. No. 154068, 3 August 2007, 529 SCRA
177, 186.
[73]

Chevron Philippines, Inc. v. Commissioner of the Bureau of Customs, G.R. No. 178759, 11
August 2008, 561 SCRA 710, 742.
[74]

43 Phil. 973, 981 (1922).

60

EN BANC

RENATO V. DIAZ and G.R. No. 193007


AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

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

61

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.

62

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.

63

Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the
VAT since this is imposed on top of the toll rate.Further, the imposition of VAT on toll fees would
have very minimal effect on motorists using the tollways.

In their reply[6] to the 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:

64

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 far-reaching implications and raises questions that need to be resolved for the public
good.[8] The Court has also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative authority.[9]

65

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
66

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
67

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.

68

And not only do tollway operators come under the broad term all kinds of services, they also
come under the specific class described in Section 108 as all other franchise grantees who are
subject to VAT, except those under Section 119 of this Code.

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than P10
million and gas and water utilities) that Section 119 [13] spares from the payment of VAT. The
word franchise broadly covers government grants of a special right to do an act or series of acts
of public concern.[14]

Petitioners of course contend that tollway operators cannot be considered franchise grantees
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the franchise grantees it speaks of are those who hold legislative
franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction
between franchises granted by Congress and franchises granted by some other government
agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or
granted by local authorities, as agents of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself. [15] The term franchise has been broadly
construed as referring, not only to authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.[16]

Tollway operators are, owing to the nature and object of their business, franchise grantees. The
construction, operation, and maintenance of toll facilities on public improvements are activities
of public consequence that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South Luzon

69

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 VATcovered 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]

70

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
thePhilippines.

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
71

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

72

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 [30] and 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]

73

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. Non-observance of the canon, however, will not render a tax
imposition invalid except to the extent that specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on tollway operations may seem burdensome to

74

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
75

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.

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 Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax
laws. Consequently, the executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.

76

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

WE CONCUR:

RENATO C. CORONA
Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.


Associate Justice Associate Justice

77

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

Associate Justice Associate Justice

(On Leave)
DIOSDADO M. PERALTA LUCAS P. BERSAMIN
Associate Justice Associate Justice

MARIANO C. DEL CASTILLO MARTIN S. VILLARAMA, JR.


Associate Justice Associate Justice

JOSE PORTUGAL PEREZ JOSE CATRAL MENDOZA


Associate Justice Associate Justice

(On Official Leave)


MARIA LOURDES P. A. SERENO
Associate Justice
78

CERTIFICATION

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

RENATO C. CORONA
Chief Justice

On leave.
On official leave.
[1]
Rollo, pp. 3-14.
[2]
Id. at 63-64.
[3]
Id. at 143-144.
[4]
Id. at 73-135.
[5]
The OSG cites VAT Ruling 045-03 (October 13, 2003) issued by then Deputy Commissioner
Jose Mario Bunag in response to a query by the Philippine National Construction Corporation
(PNCC) on its VAT liability as operator of the South and North Luzon expressways. PNCC was
informed that with the promulgation of R.A. 7716 restructuring the VAT system, services of all
franchise grantees, x x x are already subject to VAT. The ruling was apparently clarified and
reiterated in BIR Revenue Memorandum Circulars 52-2005 (September 28, 2005), 72-2009
(December 21, 2009) and 30-2010 (March 26, 2010).
[6]
Rollo, pp. 153-201.
[7]
Id. at 457-476.
**

79

[8]

Macasiano v. National Housing Authority, G.R. No. 107921, July 1, 1993, 224 SCRA 236,
243.
[9]
See Ernesto B. Francisco, Jr. and Jose Ma. O. Hizon v. Toll Regulatory Board, G.R. No.
166910, October 19, 2010.
[10]
Id.
[11]
Commissioner of Internal Revenue v. SM Primeholdings, Inc., G.R. No. 183505, February 26,
2010, 613 SCRA 774, 788.
[12]
See North Negros Sugar Co. v. Hidalgo, 63 Phil. 664, 690 (1936).
[13]
SEC. 119. Tax on Franchises. Any provision of general or special law to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio
and/or television broadcasting companies whose annual gross receipts of the preceding year do
not exceed Ten million pesos (P10,000,000), subject to Section 236 of this Code, a tax of three
percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross
receipts derived from the business covered by the law granting the franchise: Provided, however,
That radio and television broadcasting companies referred to in this Section shall have an option
to be registered as a value-added taxpayer and pay the tax due thereon; Provided, further, That
once the option is exercised, said option shall be irrevocable.
[14]
Associated Communications & Wireless Services v. National Telecommunications
Commission, 445 Phil. 621, 641 (2003).
[15]
Philippine Airlines, Inc. v. Civil Aeronautics Board, 337 Phil. 254, 265 (1997).
[16]
Metropolitan Cebu Water District v. Adala, G.R. No. 168914, July 4, 2007, 526 SCRA 465,
476.
[17]
Supra note 9.
[18]
Section 3(e), P.D. 1112.
[19]
36 Am Jur 2d S3.
[20]
G.R. No. 180356, February 16, 2010, 612 SCRA 665, 676.
[21]
Rollo, p. 517.
[22]
G.R. No. 155650, July 20, 2006, 495 SCRA 591.
[23]
Id. at 622-623.
[24]
Id. at 618.
[25]
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
xxxx
[26]
See first and third Whereas Clause of P.D. 1112.
[27]
See Law of Basic Taxation in the Philippines (Revised Ed.), Benjamin B. Aban, p. 14.
[28]

See The Fundamentals of Taxation (2004 Ed.), Hector S. De Leon and Hector M. De Leon,
Jr., p. 16.
[29]
Contex Corporation v. Commissioner of Internal Revenue, G.R. No. 151135, July 2, 2004,
433 SCRA 376, 384-385.
[30]
The National Internal Revenue Code Annotated, Eighth Ed.(Vol. II), Hector S. De Leon and
Hector M. De Leon, Jr., p. 3.
80

[31]

SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, rendered services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
xxxx
The phrase in the course of trade or business means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net income) and whether or not it sells
exclusively to members or their guests), or government entity.
[32]
Supra note 27, at 24-25.
[33]
Rollo, p. 540.
[34]
Tax Law and Jurisprudence, Third Edition (2006), Justice Jose C. Vitug and Justice Ernesto
D. Acosta, pp. 2-3.
[35]
Rollo, pp. 246-254.
[36]
SEC. 111. Transitional/Presumptive Input Tax credits.(A) Transitional Input Tax Credits.- A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to two percent (2%) of the value of such inventory or the actual value-added
tax paid on such goods, materials, and supplies, whichever is higher, which shall be creditable
against the output tax.
[37]
Supra note 27, at 119.

81

SECOND DIVISION

CITY OF PASIG, REPRESENTED G.R. No. 185023


BY THE CITY TREASURER and
THE CITY ASSESSOR,
Petitioner,
Present:

CARPIO, J., Chairperson,


BRION,
- versus - PERALTA,*
PEREZ, and
MENDOZA,** JJ.
REPUBLIC OF THE PHILIPPINES,
REPRESENTED BY THE
PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, Promulgated:
Respondent. August 24, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO, J.:

The Case
82

This is a petition1 for review on certiorari under Rule 45 of the Rules of Court. The petition
challenges the 17 October 2008 Decision2 of the Court of Appeals in CA-G.R. SP No. 97498,
affirming the 6 November 2006 Decision3 of the Regional Trial Court (RTC), National Capital
Judicial Region, Pasig City, Branch 155, in SCA No. 2901.
The Facts

Mid-Pasig Land Development Corporation (MPLDC) owned two parcels of land, with a total
area of 18.4891 hectares, situated in Pasig City. The properties are covered by Transfer
Certificate of Title (TCT) Nos. 337158 and 469702 and Tax Declaration Nos. E-030-01185 and
E-030-01186 under the name of MPLDC. Portions of the properties are leased to different
business establishments.

In 1986, the registered owner of MPLDC, Jose Y. Campos (Campos), voluntarily surrendered
MPLDC to the Republic of the Philippines.

On 30 September 2002, the Pasig City Assessors Office sent MPLDC two notices of tax
delinquency for its failure to pay real property tax on the properties for the period 1979 to
2001 totaling P256,858,555.86. In a letter dated 29 October 2002, Independent Realty
Corporation (IRC) President Ernesto R. Jalandoni (Jalandoni) and Treasurer
Rosario Razon informed the Pasig City Treasurer that the tax for the period 1979 to 1986 had
been paid, and that the properties were exempt from tax beginning 1987.

In letters dated 10 July 2003 and 8 January 2004, the Pasig City Treasurer informed MPLDC and
IRC that the properties were not exempt from tax. In a letter dated 16 February 2004, MPLDC
General Manager Antonio Merelos (Merelos) and Jalandoni again informed the Pasig City
Treasurer that the properties were exempt from tax. In a letter dated 11 March 2004, the Pasig
City Treasurer again informed Merelos that the properties were not exempt from tax.

On 20 October 2005, the Pasig City Assessors Office sent MPLDC a notice of final demand for
payment of tax for the period 1987 to 2005 totaling P389,027,814.48. On the same day, MPLDC
paid P2,000,000 partial payment under protest.

83

On 9 November 2005, MPLDC received two warrants of levy on the properties. On 1 December
2005, respondent Republic of the Philippines, through the Presidential Commission on Good
Government (PCGG), filed with the RTC a petition for prohibition with prayer for issuance of a
temporary restraining order or writ of preliminary injunction to enjoin petitioner Pasig City from
auctioning the properties and from collecting real property tax.

On 2 December 2005, the Pasig City Treasurer offered the properties for sale at public auction.
Since there was no other bidder, Pasig City bought the properties and was issued the
corresponding certificates of sale.

On 19 December 2005, PCGG filed with the RTC an amended petition for certiorari, prohibition
and mandamus against Pasig City. PCGG prayed that: (1) the assessments for the payment of real
property tax and penalty be declared void; (2) the warrants of levy on the properties be declared
void; (3) the public auction be declared void; (4) the issuance of certificates of sale be declared
void; (5) Pasig City be prohibited from assessing MPLDC real property tax and penalty; (6)
Pasig City be prohibited from collecting real property tax and penalty from MPLDC; (7) Pasig
City be ordered to assess the actual occupants of the properties real property tax and penalty; and
(8) Pasig City be ordered to collect real property tax and penalty from the actual occupants of the
properties.

The RTCs Ruling

In its 6 November 2006 Decision, the RTC granted the petition for certiorari, prohibition and
mandamus. The RTC held:

The primordial issue to be resolved in the present case is whether or not respondent City of
Pasig, through the City Treasurer and the City Assessor, acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when it assessed, levied and sold in public auction
the payanig properties for non-payment of real property taxes.

However, before dwelling on the merits of the main issue, certain matters need to be addressed
by the Court, to wit:

1.

Does the Court have jurisdiction over the instant petition?


84

2.
Who owns the so-called payanig properties that were subjected to payment of real property
taxes by respondent?

The Court maintains that it is not precluded from assuming jurisdiction over the instant amended
petition which involves the legality of the assailed actions by respondent in assessing and
collecting real property tax on the properties owned by the Republic of the Philippines. It is a
jurisprudential doctrine that the issue is purely legal when the authority of the respondent to
assess and collect real property taxes on the subject properties is being questioned (Ty
vs. Trampe, 250 SCRA 500).

xxxx

In the instant proceeding, there is no dispute that the properties are surrendered ill-gotten wealth
of former President Marcos. As such, the same assumes [sic] a public character and thus belongs
[sic] to the Republic of the Philippines. x x x

xxxx

Hence, upon the voluntary surrender by Jose Y. Campos, the controlling owner of Mid-Pasig and
Independent Realty Corporation, of the payanig properties to PCGG, a clear admission that these
properties were part of the ill-gotten wealth of former President Marcos was already evident. As
such, there was already constructive reconveyance to the State, which immediately placed
these reconveyed properties under the control and stewardship of the PCGG as representative of
the Republic of the Philippines. Under such special circumstance, these voluntary surrendered
properties had already belonged to the State.

xxxx

Premised on the foregoing, the payanig properties, being part of the recovered ill-gotten wealth
of President Marcos, and therefore are owned by the State itself, are exempt from payment of
real property taxes. It is only when the beneficial use of said properties has been granted to a
taxable person that the same may be subject to imposition of real property tax.

85

Furthermore, in real estate taxation, the unpaid tax attaches to the property and is chargeable
against the taxable person who had actual or beneficial use and possession of it regardless of
whether or not he is the owner (Testate Estate of Concordia T. Lim vs. City of Manila, 182
SCRA 482).

In the instant case, the taxable persons being referred to are the lessees occupying and/or doing
business therein and have beneficial use over portions within the payanig properties.

xxxx

Consequently, there can be no iota of doubt that respondent City of Pasig abused its discretion by
committing the acts sought to be annulled herein despite knowledge of the fact that ownership
over the subject properties belong to petitioner. But what is more appalling in the instant action is
that such abuse was capriciously committed by respondent City of Pasig against the sovereign
State itself from where that atxing local government unit derives its very existence. The spring
cannot rise higher than its source.

xxxx

In sum, the acts of respondent in assessing real property taxes on properties owned and
controlled by the Republic of the Philippines, in collecting taxes from Mid-Pasig in lieu of the
actual occupants or beneficial users of certain portions thereof, and in auctioning said properties
in favor of respondent, followed by the corresponding certificate of sale, are all unequivocally
tainted with grave abuse of discretion amounting to lack or excess of jurisdiction.

WHEREFORE, in the light of the foregoing, the instant Amended Petition is hereby GRANTED.

Accordingly, the following acts of respondent are hereby ANNULLED and SET ASIDE.

86

1.
the assessment dated September 30, 2002 for the payment of real property taxes and
penalties made by the City of Pasig on two (2) parcels of land covered by TCT No. 337158 and
TCT No. 469702 registered under the name of Mid-Pasig;
2.

the warrants of levy dated November 8, 2005 issued thereon by the City of Pasig;

3.
the subsequent public auction sale of subject properties held on December 2, 2005 followed
by the issuance of the corresponding Certificate of Sale;

FURTHER, the City of Pasig is hereby PROHIBITED from further:

1.

Assessing real property taxes and penalties charges [sic] on the said properties;

2.

Collecting said taxes and penalty charges from the State;

3.

Disposing or encumbering the subject properties or any portion thereof;

FURTHER, the City of Pasig is hereby COMMANDED:

1.
To return or effect the refund of the amount of Two Million Pesos (Php 2,000,000.00) paid
under protest by Mid-Pasig Land Development Corporation on October 20, 2005, or credit the
same amount to any outstanding tax liability that said corporation may have with the City of
Pasig; and
2.
To assess and collect from the actual occupants or beneficial users of the subject properties,
and not from the State, whatever real property taxes and penalties that may be due on the
respective areas occupied by them.

SO ORDERED.4

Pasig City appealed to the Court of Appeals.

The Court of Appeals Ruling

87

In its 31 March 2008 Decision,5 the Court of Appeals set aside the RTCs 6 November 2006
Decision. The Court of Appeals held:

We find nothing in PCGGs petition that supports its claim regarding Pasig Citys alleged grave
abuse of discretion. It is undisputed that the subject parcels of land are registered in the name of
Mid-Pasig, a private entity. Although the government, through the PCGG have [sic] sequestered
Mid-Pasig and all its assets including the subject parcels of land, the sequestration per se, did not
operate to convert Mid-Pasig and its properties to public property. The power of the PCGG to
sequester property claimed to be ill-gotten means to place or cause to be placed under its
possession or control said property, or any building or office wherein any such property and any
records pertaining thereto may be found, including business enterprises and entities for the
purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving
and preserving the same until it can be determined, through appropriate judicial proceedings,
whether the property was in truth ill-gotten, i.e., acquired through or as a result of improper or
illegal use of or the conversion of funds belonging to the Government or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of
official position, authority, relationship, connection or influence, resulting in unjust enrichment
of the ostensible owner and great damage and prejudice to the State. x x x As such, prior to a
valid court declaration the PCGG cannot perform acts of strict ownership of [sic] sequestered
property. It is a mere conservator. In view thereof and the fact that Mid-Pasig and its properties
have not been validly declared by theSandiganbayan as ill-gotten wealth, the same are not yet
public properties. The PCGG even admitted that the transfer certificates of title covering the
subject parcels of land in the name of Mid-Pasig have not been cancelled due to an order of
the Sandiganbayan. The trial court also found that the subject parcels of land are the subject of
litigation between Ortigas and Company Limited Partnership and the PCGG in Civil Case No.
0093 pending before the Sandiganbayan. These facts clearly show that the Sandiganbayan has
not validly declared yet that the subject parcels of land are ill-gotten wealth. If so, they cannot be
claimed yet as properties of the State: they remain properties of a private entity. Thus, Pasig City
through its City Assessor and City Treasurer did not act with grave abuse of discretion when it
issued real property tax assessment on the subject parcels of land.

Even admitting that the subject parcels of land are already owned by the State, we still see no
grave abuse of discretion on the part of Pasig City when it issued the challenged tax assessment,
for it is well settled that the test of exemptions from taxation is the use of the property for
purposes mentioned in the Constitution. The owner of the property does not matter. Even if he is
not a tax-exempt entity, as long as the property is being used for religious, charitable or
educational purposes, the property is exempt from tax. Conversely, even if the government owns
the property, if the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person, the property is subject to tax. Here, the PCGG admitted that portions of the
subject properties were leased to private entities engaged in commercial dealings. As well, the
trial court found that lessees occupy different areas of the subject parcels of land beginning 1992
88

until 2005. Therefore, considering that portions of the subject parcels of land are used for
commercial purposes, the duty imposed by law to owners and administrators of real property to
declare the same for tax purposes and the fact that the tax declarations over the subject parcels of
land are in the name of Mid-Pasig, again, Pasig City did not act with grave abuse of discretion
when it issued the challenged tax assessment.

The foregoing snowball to one conclusion the allegations in PCGGs petition imputing grave
abuse of discretion on the part of Pasig City, acting through the City Assessor and City Treasurer,
in the assessment and collection of the taxes were made in order to justify the filing of the
petition for certiorari, prohibition and mandamus with the trial court.

The extraordinary remedies of certiorari, prohibition and mandamus may be resorted to only
when there is no other plain, available, speedy and adequate remedy in the course of law. Where
administrative remedies are available, petitions for the issuance of these peremptory writs do not
lie in order to give the administrative body the opportunity to decide the matter by itself correctly
and to prevent unnecessary and premature resort to courts.

Republic Act No. 7160 or the Local Government Code of 1991, clearly sets forth the
administrative remedies available to a taxpayer or real property owner who is not satisfied with
the assessment or reasonableness of the real property tax sought to be collected. The Supreme
Court outlined said remedies, to wit:

Should the taxpayer/real property owner question the excessiveness or reasonableness of the
assessment, Section 252 directs that the taxpayer should first pay the tax due before his protest
can be entertained. There shall be annotated on the tax receipts the words paid under protest. It
is only after the taxpayer has paid the tax due that he may file a protest in writing within thirty
days from payment of the tax to the Provincial, City or Municipal Treasurer, who shall decide the
protest within sixty days from receipt. In no case is the local treasurer obliged to entertain the
protest unless the tax due has been paid.

If the local treasurer denies the protest or fails to act upon it within the 60-day period provided
for in Section 252, the taxpayer/real property owner may then appeal or directly file a verified
petition with the LBAA within sixty days from denial of the protest or receipt of the notice of
assessment, as provided in Section 226 of R.A. No. 7160[.]

89

And, if the taxpayer is not satisfied with the decision of the LBAA, he may elevate the same to the
CBAA, which exercises exclusive jurisdiction to hear and decide all appeals from the decisions,
orders and resolutions of the Local Boards involving contested assessments of real properties,
claims for tax refund and/or tax credits or overpayments of taxes. An appeal may be taken to the
CBAA by filing a notice of appeal within thirty days from receipt thereof.

From the Central Board Assessment Appeals, the dispute may then be taken to the Court of Tax
Appeals by filing a verified petition for review under Rule 42 of the Revised Rules of Court; to
the Court of tax Appeals en banc; and finally to the Supreme Court via a petition for review on
certiorari pursuant to Rule 45 of the Revised Rules of Court.

We are not convinced with PCGGs stance that their recourse of filing the petition for certiorari,
prohibition and mandamus before the trial court is proper as they are questioning not merely the
correctness of the tax assessment but the actions of Pasig City, through its City Assessor and City
Treasurer, which were done in grave abuse of discretion amounting to lack or excess of
jurisdiction.

The well-established rule is that allegations in the complaint and the character of the relief
sought determine the nature of an action. A perusal of the petition before the trial court plainly
shows that what is actually being assailed is the correctness of the assessments made by the City
Assessor of Pasig City on the subject parcels of land. PCGG claims, among others, that: 1) the
subject parcels of land are exempt from real property taxation as they are public property; 2)
even if the subject parcels of land are subject to tax, as the beneficial use thereof was granted to
private persons and entities, only the portion thereof used for commerce is subject to tax and the
users thereof are the ones liable to pay the tax; and 3) the right of Pasig City to collect the real
property taxes pertaining to 1987 to 1998 has already prescribed. These claims essentially
involve questions of fact, which are improper in a petition for certiorari, prohibition and
mandamus; hence, the petition should have been brought, at the very first instance, to the Local
Board Assessment Appeals, which has authority to rule on the objections of any interested party
who is not satisfied with the action of the assessor. Under the doctrine of primacy of
administrative remedies, an error in the assessment must be administratively pursued to the
exclusion of ordinary courts whose decisions would be void for lack of jurisdiction.

Granting that the assessors authority and the legality of the assessment are indeed an issue, the
proper remedy is a suit for the refund of the real property tax after paying the same under protest.
90

It must be pointed out that in order for the trial court to resolve the instant petition, the issues of
the correctness of the tax assessment and collection must also necessarily be dealt with; hence, a
petition for certiorari, prohibition and mandamus is not the proper remedy. x x x [T]he resolution
of the issues raised in the instant case involve examination and determination of relevant and
material facts, i.e. facts relating to the ownership of the subject parcels of land, the portion of the
subject parcel of land used for commercial purposes and the identities of the lessees and the users
thereof. Since resolution of factual issues is not allowed in a petition for certiorari, prohibition
and mandamus, the trial court is precluded from entertaining the petition.

Finally, Section 252 of the R.A. No. 7160 requires payment under protest in assailing real
property tax assessment. Even an appeal shall not suspend the collection of the atx assessed
without prejudice to a later adjustment pending the outcome of the appeal. This principle is
consistent with the time-honored principle that taxes are the lifeblood of the nation. But the
PCGG failed to pay the tax assessment prior to questioning it before the trial court; hence, the
trial court should have dismissed PCGGs petition in line with the Supreme Court pronouncement
that a trial court has no jurisdiction to entertain a similar petition absent payment under protest.

In conclusion and taking all the foregoing into account, we hold that the trial court had no
jurisdiction to take cognizance and decide PCGG petition for certiorari, prohibition and
mandamus; the trial court should have dismissed the petition.6

PCGG filed a motion for reconsideration. In its 17 October 2008 Decision, the Court of Appeals
reversed itself. The Court of Appeals held:

At the outset, although as a rule, administrative remedies must first be exhausted before ersort to
judicial action can prosper, there is a well-settled exception in cases where the controversy does
not involve questions of fact but only of law. We find that the Republic has shown a cause for the
application of the foregoing exception. Essentially, the Republic has raised a pure question of
law whether or not the City of Pasig has the power to impose real property tax on the subject
properties, which are owned by the State. It bears stressing that the Republic did not raise any
question concerning the amount of the real property tax or the determination thereof. Thus,
having no plain, speedy, and adequate remedy in law, the Republic correctly resorted to judicial
action via the petition for certiorari, prohibition, and mandamus, to seek redress.

We are convinced that the subject properties were not sequestered by the government so as to
amount to a deprivation of property without due process of law; instead, they were voluntarily
surrendered to the State by Campos, a self-admitted crony of the then President Marcos. The
91

relinquishment of the subject properties to the State as ill-gotten wealth of Marcos, as recognized
by the Supreme Court, makes a judicial declaration that the same were ill-gotten unnecessary. By
virtue of said relinquishment, the State correctly exercised dominion over the subject properties.
Indubitably, the subject properties, being ill-gotten wealth, belong to the State. x x x By its
nature, ill-gotten wealth is owned by the State. As a matter of fact, the Republic continues to
exercise dominion over the subject properties.7

Hence, the present petition.

Issues

Pasig City raises as issues that the lower courts erred in granting PCGGs petition for certiorari,
prohibition and mandamus and in ordering Pasig City to assess and collect real property tax from
the lessees of the properties.

The Courts Ruling

The petition is partly meritorious.

As correctly found by the RTC and the Court of Appeals, the Republic of the Philippines owns
the properties. Campos voluntarily surrendered MPLDC, which owned the properties, to the
Republic of the Philippines. In Republic of the Philippines v. Sandiganbayan,8 the Court stated:

x x x Jose Y. Campos, a confessed crony of former President Ferdinand E. Marcos, voluntarily


surrendered or turned over to the PCGG the properties, assets and corporations he held in trust
for the deposed President. Among the corporations he surrendered were the Independent Realty
Corporation and the Mid-Pasig Land Development Corporation.9

In Republic of the Philippines v. Sandiganbayan,10 the Court stated:


92

The antecedent facts are stated by the Solicitor General as follows:

xxxx

3. Sometime in the later part of August 1987, defendant Jose D. Campos, Jr., having been served
with summons on August 5, 1987, filed with the respondent Court an undated Manifestation and
Motion to Dismiss Complaint with Respect to Jose D. Campos praying that he be removed as
party defendant from the complaint on the grounds that he had voluntarily surrendered or turned
over any share in his name on [sic] any of the corporations referred to, aside from disclaiming
any interest, ownership or right thereon to the Government of the Republic of the Philippines and
that he was entitled to the immunity granted by the Presidential Commission on Good
Government pursuant to Executive Order No. 14, under the Commissions Resolution dated May
28, 1986 to Mr. Jose Y. Campos and his family he being a member of the immediate family of
Jose Y. Campos.

xxxx

In the instant case, the PCGG issued a resolution dated May 28, 1986, granting immunity from
both civil and criminal prosecutions to Jose Y. Campos and his family. The pertinent provisions
of the resolution read as follows:
3.0. In consideration of the full cooperation of Mr. Jose Y. Campos to this Commission, his
voluntary surrender of the properties and assets disclosed and declared by him to belong to
deposed President Ferdinand E. Marcos to the Government of the Republic of the Philippines,
his full, complete and truthful disclosures, and his commitment to pay a sum of money as
determined by the Philippine Government, this Commission has decided and agreed:

xxxx

Undoubtedly, this resolution embodies a compromise agreement between the PCGG on one hand
and Jose Y. Campos on the other. Hence, in exchange for the voluntary surrender of the ill-gotten
properties acquired by the then President Ferdinand E. Marcos and his family which were in Jose
Campos control, the latter and his family were given full immunity in both civil and criminal
prosecutions. x x x
93

xxxx

By virtue of the PCGGs May 28, 1986 resolution, Jose Campos, Jr. was given full immunity
from both civil and criminal prosecutions in exchange for the full cooperation of Mr. Jose Y.
Campos to this Commission, his voluntary surrender of the properties and assets disclosed and
declared by him to belong to deposed President Ferdinand E. Marcos to the Government of the
Republic of the Philippines, his full, complete and truthful disclosures, and his commitment to
pay a sum of money as determined by the Philippine Government. In addition, Campos, Jr. had
already waived and surrendered to the Republic his registered equity interest in the
Marcos/Romualdez corporations involved in the civil case.11

Even as the Republic of the Philippines is now the owner of the properties in view of the
voluntary surrender of MPLDC by its former registered owner, Campos, to the State, such
transfer does not prevent a third party with a better right from claiming such properties in the
proper forum. In the meantime, the Republic of the Philippines is the presumptive owner of the
properties for taxation purposes.

Section 234(a) of Republic Act No. 7160 states that properties owned by the Republic of the
Philippines are exempt from real property tax except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person. Thus, the portions of the
properties not leased to taxable entities are exempt from real estate tax while the portions of the
properties leased to taxable entities are subject to real estate tax. The law imposes the liability to
pay real estate tax on the Republic of the Philippines for the portions of the properties leased to
taxable entities. It is, of course, assumed that the Republic of the Philippines passes on the real
estate tax as part of the rent to the lessees.

In Philippine Fisheries Development Authority v. Central Board of Assessment Appeals,12 the


Court held:

In the 2007 case of Philippine Fisheries Development Authority v. Court of Appeals, the Court
resolved the issue of whether the PFDA is a government-owned or controlled corporation or an
instrumentality of the national government. In that case, the City of Iloilo assessed real
property taxes on the Iloilo Fishing Port Complex (IFPC), which was managed and
94

operated by PFDA. The Court held that PFDA is an instrumentality of the government and
is thus exempt from the payment of real property tax, thus:

The Court rules that the Authority is not a GOCC but an instrumentality of the national
government which is generally exempt from payment of real property tax. However, said
exemption does not apply to the portions of the IFPC which the Authority leased to private
entities. With respect to these properties, the Authority is liable to pay property tax.
Nonetheless, the IFPC, being a property of public dominion cannot be sold at public auction to
satisfy the tax delinquency.
xxxx

This ruling was affirmed by the Court in a subsequent PFDA case involving the Navotas Fishing
Port Complex, which is also managed and operated by the PFDA. In consonance with the
previous ruling, the Court held in the subsequent PFDA case that the PFDA is a government
instrumentality not subject to real property tax except those portions of
the Navotas Fishing Port Complex that were leased to taxable or private persons and
entities for their beneficial use.
Similarly, we hold that as a government instrumentality, the PFDA is exempt from real
property tax imposed on the Lucena Fishing Port Complex, except those portions which
are leased to private persons or entities.13 (Emphasis supplied)
In Government Service Insurance System v. City Treasurer of the City of Manila,14 the Court
held:

x x x The tax exemption the property of the Republic or its instrumentalities carries ceases
only if, as stated in Sec. 234(a) of the LGC of 1991, beneficial use thereof has been granted,
for a consideration or otherwise, to a taxable person. GSIS, as a government instrumentality,
is not a taxable juridical person under Sec. 133(o) of the LGC. GSIS, however,lost in a sense
that status with respect to the Katigbak property when it contracted its beneficial use to
MHC, doubtless a taxable person. Thus, the real estate tax assessment ofPhp 54,826,599.37
covering 1992 to 2002 over the subject Katigbak property is valid insofar as said tax
delinquency is concerned as assessed over said property.15 (Emphasis supplied)

In Manila International Airport Authority v. Court of Appeals,16 the Court held:

95

x x x Section 234(a) of the Local Government Code states that real property owned by the
Republic loses its tax exemption only if the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person. MIAA, as a government instrumentality, is
not a taxable person under Section 133(o) of the local Government Code. Thus, even if we
assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities
are not exempt from real estate tax. For example, the land area occupied by hangars that
MIAA leases to private corporations is subject to real estate tax. In such a case, MIAA has
granted the beneficial use of such land area for a consideration to a taxable person and
therefore such land area is subject to real estate tax.17 (Emphasis supplied)

In Lung Center of the Philippines v. Quezon City,18 the Court held:

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

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
other hand, the portions of the land occupied by the hospital and portions of the hospital used for
its patients, whether paying or non-paying, are exempt from real property taxes.19(Emphasis
supplied)

Article 420 of the Civil Code classifies as properties of public dominion those that are intended
for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State,
banks, shores, roadsteads and those that are intended for some public service or for the
development of the national wealth. Properties of public dominion are not only exempt from real
estate tax, they are exempt from sale at public auction. In Heirs of Mario Malabanan v.
Republic,20 the Court held that, It is clear that property of public dominion, which generally
includes property belonging to the State, cannot be x x x subject of the commerce of man.21
96

In Philippine Fisheries Development Authority v. Court of Appeals,22 the Court held:

x x x [T]he real property tax assessments issued by the City of Iloilo should be upheld only with
respect to the portions leased to private persons. In case the Authority fails to pay the real
property taxes due thereon, said portions cannot be sold at public auction to satisfy the tax
delinquency. In Chavez v. Public Estates Authority it was held that reclaimed lands are lands
of the public dominion and cannot, without Congressional fiat, be subject of a sale, public
or private x x x.

In the same vein, the port built by the State in the Iloilo fishing complex is a property of the
public dominion and cannot therefore be sold at public auction. Article 420 of the Civil
Code, provides:

Article 420. The following things are property of public dominion:

1.
Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
2.
Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth.

The Iloilo fishing port which was constructed by the State for public use and/or public
service falls within the term port in the aforecited provision. Being a property of public
dominion the same cannot be subject to execution or foreclosure sale. In like manner, the
reclaimed land on which the IFPC is built cannot be the object of a private or public sale without
Congressional authorization.23 (Emphasis supplied)

In Manila International Airport Authority,24 the Court held:

97

x x x [T]he Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth.

The term ports x x x constructed by the Sate includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings are
properties of public dominion. As properties of public dominion, the the Airport lands and
Buildings are owned by the Republic and thus exempt from real estate tax under Section 234(a)
of the Local Government Code.

xxxx

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions ports x x x constructed by the State, which
includes public airports and seaports, as properties of public dominion and owned by the
Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever
that the Airport Lands and Buildings are expressly exempt from real estate tax under Section
234(a) of the local Government Code. This Court has also repeatedly ruled that properties of
public dominion are not subject to execution or foreclosure sale.25(Emphasis supplied)

In the present case, the parcels of land are not properties of public dominion because they are not
intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads. Neither are they intended for some public service or for the
development of the national wealth. MPLDC leases portions of the properties to different
98

business establishments. Thus, the portions of the properties leased to taxable entities are not
only subject to real estate tax, they can also be sold at public auction to satisfy the tax
delinquency.

In sum, only those portions of the properties leased to taxable entities are subject to real estate
tax for the period of such leases. Pasig City must, therefore, issue to respondent new real
property tax assessments covering the portions of the properties leased to taxable entities. If the
Republic of the Philippines fails to pay the real property tax on the portions of the properties
leased to taxable entities, then such portions may be sold at public auction to satisfy the tax
delinquency.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court SETS ASIDE the 17
October 2008 Decision of the Court of Appeals in CA-G.R. SP No. 97498 and
declares VOID the 30 September 2002 real property tax assessment issued by Pasig City on the
subject properties of Mid-Pasig Land Development Corporation, the 8 November 2005 warrants
of levy on the properties, and the 2 December 2005 auction sale. Pasig City is DIRECTED to
issue to respondent new real property tax assessments covering only the portions of the
properties actually leased to taxable entities, and only for the period of such leases. Interests and
penalties on such new real property tax assessment shall accrue only after receipt of such new
assessment by respondent.
SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

ARTURO D. BRION
Associate Justice

99

DIOSDADO M. PERALTA JOSE PORTUGAL PEREZ


Associate Justice Associate Justice

JOSE C. MENDOZA
Associate Justice

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

ANTONIO T. CARPIO
Associate Justice
Chairperson

CERTIFICATION
100

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

RENATO C. CORONA
Chief Justice

* Designated Acting Member per Special Order No. 1067 dated 23 August 2011.
** Designated Acting Member per Special Order No. 1066 dated 23 August 2011.
1 Rollo, pp. 9-38.
2 Id. at 41-48. Penned by Associate Justice Marlene Gonzales-Sison, with Associate
Justices Amelita G. Tolentino and Celia C. Librea-Leagogo concurring.
3 Id. at 49-60. Penned by Judge Luis R. Tongco.
4 Id. at 51-60.
5 Id. at 62-74.
6 Id. at 67-73.
7 Id. at 44-45.
8 499 Phil. 138 (2005).
9 Id. at 141.
101

10 G.R. No. 84895, 4 May 1989, 173 SCRA 72.


11 Id. at 76-85.
12 G.R. No. 178030, 15 December 2010, 638 SCRA 644.
13 Id. at 650-651.
14 G.R. No. 186242, 23 December 2009, 609 SCRA 330.
15 Id. at 350.
16 G.R. No. 155650, 20 July 2006, 495 SCRA 591.
17 Id. at 629-630.
18 G.R. No. 144104, 29 June 2004, 433 SCRA 119.
19 Id. at 138.
20 G.R. No. 179987, 29 April 2009, 587 SCRA 172.
21 Id. at 202.
22 G.R. No. 169836, 31 July 2007, 528 SCRA 706.
23 Id. at 716-718.
24 Supra note 16.
25 Id. at 644-646.

102

SECOND DIVISION
[G.R. No. 164050 : July 20, 2011]
MERCURY DRUG CORPORATION, PETITIONER, VS. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.
DECISION
PEREZ, J.:
This petition for review on certiorari calls for an interpretation of the term cost as used
in Section 4(a) of Republic Act No. 7432, otherwise known as An Act to Maximize the
Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and
For Other Purposes.
A rundown of the pertinent facts is presented below.
Pursuant to Republic Act No. 7432, petitioner Mercury Drug Corporation (petitioner), a retailer
of pharmaceutical products, granted a 20% sales discount to qualified senior citizens on their
purchases of medicines. For the taxable year April to December 1993 and January to December
1994, the amounts representing the 20% sales discount totalled P3,719,287.68[1] and
P35,500,593.44,[2]respectively, which petitioner claimed as deductions from its gross income.
Realizing that Republic Act No. 7432 allows a tax credit for sales discounts granted to senior
citizens, petitioner filed with the Commissioner of Internal Revenue (CIR) claims for refund in
the amount of P2,417,536.00 for the year 1993 and P23,075,386.00 for the year 1994. Petitioner
presented a computation[3] of its overpayment of income tax, thus:
TAXABLE YEAR 1993
SALES, Net

P10,228,518,335.0
0
3,719,288.00

Add: Cost of 20% Discount to Senior


Citizens
SALES, Gross

P10,232,237,623.0
0

COST OF SALES
Merchandise Inventory, Beg.
Purchases
Goods Available for Sales
Merchandise Inventory, End

P2,427,972,150.00
8,717,393,710.00
P11,145,365,860.00
2,458,743,127.00

8,686,622,733.00

GROSS PROFIT
Add: Miscellaneous Income

P1,545,614,890.00
58,247,973.00

TOTAL INCOME

P1,603,862,863.00
103

OPERATING EXPENSES

1,226,816,343.00

NET INCOME BEFORE TAX


Less: Income subjected to final income tax

P 377,046,520.00
20,966,602.00

NET TAXABLE INCOME

P 356,079,918.00

INCOME TAX PAYABLE

P 124,627,972.00

LESS: TAX CREDIT (20% Sales


Discount to Senior Citizens)
TAX ACTUALLY PAID

P 3,719,288.00
123,326,220.00

TAX REFUNDABLE

127,045,508.00
P 2,417,536.00

xxxx
TAXABLE YEAR 1994
SALES, Net
Add: Cost of 20% Sales Discount to
Senior Citizens

P 11,671,366,402.00
35,500,594.00

SALES, Gross

P11,706,866,996.00

COST OF SALES
Merchandise Inventory, Beg.

P2,458,743,127.00

Purchases

10,316,941,308.00

Goods Available for Sales

Less: Merchandise Inventory, End

P12,775,684,435.00

2,928,397,228.00

9,847,287,207.00

GROSS PROFIT
Add: Miscellaneous Income

P1,859,579,789.00
68,809,864.00

TOTAL INCOME
OPERATING EXPENSES

P1,928,389,653.00
1,499,422,645.00

NET INCOME BEFORE TAX


Less: Income subjected to final Income
tax

428,967,008.00
25,591,586.00

NET TAXABLE INCOME

P 403, 375,422.00
104

INCOME TAX PAYABLE

P 141,181,398.00

LESS: TAX CREDIT (Cost of 20%


P 35,500,594.00
Discount to Senior Citizens)
128,756,190.00

164,256,784.00

TAX ACTUALLY PAID


TAX REFUNDABLE

P 23,075,386.00

When the CIR failed to act upon petitioners claims, the latter filed a petition for review with
the Court of Tax Appeals. On 6 September 2000, the Court of Tax Appeals rendered the
following judgment:[4]
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, Revenue Regulations No. 2-94 of the Respondent is declared null and
void insofar as it treats the 20% discount given by private establishments as a deduction from
gross sales. Respondent is hereby ORDERED to GRANT A REFUND OR ISSUE A TAX
CREDIT CERTIFICATE to Petitioner in the reduced amount of P1,688,178.43 representing the
latters overpaid income tax for the taxable year 1993. However, the claim for refund for
taxable year 1994 is denied for lack of merit.[5]
The Court of Tax Appeals favored petitioner by declaring that the 20% sales discount should be
treated as tax credit rather than a mere deduction from gross income. The Court of Tax Appeals
however found some discrepancies and irregularities in the cash slips submitted by petitioner as
basis for the tax refund. Hence, it disallowed the claim for taxable year 1994 and some portion
of the amount claimed for 1993 by petitioner, viz:
So, contrary to the allegation of Petitioner that it granted 20% sales discounts to senior citizens in
the total amount of P3,719,888.00 for taxable year 1993 and P35,500,554.00 for taxable year
1994, this Courts study and evaluation of the evidence show that for taxable year 1993 only
the amounts of P3,522,123.25 and for 1994, the amount of P8,789,792.27 were properly
substantiated. The amount of P3,522,123.25 corresponding to 1993 will be further reduced to
P2,989,930.43 as this Courts computation is based on the cost of the 20% discount and not
on the total amount of the 20% discount based on the decision of the Court of Appeals in
Commissioner of Internal Revenue v. Elmas Drug Corporation, CA-SP No. 49946 promulgated
on October 19, 1999, where it ruled:
Thus the cost of the 20% discount represents the actual amount spent by drug corporations
in complying with the mandate of RA 7432. Working on this premise, it could not have been the
intention of the lawmakers to grant these companies the full amount of the 20% discount as this
could be extending to them more than what they actually sacrificed when they gave the 20%
discount to senior citizens. (Underscoring supplied).
Similarly the amount of P8,789,792.27 corresponding to taxable year 1994 will be reduced to
105

P7,393,094.28 based on the aforequoted Court of Appeals decision. These reductions are
illustrated as follows:
TAXABLE YEAR 1993
Cost of Sales
Divided by Gross Sales
Cost of Sales Percentage
Adjusted Amount of 20% Discount given

P 8,686,622,733.00
10,232,237,623.00
84.89%
3,522,123.25

to Senior Citizens
Multiply by
Allowable Tax Credit

84.89%
P 2,989,930.43

TAXABLE YEAR 1994


Cost of Sales
Divided by Gross Sales
Cost of Sales Percentage
Adjusted Amount of 20% Discount given
to Senior Citizens
Multiply by
Allowable Tax Credit

P9,847,287,207.00
11,706,866,996.00
84.11%
P 8,789,792.27
84.11%
P 7,393,094.28

With the foregoing changes in the amount of discounts granted by Petitioner in 1993 and 1994, it
necessarily follows that adjustments have to be made in the computation of the refundable
amount which is entirely different from the computation presented by the Petitioner. This
Courts conclusion is that Petitioner is only entitled to a tax credit of P1,688,178.43 for
taxable year 1993 detailed as follows:
TAXABLE YEAR 1993
Sales, Net
Add: Cost of 20% Discount
given to Senior Citizens

P10,228,518,335.00

SALES, Gross

P10,232,237,623.00

COST OF SALES
Merchandise Inventory, Beg.
Add: Purchases
Total goods available for sale
Less: Merchandise Inventory, End
GROSS PROFIT
Add: Miscellaneous Income
TOTAL INCOME
OPERATING EXPENSES

P2,427,972,150.00
8,717,393,710.00
P1,145,365,860.00
2,458,743,127.00
P 1,545,614,890.00
58,247,973.00
P 1,603,862,863.00
1,226,816,343.00

3,719,288.00

106

8,686,622,733.00

NET INCOME BEFORE TAX


Less: Income subjected to final income tax
NET TAXABLE INCOME
INCOME TAX PAYABLE
LESS: TAX CREDIT (20% Sales Discount
given to Senior Citizens)
TAX ACTUALLY PAID
TAX REFUNDABLE

P 377,046,520.00
20,966,602.00
P 356,079,918.00
P 124,627,972.00
P 2,989,930.43
123,326,220.00
126,316,150.43
P 1,688,178.43

and no refund or tax credit for taxable year 1994 as the computation below shows that Petitioner,
instead of having a tax credit of P23,075,386.00 as claimed in the Petition, still has a tax due of
P5,032,113.72 detailed as follows:
TAXABLE YEAR 1994
SALES, Net
Add: Cost of 20% Sales Discount
given
to Senior Citizens

P11,671,366,402.00
35,500,594.00

SALES, Gross
COST OF SALES
Merchandise Inventory, Beg.
Add: Purchases
Total goods available for sale
Less: Merchandise Inventory, End

11,706,866,996.00
P2,458,743,127.00
10,316,941,308.00
P12,775,684,435.00
2,928,397,228.00

GROSS PROFIT

9,847,287,207.00

P
1,859,579,789.00
68,809,864.00
P
1,928,389,653.00

Add: Miscellaneous Income


TOTAL INCOME
OPERATING EXPENSES

1,499,422,645.00

NET INCOME BEFORE TAX

P 428,967,008.00

Less: Income subjected to final income


Tax

25,591,586.00

NET TAXABLE INCOME

P 403,375,422.0
0
P 141,181,398.00

INCOME TAX PAYABLE


LESS: TAX CREDIT (Cost of 20%
Discount given to Senior Citizens)
TAX ACTUALLY PAID

P7,393,094.28
128,756,190.00

TAX STILL DUE

P 5,032,113.72
107

136,149,284.28

The conclusion of tax liability instead of tax overpayment pertaining to taxable year 1994 has the
effect of negating the tax refund of Petitioner because the basis of such refund is the fact that
there is tax credit. Under the circumstances, instead to tax credit, Petitioner has a tax liability of
P5,032,113.72, hence the refund for the period must fail.[6]
Moreover, the Court of Tax Appeals stated that the claim for tax credit must be based on the
actual cost of the medicine and not the whole amount of the 20% senior citizens discount. It
applied the formula: cost of sales/gross sales x amount of 20% sales discount.
Petitioner moved for partial reconsideration. In a Resolution dated 20 December 2000, the Court
of Tax Appeals modified its earlier ruling by increasing the creditable tax amount to
P18,038,489.71, inclusive of the taxable years 1993 and 1994. The Court of Tax Appeals finally
granted the claim for refund for the taxable year 1994 on the basis of the cash slips submitted by
petitioner, in the sum of P16,350,311.28, thus:
TAXABLE YEAR 1994
a) Computation of adjusted amount of 20% discount given to senior citizens:
Sales discount to be considered as basis for disallowance P35,414,211.68
Less: Disallowances
a) Sales discount without supporting documents P224,269.15
b) Sales discounts twice recorded
7,462.66
c) Overstatement of sales discount
648,988.28
880,720.09
Adjusted amount of 20% sales discount
P34,211,769.45
b) Computation of the allowable tax credit on the 20% sales discount:
Cost of Sales
Divided by Gross Sales
Cost of Sales Percentage

P9,847,287,207.00
11,706,866,996.00
84.11%

Adjusted Amount of 20% discount given to


Senior Citizens
P34,211,769.45
Multiply by
84.11%
P28,775,519.28
c) Computation of the refundable amount:
SALES, Net
Add: Cost of 20% Sales discount given
to Senior Citizens
SALES, Gross

P11,671,366,402.00
35,500,594.00
P11,706,866,996.00

COST OF SALES

9,847,287,207.00

GROSS PROFIT

P 1,859,579,789.00
108

Add: Miscellaneous Income

68,809,864.00

TOTAL INCOME

P 1,928,389,653.00

OPERATING EXPENSES

1,499,422,645.00

NET INCOME BEFORE TAX

428,967,008.00

Less: Income subjected to final income tax

25,591,586.00

NET TAXABLE INCOME

P 403,375,422.00

INCOME TAX PAYABLE

P 141,181,398.00

LESS: TAX CREDIT (Cost of 20%


Discount given to Senior Citizens)
TAX ACTUALLY PAID

P28,775,519.28
128,756,190.00

AMOUNT REFUNDABLE FOR


TAXABLE YEAR 1994

157,531,709.28
P 16,350,311.28[7]

Petitioner elevated the case to the Court of Appeals via a Petition for Review under Rule 43.
Petitioner sought a partial modification of the above resolution raising as legal issue the basis of
the computation of tax credit. Petitioner contended that the actual discount granted to the senior
citizens, rather than the acquisition cost of the item availed by senior citizens, should be the basis
for computation of tax credit.
On 20 October 2003, the Court of Appeals rendered a Decision[8] sustaining the Court of Tax
Appeals and dismissing the petition. Citing the Court of Appeals cases of Commissioner of
Internal Revenue v. Elmas Drug Corporation and Trinity Franchising and Management Corp. v.
Commissioner of Internal Revenue, the appellate court interpreted the term cost as used
in Section 4(a) of Republic Act No. 7432 to mean the acquisition cost of the medicines sold to
senior citizens. Therefore, it upheld the computation provided by the Court of Tax Appeals in its
20 December 2000 Resolution.
Petitioner filed a motion for partial reconsideration which the Court of Appeals denied in a
Resolution[9] dated 23 June 2004. This prompted petitioner to file the instant petition for review.
Petitioner raises the following legal grounds for the allowance of its petition:
I.
LIMITING THE TAX CREDIT ON THE ACQUISITION COST OF THE MEDICINES SOLD
AMOUNTS TO A TAKING OF PROPERTY FOR PUBLIC USE WITHOUT JUST
COMPENSATION.
II.
FORCING PETITIONER TO GRANT 20% DISCOUNT ON SALE OF MEDICINE TO
SENIOR CITIZENS WITHOUT FULLY REIMBURSING IT FOR THE AMOUNT OF
DISCOUNT GRANTED VIOLATES THE DUE PROCESS CLAUSE FOR BEING
109

OPPRESSIVE, UNREASONABLE, CONFISCATORY, AND AN UNDUE RESTRAINT OF


TRADE.
III.
EVEN THE COURT OF APPEALS HAD AN INTERPRETATION OF THE TERM
COST THAT IS DIFFERENT FROM, AND BROADER THAN THE
INTERPRETATION OF THE COURT OF TAX APPEALS. YET, THE COURT OF APPEALS
AFFIRMED IN TOTO THE COURT OF TAX APPEALS DECISION.
IV.
THE COURT MAY CONSIDER THE SPIRIT AND REASON OF THE LAW WHERE A
LITERAL MEANING WOULD LEAD TO INJUSTICE OR DEFEAT THE CLEAR INTENT
OF THE LAWMAKERS.
V.
RESPONDENT MUST ACCORD PETITIONER THE SAME TREATMENT AS MAR-TESS
DRUG IN ACCORDANCE WITH THE PRINCIPLE OF EQUAL PROTECTION OF LAWS. [10]
Petitioner adopts a two-tiered approach towards defending its thesis. First, petitioner explains
that in addition to the direct expenses incurred in acquiring the medicine intended for re-sale to
senior citizens, operating expenses or administrative overhead are likewise incurred. Limiting
the tax credit on the acquisition cost of the medicines sold amounts to a taking of property for
public use without just compensation, petitioner argues. Moreover, petitioner contends that to
compel it to grant 20% discount on sale of medicine to senior citizens without fully reimbursing
it for the amount of discount granted violates the due process clause for being oppressive,
unreasonable, confiscatory and an undue restraint of trade. In the second tier, petitioner
maintains that the term cost should at least include all business expenses directly
incurred to produce the merchandise and to bring them to their present location and use.
Petitioner alleges that while the Court of Appeals subscribes to the above interpretation, it
nevertheless affirmed in toto the Court of Tax Appeals erroneous decision.
In lieu of its Comment, the Office of the Solicitor General (OSG) filed a Manifestation and
Motion supporting petitioners theory that the amount of tax credit should be computed
based on sales discounts properly substantiated by petitioner. The OSG adverted to the case
of Bicolandia Drug Corporation (Formerly Elmas Drug Corporation) v. Commissioner of
Internal Revenue[11] wherein we held that the term cost refers to the amount of the 20%
discount extended by a private establishment to senior citizens in their purchase of medicines,
which amount should be applied as a tax credit. The OSG opines that the allowance of claim for
additional tax credits should be based on sales discounts properly substantiated before the Court
of Appeals.
The main thrust of the petition is to determine whether the claim for tax credit should be based
on the full amount of the 20% senior citizens discount or the acquisition cost of the
merchandise sold.
Preliminarily, Republic Act No. 7432 is a piece of social legislation aimed to grant benefits and
110

privileges to senior citizens. Among the highlights of this Act is the grant of sales discounts on
the purchase of medicines to senior citizens. Section 4(a) of Republic Act No. 7432 reads:
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 the utilization of
transportation 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 burden imposed on private establishments amounts to the taking of private property for
public use with just compensation in the form of a tax credit.[12]
The foregoing proviso specifically allows the 20% senior citizens' discount to be claimed by the
private establishment as a tax credit and not merely as a tax deduction from gross sales or gross
income. The law however is silent as to how the cost of the discount as tax credit should
be construed.
Indeed, there is nothing novel in the issues raised in this petition. Our rulings in Bicolandia
Drug Corporation (Formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue,
[13]
Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue,[14] and M.E. Holding
Corporation v. Court of Appeals[15] operate as stare decisis[16] with respect to this legal question.
In Bicolandia, we construed the term cost as referring to the amount of the 20% discount
extended by a private establishment to senior citizens in their purchase of medicines.[17] The
Court of Appeals decision in Commissioner of Internal Revenue v. Elmas Drug
Corporation dated 19 October 1999 was relied upon by the Court of Appeals as basis for its
interpretation of the term cost when it decided the instant case in 20 October 2003. As
correctly pointed out by the OSG, said case had been elevated to this Court and had been
eventually resolved with finality on 22 June 2006 in the case entitled Bicolandia Drug
Corporation v. Commissioner of Internal Revenue.
We reiterated this ruling in the 2008 case of Cagayan Valley Drug by holding that petitioner
therein is entitled to a tax credit for the full 20% sales discounts it extended to qualified senior
citizens. This holds true despite the fact that petitioner suffered a net loss for that taxable year.[18]
The most recent case in point is M.E. Holding Corporation which bears a strikingly similar set of
facts and issues with the case at bar. Both petitioners filed their respective income tax return
initially treating the 20% sales discount to senior citizens as deductions from its gross income.
When advised that the discount should be treated as tax credit, they both filed a claim for
overpayment. The Bureau of Internal Revenue on both occasions failed to act timely on the
claims, hence they appealed before the Court of Tax Appeals. The Court of Tax Appeals in M.E.
Holding concedes that the 20% sales discount granted to qualified senior citizens should be
treated as tax credit but it placed reliance on the Court of Appeals decision in Commissioner
of Internal Revenue v. Elmas Drug Corporationwhere the term cost of the discount was
interpreted to mean only the direct acquisition cost, excluding administrative and other
incremental costs. This was the very same case relied upon by the Court of Appeals in the
present case. We finally affirmed in M.E. Holding that the tax credit should be equivalent to the
actual 20% sales discount granted to qualified senior citizens.
111

It is worthy to mention that Republic Act No. 7432 had undergone two (2) amendments; first in
2003 by Republic Act No. 9257 and most recently in 2010 by Republic Act No. 9994. The 20%
sales discount granted by establishments to qualified senior citizens is now treated as tax
deduction and not as tax credit. As we have likewise declared in Commissioner of Internal
Revenue v. Central Luzon Drug Corporation,[19] this case covers the taxable years 1993 and
1994, thus, Republic Act No. 7432 applies.
Based on the foregoing, we sustain petitioners argument that the cost of discount should be
computed on the actual amount of the discount extended to senior citizens. However, we give
full accord to the factual findings of the Court of Tax Appeals with respect to the actual amount
of the 20% sales discount, i.e., the sum of P3,522,123.25. for the year 1993 and P34,211,769.45
for the year 1994. Therefore, petitioner is entitled to a tax credit equivalent to the actual amounts
of the 20% sales discount as determined by the Court of Tax Appeals. A new computation for tax
refund is in order, to wit:
TAXABLE YEAR 1993
SALES, Net
Add: Cost of 20% Discount to Senior Citizens

P10,228,518,335.00
3,522,123.25

SALES, Gross

P10,232,040,458.25

COST OF SALES
Merchandise Inventory, Beg.
Purchases
Goods Available for Sales
Merchandise Inventory, End

P2,427,972,150.00
8,717,393,710.00
P11,145,365,860.00
2,458,743,127.00

8,686,622,733.00

GROSS PROFIT
Add: Miscellaneous Income

P1,545,417,725.25
58,247,973.00

TOTAL INCOME
OPERATING EXPENSES

P1,603,665,698.25
1,226,816,343.00

NET INCOME BEFORE TAX


Less: Income subjected to final income tax

P 376,849,349.25
20,966,602.00

NET TAXABLE INCOME

P 355,882,747.25

INCOME TAX PAYABLE

P 124,558,961.54

LESS: TAX CREDIT (20% Sales


Discount to Senior Citizens)
TAX ACTUALLY PAID

P 3,522,123.25
123,326,220.00

TAX REFUNDABLE

126,848,343.25
P 2,289,381.71

TAXABLE YEAR 1994


112

SALES, Net

P
11,671,366,402.00

Add: Cost of 20% Sales Discount


to Senior Citizens

34,211,769.45

SALES, Gross

P11,705,578,171.45

COST OF SALES
Merchandise Inventory, Beg.

P2,458,743,127.00

Purchases

10,316,941,308.00

Goods Available for Sales

12,775,684,435.00

Less: Merchandise Inventory, End

2,928,397,228.00

9,847,287,207.00

GROSS PROFIT
Add: Miscellaneous Income

P1,858,290,964.45
68,809,864.00

TOTAL INCOME

P1,927,100,828.45

OPERATING EXPENSES

1,499,422,645.00

NET INCOME BEFORE TAX


Less: Income subjected to final Income tax

427,678,183.45
25,591,586.00

NET TAXABLE INCOME

P 402,086,597.45

INCOME TAX PAYABLE


LESS: TAX CREDIT (Cost of 20%
Discount to Senior Citizens)
TAX ACTUALLY PAID

P 140,730,309.11
P 34,211,769.45
128,756,190.00

TAX REFUNDABLE

162,967,959.45
P 22,237,650.34

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court
of Appeals are REVERSED and SET ASIDE. Respondent Commissioner of Internal Revenue
is ORDERED to issue tax credit certificates in favor of petitioner in the amounts of
P2,289,381.71 and P22,237,650.34.
SO ORDERED.
Carpio, (Chairperson), Leonardo De Castro,* Brion, and Peralta,** JJ., concur.
Endnotes:
*

Per Special Order No. 1006.


113

**

Per Special Order No. 1040.

[1]

The amount was rounded off to read as P3,719,288.00.

[2]

The amount was rounded off to read as P35,500,594.00.

[3]

Rollo, pp. 51-52.

[4]

Penned by Associate Justice Ramon O. De Veyra with Associate Justices Ernesto D. Acosta and
Amancio Q. Saga, concurring. Id. at 49-62.
[5]

Id. at 61-62.

[6]

Id. at 59-61.

[7]

Id. at 91-92.

[8]

Penned by Associate Justice Rosmari D. Carandang with Associate Justices Eugenio S. Labitoria and
Mercedes Gozo-Dadole, concurring. Id. at 128-136.
[9]

Id. at 153-154.

[10]

Id. at 16-31.

[11]

G.R. No. 142299, 22 June 2006, 492 SCRA 159.

[12]

See Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April
2005, 456 SCRA 414, 443-444; City of Cebu v. Spouses Dedamo, 431 Phil. 524, 532 (2002).
[13]

Supra note 11.

[14]

G.R. No. 151413, 13 February 2008, 545 SCRA 10.

[15]

G.R. No. 160193, 3 March 2008, 547 SCRA 389.

[16]

Once a case has been decided one way, the rule is settled that any other case involving exactly the
same point at issue should be decided in the same manner under the principle stare decisis et non quieta
movere. See Petron Corporation v. Commissioner of Internal Revenue, G.R. No. 180385, 28 July 2010,
626 SCRA 100, 122 citing Commissioner of Internal Revenue v. Trustworthy Pawnshop, Inc., G.R. No.
149834, 2 May 2006, 488 SCRA 538, 545.
[17]

Supra note 11 at 168.

[18]

Supra note 14 at 21-22.

[19]

G.R. No. 159647, 15 April 2005, 456 SCRA 414.

FIRST DIVISION

114

[G.R. No. 180390 : July 27, 2011]


PRUDENTIAL BANK, PETITIONER, VS. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.
DECISION
DEL CASTILLO, J.:
A certificate of deposit need not be in a specific form; thus, a passbook of an interest-earning
deposit account issued by a bank is a certificate of deposit drawing interest. [1]
This Petition for Review on Certiorari [2] under Rule 45 of the Rules of Court assails the
Decision [3]dated March 30, 2007 and the Resolution [4] dated October 30, 2007 of the Court of
Tax Appeals (CTA) in CTA EB No. 185.
Factual Antecedents
Petitioner Prudential Bank [5] is a banking corporation organized and existing under Philippine
law.[6] On July 23, 1999, petitioner received from the respondent Commissioner of Internal
Revenue (CIR) a Final Assessment Notice No. ST-DST-95-0042-99 and a Demand Letter for
deficiency Documentary Stamp Tax (DST) for the taxable year 1995 on its Repurchase
Agreement with theBangko Sentral ng Pilipinas [BSP], Purchase of Treasury Bills from the BSP,
and on its Savings Account Plus [SAP] product, in the amount of P18,982,734.38, broken down
as follows:
a.

Repurchase Agreement -- BSP Seller

Basic1,656,000,000.00 x .30
200
Add: 25% Surcharge
Compromise Penalty
b.

621,000.00
25,000.00

P3,130,000.00

Purchase of [Treasury] Bills from


BSP

Basic5,038,610,000.00 x .30
200
Add: 25% Surcharge
Compromise Penalty

c.

P2,484,000.00

P7,557,915.00
1,889,478.75
25,000.00

Savings Account Plus (page 1307 of


the docket)

Basic3,389,515,000.00 x .30

P5,084,272.50
115

P9,472,393.75

200
Add: 25% Surcharge
Compromise Penalty

1,271,068.13
25,000.00

P6,380,340.63

GRAND TOTAL
P18,982,734.38[7]
Petitioner protested the assessment on the ground that the documents subject matter of the
assessment are not subject to DST. [8] However, respondent denied [9] the protest on December
28, 2001.
Thus, petitioner filed a Petition for Review before the CTA which was raffled to its First Division
and docketed as CTA Case No. 6396. [10]
Ruling of the First Division of the Court of Tax Appeals
On February 10, 2006, the First Division of the CTA affirmed the assessment for deficiency DST
insofar as the SAP is concerned, but cancelled and set aside the assessment on petitioner's
repurchase agreement and purchase of treasury bills [11] with the BSP. Thus, it disposed of the
case as follows:
WHEREFORE, the instant petition is hereby PARTIALLY GRANTED. The subject Decision
of the Commissioner of Internal Revenue dated December 28, 2001 assessing petitioner of
deficiency documentary stamp taxes is hereby AFFIRMED insofar as the Savings Account Plus
is concerned. The deficiency assessment on petitioner's repurchase agreements and treasury bills
are hereby CANCELLED and SET ASIDE.
Accordingly, petitioner is hereby ORDERED TO PAY respondent the reduced amount of
P6,355,340.63 plus 20% delinquency interest from August 23, 1999 up to the time such amount
is fully paid pursuant to Section 249 (c) of the [old] NIRC, as amended, covered by Assessment
Notice No. ST-DST-95-0042-99 as deficiency documentary stamp tax for the taxable year 1995,
recomputed as follows:
Savings Account Plus
Add: 25% Surcharge

P5,084,272.50
1,271,068.13

TOTAL

P6,355,340.63

SO ORDERED. [12]
Petitioner moved for partial reconsideration but the same was denied by the First Division of the
CTA in its Resolution dated May 22, 2006. [13]
Thus, petitioner appealed to the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On March 30, 2007, the CTA En Banc denied the appeal for lack of merit. It affirmed the ruling
of its First Division that petitioner's SAP is a certificate of deposit bearing interest subject to
DST under Section 180 of the old National Internal Revenue Code (NIRC), as amended by
Republic Act (RA) No. 7660. [14]
116

Petitioner sought reconsideration but later moved to withdraw the same in view of its availment
of the Improved Voluntary Assessment Program (IVAP) pursuant to Revenue Regulation (RR)
No. 18-2006[15] in relation to RR No. 15-2006 [16] and Revenue Memorandum Order (RMO) No.
23-2006. [17]
On October 30, 2007, the CTA En Banc rendered a Resolution [18] denying petitioner's motion to
withdraw for non-compliance with the requirements for abatement. It found that the amount
paid for purposes of the abatement program was not in accordance with Revenue Memorandum
Circular (RMC) No. 66-2006, [19] which provides that the amount to be paid should be based on
the original assessment or the court's decision, whichever is higher. [20] It also noted that
petitioner failed to comply with RMO No. 23-2006, specifically with the requirement to submit
the letter of termination and authority to cancel assessment signed by the respondent. [21] In the
same Resolution, the CTAEn Banc denied petitioner's motion for reconsideration for lack of
merit. [22]
Issues
Hence, the present recourse by petitioner raising the following issues:
I.
WHETHER X X X PETITIONER'S [SAP] WITH A HIGHER INTEREST IS SUBJECT TO
DOCUMENTARY STAMP TAX.
II.
WHETHER X X X THE CTA EN BANC ERRED IN NOT ALLOWING THE WITHDRAWAL
OF THE PETITION AND/OR CANCELLATION OF THE DST ASSESSMENT ON
PETITIONER'S [SAP] ON THE GROUND THAT PETITIONER HAD ALREADY PAID AND
SUBSTANTIALLY COMPLIED WITH RR NO. 15-2006 AND RMO NO. 23-2006. [23]
Petitioner's Arguments
Petitioner contends that its SAP is not subject to DST because it is not included in the list of
documents under Section 180 of the old NIRC, as amended. [24] Petitioner insists that unlike a
time deposit, its SAP is evidenced by a passbook and not by a deposit certificate. [25] In addition,
its SAP is payable on demand and not on a fixed determinable future. [26] To support its position,
petitioner relies on the legislative intent of the law prior to Republic Act (RA) No. 9243 [27] and
the historical background of the taxability of certificates of deposit. [28]
Petitioner further contends that even assuming that its SAP is subject to DST, the CTA En
Bancnonetheless erred in denying petitioner's withdrawal of its petition considering that it has
paid under the IVAP the amount of P5,084,272.50, which it claims is 100% of the basic tax of the
original assessment of the Bureau of Internal Revenue (BIR). [29] Petitioner insists that the
payment it made should be deemed substantial compliance considering the refusal of the
respondent to issue the letter of termination and authority to cancel assessment. [30]
Respondent's Arguments
117

Respondent maintains that petitioner's SAP is subject to DST conformably with the ruling
inInternational Exchange Bank v. Commissioner of Internal Revenue. [31] It also contends that
the CTAEn Banc correctly denied the motion to withdraw since petitioner failed to comply with
the requirements of the IVAP. [32] Mere payment of the deficiency DST cannot be deemed
substantial compliance as tax amnesty, like tax exemption, must be construed strictly against the
taxpayer. [33]
Our Ruling
The petition lacks merit.
Petitioner's Savings Account Plus is
subject to Documentary Stamp Tax.
DST is imposed on certificates of deposit bearing interest pursuant to Section 180 of the old
NIRC, as amended, to wit:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities, certificates
of deposit bearing interest and others not payable on sight or demand. - On all loan agreements
signed abroad wherein the object of the contract is located or used in the Philippines; bills of
exchange (between points within the Philippines), drafts, instruments and securities issued by the
Government or any of its instrumentalities or certificates of deposits drawing interest, or
orders for the payment of any sum of money otherwise than at the sight or on demand, or on all
promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation,
and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of any
such agreement, bill of exchange, draft, certificate of deposit, or note: Provided, That only one
documentary stamp tax shall be imposed on either loan agreement, or promissory note issued to
secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or
promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos
(P250,000.00) executed by an individual for his purchase on installment for his personal use or
that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle,
appliance or furniture shall be exempt from the payment of the documentary stamp tax provided
under this section. (Emphasis supplied.)
A certificate of deposit is defined as "a written acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor,
to the order of the depositor, or to some other person or his order, whereby the relation of debtor
and creditor between the bank and the depositor is created." [34]
In this case, petitioner claims that its SAP is not a certificate of deposit bearing interest because
unlike a time deposit, its SAP is payable on demand and is evidenced by a passbook and not by a
certificate of deposit.
We do not agree.
In China Banking Corporation v. Commissioner of Internal Revenue, [35] we held that the Savings
Plus Deposit Account, which has the following features:
118

1.

Amount deposited is withdrawable anytime;

2.

The same is evidenced by a passbook;

3.

The rate of interest offered is the prevailing market rate, provided the depositor would
maintain his minimum balance in thirty (30) days at the minimum, and should he withdraw
before the period, his deposit would earn the regular savings deposit rate;
is subject to DST as it is essentially the same as the Special/Super Savings Deposit Account
inPhilippine Banking Corporation v. Commissioner of Internal Revenue, [36] and the Savings
Account-Fixed Savings Deposit in International Exchange Bank v. Commissioner of Internal
Revenue, [37]which are considered certificates of deposit drawing interests. [38]
Similarly, in this case, although the money deposited in a SAP is payable anytime, the
withdrawal of the money before the expiration of 30 days results in the reduction of the interest
rate. [39] In the same way, a time deposit withdrawn before its maturity results to a lower interest
rate and payment of bank charges or penalties. [40]
The fact that the SAP is evidenced by a passbook likewise cannot remove its coverage from
Section 180 of the old NIRC, as amended. A document to be considered a certificate of deposit
need not be in a specific form. [41] Thus, a passbook issued by a bank qualifies as a certificate of
deposit drawing interest because it is considered a written acknowledgement by a bank that it has
accepted a deposit of a sum of money from a depositor. [42]
In view of the foregoing, we find that the CTA En Banc correctly affirmed the ruling of its First
Division that petitioner's SAP is a certificate of deposit bearing interest and that the same is
subject to DST.
The CTA En Banc's denial of
petitioner's motion to withdraw is proper.
The CTA En Banc denied petitioner's motion to withdraw because it failed to show that it was
able to comply with the requirements of IVAP.
To avail of the IVAP, a taxpayer must pay the 100% basic tax of the original assessment of the
BIR or the CTA Decision, whichever is higher [43] and submit the letter of termination and
authority to cancel assessment signed by the respondent. [44] In this case, petitioner failed to
submit the letter of termination and authority to cancel assessment as respondent found the
payment of P5,084,272.50 not in accordance with RMC No. 66-2006. Hence, we find no error
on the part of the CTA En Banc in denying petitioner's motion to withdraw.
Petitioner's payment of P5,084,272.50, without the supporting documents, cannot be deemed
substantial compliance as tax amnesty must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. [45] Nevertheless, the amount of P5,084,272.50 paid by
petitioner to the BIR must be considered as partial payment of petitioner's tax liability.
WHEREFORE, the petition is hereby DENIED. The assailed Decision dated March 30, 2007
and the Resolution dated October 30, 2007 of the Court of Tax Appeals in CTA EB No. 185 are
119

herebyAFFIRMED with MODIFICATION that petitioner Prudential Bank's payment be


considered as partial payment of its tax liability.
SO ORDERED.
Corona, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Villarama, Jr., JJ., concur.
Endnotes:
[1]

International Exchange Bank v. Commissioner of Internal Revenue, G.R. No. 171266, April 4,
2007, 520 SCRA 688, 697.
[2]

Rollo, pp. 178-345, with Annexes "A" to "L" inclusive.

[3]

Id. at 222-230; penned by Associate Justice Erlinda P. Uy and concurred in by Associate


Justices Juanito C. Castaeda, Jr., Lovell R. Bautista, Caesar A. Casanova and Olga PalancaEnriquez.
[4]

Id. at 232-235; penned by Associate Justice Erlinda P. Uy and concurred in by Presiding


Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaeda, Jr., Lovell R. Bautista,
Caesar A. Casanova and Olga Palanca-Enriquez.
[5]

On May 2, 2000, petitioner acquired the entire assets and liabilities of Pilipinas Bank through a
merger. (Id. at 223-224)
[6]

Id. at 223.

[7]

Id. at 224.

[8]

Id. at 225.

[9]

Id.

[10]

Id.

[11]

Id.

[12]

Id. at 223.

[13]

Id. at 225.

[14]

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF


THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES.
December 23, 1993.
[15]

Improved Voluntary Assessment Program (IVAP) for Taxable Year 2005 and Prior Years
120

under Certain Conditions.


[16]

Implementing a One-Time Administrative Abatement of all Penalties/Surcharges and Interest


on Delinquent Accounts and Assessments (Preliminary or Final, Disputed or Not) as of June 30,
2006.
[17]

Prescribing the Guidelines and Procedures on the One-Time Administrative Abatement of all
Penalties/Surcharges and Interest on Delinquent Accounts and Assessments (Preliminary or
Final, Disputed or Not) as of June 30, 2006 as implemented by Revenue Regulations No. 152006.
[18]

Rollo, pp. 232-235.

[19]

Clarification to Revenue Regulations No. 15-2006 Implementing Section 204 (B) of the Tax
Code, as amended.
[20]

Rollo, pp. 233-234.

[21]

Id. at 234.

[22]

Id.

[23]

Id. at 414.

[24]

Id. at 414-417.

[25]

Id. at 419.

[26]

Id.

[27]

An Act Rationalizing The Provisions On The Documentary Stamp Tax Of The National
Internal Revenue Code of 1997, As Amended, And For Other Purpose. Approved on February
17, 2004.
[28]

Rollo, pp. 421-439.

[29]

Id. at 440-443.

[30]

Id. at 443.

[31]

Supra note 1.

[32]

Rollo, pp. 364-366.

[33]

Id. at 367.

[34]

Philippine Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of


Internal Revenue, G.R. No. 170574, January 30, 2009, 577 SCRA 366, 380, citing Far East
Bank and Trust Company v. Querimit, 424 Phil. 721, 730 (2002).
121

[35]

G.R. No. 172359, October 2, 2009, 602 SCRA 316, 332.

[36]

Supra note 34.

[37]

Supra note 1.

[38]

China Banking Corporation v. Commissioner of Internal Revenue, supra note 35 at 331-332.

[39]

Rollo, p. 359.

[40]

International Exchange Bank v. Commissioner of Internal Revenue, supra note 1 at 698-699.

[41]

Id. at 697.

[42]

Id.

[43]

RMC No. 66-2006

Q-17 Can civil tax cases pending in courts, decision for which has not yet become final and
executory, be the subject of abatement? If the amount already assessed by the BIR was
reduced or increased based on the court's decision, what will be the basis of the abatement?
A-17 Yes. The amount of the original assessment or the court's decision whichever is
higher shall be the basis for availment of abatement.
[44]

RMO No. 23-2006

SECTION 4. PROCEDURES IN THE AVAILMENT OF THE ABATEMENT PROGRAM 4.1 Any person/taxpayer, natural or juridical, with existing delinquent account or assessment
which has been issued as of June 30, 2006, may avail of this Abatement Program.
4.2 Taxpayer may avail by submitting an application for abatement (Annex "A") for every tax
type to the concerned office, as follows:
xxx
4.5 For cases pending in courts, the concerned taxpayer shall fully pay the amount equal to One
Hundred Percent (100%) of the basic tax before the same should be withdrawn, following the
existing legal procedures.
xxx
4.7 Within fifteen (15) days after payment of the basic tax, the following procedures shall be
followed:
4.7.1 Attached proof of payment (Revenue Official Receipt/BIR Form 0605 with machine
validation) and the application form to the docket of the case;
122

4.7.2 Prepare Termination Letter (Annex B) for every tax type for the signature of the
Commissioner of Internal Revenue;
4.7.3 Prepare Authority to Cancel Assessment (Form 17.58-ATCA) to cancel assessments for
penalties (surcharge, interest and compromise penalty), following the existing rules and
procedures in RDAO 6-2001, to be signed only after the Termination Letter has been issued;
4.7.4 Thereafter, the docket of the case, page numbered and with Table of Contents, shall be
forwarded to the Office of the Commissioner for the signature of the Termination Letter, through
the Deputy Commissioner - Operations Group, Attention : The Assistant Commissioner for
Collection;
xxx
[45]

Commissioner of Internal Revenue v. Marubeni Corp., 423 Phil. 862, 874 (2001).

123

THIRD DIVISION
[G.R. No. 170257 : September 07, 2011]
RIZAL COMMERCIAL BANKING CORPORATION, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27, 2005
Decision[1] and October 26, 2005 Resolution[2] of the Court of Tax Appeals En Banc (CTA-En
Banc) in C.T.A. E.B. No. 83 entitled "Rizal Commercial Banking Corporation v. Commissioner
of Internal Revenue."
THE FACTS
Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in general
banking operations. It seasonably filed its Corporation Annual Income Tax Returns for Foreign
Currency Deposit Unit for the calendar years 1994 and 1995.[3]
On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then
Commissioner of Internal Revenue (CIR) Liwayway Vinzons-Chato, authorizing a special audit
team to examine the books of accounts and other accounting records for all internal revenue
taxes from January 1, 1994 to December 31, 1995.[4]
On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under the
Statute of Limitations of the National Internal Revenue Code covering the internal revenue taxes
due for the years 1994 and 1995, effectively extending the period of the Bureau of Internal
Revenue (BIR) to assess up to December 31, 2000.[5]
Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together with
Assessment Notices from the BIR for the following deficiency tax assessments:[6]
Particulars

Deficiency Income Tax


1995 (ST-INC-95-01992000)
1994 (ST-INC-94-02002000)
Deficiency Gross
Receipts Tax
1995 (ST-GRT-95-02012000)
1994 (ST-GRT-94-0202-

Basic Tax

Interest

P252,150,988.01 P191,496,585.96
216,478,397.90

13,697,083.68

207,819,261.99

Compromise
Penalties

Total

P25,000.00 P443,672,573.97
25,000.00

424,322,659.89

12,428,696.21 2,819,745.52

28,945,525.41

2,488,462.38

2,755,716.42
124

25,000.00

5,269,178.80

2000)
Deficiency Final
Withholding Tax
1995 (ST-EWT-95-02032000)
1994 (ST-EWT-94-02042000)
Deficiency Final Tax on
FCDU Onshore Income
1995 (ST-OT-95-02052000)
1994 (ST-OT-94-02062000)
Deficiency Expanded
Withholding Tax
1995 (ST-EWT-95-02072000)
1994 (ST-EWT-94-02082000)
Deficiency Documentary
Stamp Tax
1995 (ST-DST1-95-02092000)
1995 (ST-DST2-95-02102000)
1994 (ST-DST3-94-02112000)
1994 (ST-DST4-94-02122000)
TOTALS

64,365,610.12

58,757,866.78

25,000.00

123,148,477.15

53,058,075.25

59,047,096.34

25,000.00

112,130,171.59

81,508,718.20

61,901,963,.52

25,000.00

143,435,681.72

34,429,503.10

33,052,322.98

25,000.00

67,506,826.08

5,051,415.22

4,583,640.33

113,000.00

9,748,055.55

4,482,740.35

4,067,626.31

78,200.00

8,628,566.66

351,900,539.39

315,804,946.26

250,000.00

667,955,485.65

367,207,105.29

331,535,844.68

300,000.00

699,042,949.97

460,370,640.05

512,193,460.02

300,000.00

972,864,100.07

223,037,675.89

240,050,706.09

300,000.00

463,388,381.98

P2,130,226,954.83P2,035,495,733.89 P4,335,945.5P4,170,058,634.49
2

Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February 24, 2000
and later submitted the relevant documentary evidence to support it. Much later on November
20, 2000, it filed a petition for review before the CTA, pursuant to Section 228 of the 1997 Tax
Code.[7]
On December 6, 2000, RCBC received another Formal Letter of Demand with Assessment
Notices dated October 20, 2000, following the reinvestigation it requested, which drastically
reduced the original amount of deficiency taxes to the following:[8]

Particulars

Basic Tax

Interest
125

Surcharge &/

Total

Compromise
Deficiency Income Tax
1995 (INC-95-000003)
1994 (INC-94-000002)
Deficiency Gross Receipts
Tax
1995 (GRT-95-000004)
1994 (GRT-94-000003)
Deficiency Final Withholding
Tax
1995 (FT-95-000005)
1994 (FT-94-000004)
Deficiency Final Tax on
FCDU Onshore Income
1995 (OT-95-000006)
1994 (OT-94-000005)
Deficiency Expanded
Withholding Tax
1995 (EWT-95-000004)
1994 (EWT-94-000003)
Deficiency Documentary
Stamp Tax
1995 (DST-95-000006)
1995 (DST2-95-000002)
1994 (DST-94-000005)
1994 (DST2-94-000001)
TOTALS

P374,348.45
1,392,366.28

P346,656.92
1,568,605.52

P721,005.37
2,960,971.80

2,000,926.96
138,368.61

3,322,589.63 P1,367,222.04
161,872.32

6,690,738.63
300,240.93

362,203.47
188,746.43

351,287.75
220,807.47

713,491.22
409,553.90

81,508,718.20
34,429,503.10

79,052,291.08
40,277,802.26

160,561,009.28
74,707,305.36

520,869.72
297,949.95

505,171.80
348,560.63

599,890.72
24,953,842.46
905,064.74
17,040,104.84

25,000.00
25,000.00

1,051,041.03
671,510.58

149,972.68
6,238,460.62
226,266.18
4,260,026.21

749,863.40
31,192,303.08
1,131,330.92
21,300,131.05

P164,712,903.4P126,155,645.38 P12,291,947.7P303,160,496.55
4
3

On the same day, RCBC paid the following deficiency taxes as assessed by the BIR:[9]
Particulars

1994

1995

Total

Deficiency Income Tax


Deficiency Gross Receipts Tax
Deficiency Final Withholding Tax
Deficiency Expanded Withholding Tax
Deficiency Documentary Stamp Tax

P2,965,549.44
300,695.84
410,174.44
672,490.14
1,131,330.92

P722,236.11
6,701,893.17
714,682.02
1,052,753.48
749,863.40

P3,687,785.55
7,002,589.01
1,124,856.46
1,725,243.62
1,881,194.32

TOTALS

P5,480,240.78 P9,941,428.18

P15,421,668.96

126

RCBC, however, refused to pay the following assessments for deficiency onshore tax and
documentary stamp tax which remained to be the subjects of its petition for review:[10]
Particulars
Deficiency Final Tax on FCDU Onshore
Income
Basic
Interest
Sub Total

1994

1995

Total

P34,429,503.10 P81,508,718.20P115,938,221.30
40,277,802.26 79,052,291.08 119,330,093.34
P74,707,305.36 P160,561,009.2P235,268,314.64
8

Deficiency Documentary Stamp Tax


Basic
Surcharge

P17,040,104.84 P24,953,842.46 P41,993,947.30


4,260,026.21
6,238,460.62 10,498,486.83

Sub Total

P21,300,131.05 P31,192,303.08 P52,492,434.13

TOTALS

P96,007,436.41 P191,753,312.3P287,760,748.77
6

RCBC argued that the waivers of the Statute of Limitations which it executed on January 23,
1997 were not valid because the same were not signed or conformed to by the respondent CIR as
required under Section 222(b) of the Tax Code.[11] As regards the deficiency FCDU onshore tax,
RCBC contended that because the onshore tax was collected in the form of a final withholding
tax, it was the borrower, constituted by law as the withholding agent, that was primarily liable for
the remittance of the said tax.[12]
On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First
Division) promulgated its Decision[13] which partially granted the petition for review. It
considered as closed and terminated the assessments for deficiency income tax, deficiency gross
receipts tax, deficiency final withholding tax, deficiency expanded withholding tax, and
deficiency documentary stamp tax (not an industry issue) for 1994 and 1995.[14] It, however,
upheld the assessment for deficiency final tax on FCDU onshore income and deficiency
documentary stamp tax for 1994 and 1995 and ordered RCBC to pay the following amounts plus
20% delinquency tax:[15]

127

Particulars

1994

1995

Total

Deficiency Final Tax on FCDU Onshore


Income
Basic

P22,356,324.4P16,067,952.86P115,938, 221.30
3
26,153,837.08 15,583,713.19 119,330,093.34

Interest

48,510,161.51 31,651,666.05 119,330,093.34


Sub Total

Deficiency Documentary Stamp Tax (Industry


Issue)
Basic

P17,040,104.8P24,953,842.46 P41,993,947.30
4
4,260,026.21

6,238,460.62

10,498,486.83

1,300,131.05 31,192,303.08

52,492,434.13

Surcharge

Sub Total

TOTALS

P69,810,292.5P62,843,969.13 P171,822,527.47
6

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing that: (1)
the CTA erred in its addition of the total amount of deficiency taxes and the correct amount
should only be ?132,654,261.69 and not ?171,822,527.47; (2) the CTA erred in holding that
RCBC was estopped from questioning the validity of the waivers; (3) it was the payor-borrower
as withholding tax agent, and not RCBC, who was liable to pay the final tax on FCDU, and (4)
RCBC's special savings account was not subject to documentary stamp tax.[16]
In its Resolution[17] dated April 11, 2005, the CTA-First Division substantially upheld its earlier
ruling, except for its inadvertence in the addition of the total amount of deficiency taxes. As
such, it modified its earlier decision and ordered RCBC to pay the amount of ?132,654,261.69
plus 20% delinquency tax.[18]
RCBC elevated the case to the CTA-En Banc where it raised the following issues:
128

I.
Whether or not the right of the respondent to assess deficiency onshore tax and
documentary stamp tax for taxable year 1994 and 1995 had already prescribed when it
issued the formal letter of demand and assessment notices for the said taxable years.
II.
Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994 and
1995.
III.
Whether or not petitioner's special savings account is subject to documentary stamp tax
under then Section 180 of the 1993 Tax Code.[19]
The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled that by
receiving, accepting and paying portions of the reduced assessment, RCBC bound itself to the
new assessment, implying that it recognized the validity of the waivers.[20] RCBC could not
assail the validity of the waivers after it had received and accepted certain benefits as a result of
the execution of the said waivers.[21] As to the deficiency onshore tax, it held that because the
payor-borrower was merely designated by law to withhold and remit the said tax, it would then
follow that the tax should be imposed on RCBC as the payee-bank.[22] Finally, in relation to the
assessment of the deficiency documentary stamp tax on petitioner's special savings account, it
held that petitioner's special savings account was a certificate of deposit and, as such, was subject
to documentary stamp tax.[23]
Hence, this petition.
While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22, 2009,
informing the Court that this petition, relative to the DST deficiency assessment, had been
rendered moot and academic by its payment of the tax deficiencies on Documentary Stamp
Tax (DST) on Special Savings Account (SSA) for taxable years 1994 and 1995 after the BIR
approved its applications for tax abatement.[24]
In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the only
remaining issues raised in the present petition were those pertaining to RCBC's deficiency tax on
FCDU Onshore Income for taxable years 1994 and 1995 in the aggregate amount of ?
80,161,827.56 plus 20% delinquency interest per annum. The CIR prayed that RCBC be
considered to have withdrawn its appeal with respect to the CTA-En Banc ruling on its DST on
SSA deficiency for taxable years 1994 and 1995 and that the questioned CTA decision regarding
RCBC's deficiency tax on FCDU Onshore Income for the same period be affirmed.[25]
THE ISSUES
Thus, only the following issues remain to be resolved by this Court:
Whether petitioner, by paying the other tax assessment covered by the waivers of the
statute of limitations, is rendered estopped from questioning the validity of the said waivers
with respect to the assessment of deficiency onshore tax.[26]
129

and
Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is
mandated by law to be collected at source in the form of a final withholding tax.[27]
THE COURT'S RULING
Petitioner is estopped from
questioning the validity of the waivers
RCBC assails the validity of the waivers of the statute of limitations on the ground that the said
waivers were merely attested to by Sixto Esquivias, then Coordinator for the CIR, and that
he failed to indicate acceptance or agreement of the CIR, as required under Section 223 (b) of the
1977 Tax Code.[28] RCBC further argues that the principle of estoppel cannot be applied against
it because its payment of the other tax assessments does not signify a clear intention on its part to
give up its right to question the validity of the waivers.[29]
The Court disagrees.
Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that "an
admission or representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon." A party is precluded from denying
his own acts, admissions or representations to the prejudice of the other party in order to prevent
fraud and falsehood.[30]
Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the
revised assessments issued within the extended period as provided for in the questioned waivers,
impliedly admitted the validity of those waivers. Had petitioner truly believed that the waivers
were invalid and that the assessments were issued beyond the prescriptive period, then it should
not have paid the reduced amount of taxes in the revised assessment. RCBC's subsequent
action effectively belies its insistence that the waivers are invalid. The records show that on
December 6, 2000, upon receipt of the revised assessment, RCBC immediately made payment on
the uncontested taxes. Thus, RCBC is estopped from questioning the validity of the waivers. To
hold otherwise and allow a party to gainsay its own act or deny rights which it had previously
recognized would run counter to the principle of equity which this institution holds dear.[31]
Liability for Deficiency
Onshore Withholding Tax
RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly liable for
the payment of onshore tax, citing Section 2.57(A) of Revenue Regulations No. 2-98 which
states:
(A) Final Withholding Tax. -- Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as a full and final payment of the income tax
due from the payee on the said income. The liability for payment of the tax rests primarily on
the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case
of under withholding, the deficiency tax shall be collected from the payor/withholding
agent. The payee is not required to file an income tax return for the particular income. (Emphasis
supplied)
130

The petitioner is mistaken.


Before any further discussion, it should be pointed out that RCBC erred in citing the
abovementioned Revenue Regulations No. 2-98 because the same governs collection at source
on income paid only on or after January 1, 1998. The deficiency withholding tax subject of this
petition was supposed to have been withheld on income paid during the taxable years of 1994
and 1995. Hence, Revenue Regulations No. 2-98 obviously does not apply in this case.
In Chamber of Real Estate and Builders' Associations, Inc. v. The Executive Secretary,[32] the
Court has explained that the purpose of the withholding tax system is three-fold: (1) to provide
the taxpayer with a convenient way of paying his tax liability; (2) to ensure the collection of tax,
and (3) to improve the government's cashflow. Under the withholding tax system, the payor is
the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent
or a collector of the government to ensure the collection of taxes.[33]
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a
taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of
Appeals,[34]to wit:
In the operation of the withholding tax system, the withholding agent is the payor, a separate
entity acting no more than an agent of the government for the collection of the tax in order to
ensure its payments; the payer is the taxpayer - he is the person subject to tax imposed by law;
and the payee is the taxing authority. In other words, the withholding agent is merely a tax
collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a
payee by fiction of law. His (agent) liability is direct and independent from the taxpayer,
because the income tax is still imposed on and due from the latter. The agent is not liable
for the tax as no wealth flowed into him - he earned no income. The Tax Code only makes
the agent personally liable for the tax arising from the breach of its legal duty to withhold as
distinguished from its duty to pay tax since:
"the government's cause of action against the withholding agent is not for the collection of
income tax, but for the enforcement of the withholding provision of Section 53 of the Tax
Code, compliance with which is imposed on the withholding agent and not upon the
taxpayer."[35] (Emphases supplied)
Based on the foregoing, the liability of the withholding agent is independent from that of the
taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the
income subject to withholding tax. The withholding agent is liable only insofar as he failed to
perform his duty to withhold the tax and remit the same to the government. The liability for the
tax, however, remains with the taxpayer because the gain was realized and received by him.
While the payor-borrower can be held accountable for its negligence in performing its duty to
withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the one which
earned income on the transaction, remains liable for the payment of tax as the taxpayer shares the
responsibility of making certain that the tax is properly withheld by the withholding agent, so as
to avoid any penalty that may arise from the non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payorborrower as the withholding agent. As such, it is liable for payment of deficiency onshore tax on
131

interest income derived from foreign currency loans, pursuant to Section 24(e)(3) of the National
Internal Revenue Code of 1993:
Sec. 24. Rates of tax on domestic corporations.
xxxx
(e) Tax on certain incomes derived by domestic corporations
xxxx
(3) Tax on income derived under the Expanded Foreign Currency Deposit System. - Income
derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking units in the Philippines, local
commercial banks including branches of foreign banks that may be authorized by the Central
Bank to transact business with foreign currency depository system units and other depository
banks under the expanded foreign currency deposit system shall be exempt from all taxes, except
taxable income from such transactions as may be specified by the Secretary of Finance, upon
recommendation of the Monetary Board to be subject to the usual income tax payable by banks:
Provided,That interest income from foreign currency loans granted by such depository
banks under said expanded system to residents (other than offshore banking units in the
Philippines or other depository banks under the expanded system) shall be subject to a
10% tax. (Emphasis supplied)
As a final note, this Court has consistently held that findings and conclusions of the CTA shall be
accorded the highest respect and shall be presumed valid, in the absence of any clear and
convincing proof to the contrary.[36] The CTA, as a specialized court dedicated exclusively to the
study and resolution of tax problems, has developed an expertise on the subject of taxation.[37]
As such, its decisions shall not be lightly set aside on appeal, unless this Court finds that the
questioned decision is not supported by substantial evidence or there is a showing of abuse or
improvident exercise of authority on the part of the Tax Court.[38]
WHEREFORE, the petition is DENIED.
SO ORDERED.
Velasco, Jr., (Chairperson), Peralta, Abad, and Villarama, Jr.,* JJ., concur.
Endnotes:
*

Designated as additional member in lieu of Associate Justice Maria Lourdes P.A. Sereno, per
Special Order No. 1076 dated September 6, 2011.
[1]

Penned by Associate Justice Olga Palanca-Enriquez and concurred in by Presiding Justice


Ernesto D. Acosta and Associate Justices Juanito C. Castaneda, Jr., Lovell R. Bautista, Erlinda P.
Uy and Caesar A. Casanova; rollo, pp. 44-66.
[2]

Id. at 67-68.
132

[3]

Id. at 69-70.

[4]

Id.

[5]

Id..

[6]

Id. at 70-71.

[7]

Id. at 71-72.

[8]

Id. at 72.

[9]

Id. at 73.

[10]

Id.

[11]

Id. at 100.

[12]

Id. at 104.

[13]

Id. at 69-87. Penned by Presiding Justice Ernesto D. Acosta and concurred in by Associate
Justices Lovell R. Bautista and Caesar A. Casanova.
[14]

Id. at 86.

[15]

Id.

[16]

Id. at 89.

[17]

Id. at 88-94.

[18]

Id. at 94.

[19]

Id. at 50-51.

[20]

Id. at 55.

[21]

Id.

[22]

Id. at 59.

[23]

Id. at 65.

[24]

Id. at 218-220.

[25]

Id. at 233-235.

[26]

Id. at 15.
133

[27]

Id.

[28]

Id. at 173.

[29]

Id. at 176.

[30]

Tolentino, Arturo M. Commentaries and Jurisprudence on the Civil Code of the Philippines,
Vol. 4, p. 660.
[31]

Id.

[32]

G.R. No. 160756, March 9, 2010, 614 SCRA 605, 632-633.

[33]

Bank of America NT & SA v. Court of Appeals, G.R. Nos. 103092 and 103106, July 21, 1994,
234 SCRA 302, 310.
[34]

361 Phil. 103 (1999).

[35]

Commissioner of Internal Revenue v. Court of Appeals, 361 Phil. 103, 117-118 (1999),
citing Commissioner of Internal Revenue v. Malayan Insurance, 129 Phil. 165, 170 (1967),
citing Jai Alai v. Republic, L-17462, May 29, 1967; 1967B PHILD 460.
[36]

Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita


Business Machine Corporation of the Philippines) v. Commissioner of Internal Revenue, G.R.
No. 178090, February 8, 2010, 612 SCRA 28, 38, citingCommissioner of Internal Revenue v.
Cebu Toyo Corporation, 491 Phil. 625,640 (2005);Commissioner of Internal Revenue v. Court of
Appeals, Atlas Consolidated Mining and Development Corporation, 312 Phil. 337 (1995),
citing Luzon Stevedoring Corporation v. Court of Tax Appeals, et al., 246 Phil. 666 (1988).
[37]

Commissioner of Internal Revenue v. Court of Appeals, 363 Phil. 239, 246 (1999),
citing Commissioner of Internal Revenue v. Wander Philippines, Inc., 243 Phil. 717 (1988).
[38]

Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal Revenue, G.R. No.
157594, March 9, 2010, 614 SCRA 526, 561-562, citing Barcelon, Roxas Securities, Inc. (now
known as UBP Securities, Inc.) v. Commissioner of Internal Revenue, G.R. No. 150764, August
7, 2006, 498 SCRA 126,135-136 and Commissioner of Internal Revenue v. Cebu Toyo
Corporation, 491 Phil. 625,640 (2005).

134

SECOND DIVISION
[G.R. No. 193247 : September 14, 2011]
SERGIO I. CARBONILLA, EMILIO Y. LEGASPI IV, AND ADONAIS Y. REJUSO,
PETITIONERS, VS. BOARD OF AIRLINES REPRESENTATIVES (MEMBER
AIRLINES: ASIANA AIRLINES, CATHAY PACIFIC AIRWAYS, CHINA AIRLINES,
CEBU PACIFIC AIRLINES, CHINA SOUTHERN AIRLINES, CONTINENTAL
MICRONESIA AIRLINES, EMIRATES, ETIHAD AIRWAYS, EVA AIR AIRWAYS,
FEDERAL EXPRESS CORPORATION, GULF AIR, JAPAN AIRLINES, AIR FRANCEKLM ROYAL DUTCH AIRLINES, KOREAN AIR, KUWAIT AIRWAYS
CORPORATION, LUFTHANSA GERMAN AIRLINES, MALAYSIA AIRLINES,
NORTHWEST AIRLINES, PHILIPPINE AIRLINES, INC., QANTAS AIRWAYS, LTD.,
QATAR AIRLINES, ROYAL BRUNEI AIRLINES, SINGAPORE AIRLINES, SWISS
INTERNATIONAL AIRLINES, LTD., SAUDI ARABIAN AIRLINES, AND THAI
INTERNATIONAL AIRWAYS), RESPONDENTS.
[G.R. NO. 194276]
OFFICE OF THE PRESIDENT, REPRESENTED BY HON. PAQUITO N. OCHOA,* IN
HIS CAPACITY AS EXECUTIVE SECRETARY, DEPARTMENT OF FINANCE,
REPRESENTED BY HON. CESAR V. PURISIMA** IN HIS CAPACITY AS SECRETARY
OF FINANCE, AND THE BUREAU OF CUSTOMS, REPRESENTED BY HON.
ANGELITO A. ALVAREZ**** IN HIS CAPACITY AS COMMISSIONER OF CUSTOMS,
PETITIONERS, VS. BOARD OF AIRLINES REPRESENTATIVES (MEMBER
AIRLINES: ASIANA AIRLINES, CATHAY PACIFIC AIRWAYS, CHINA AIRLINES,
CEBU PACIFIC AIRLINES, CHINA SOUTHERN AIRLINES, CONTINENTAL
MICRONESIA AIRLINES, EMIRATES, ETIHAD AIRWAYS, EVA AIR AIRWAYS,
FEDERAL EXPRESS CORPORATION, GULF AIR, JAPAN AIRLINES, AIR FRANCEKLM ROYAL DUTCH AIRLINES, KOREAN AIR, KUWAIT AIRWAYS
CORPORATION, LUFTHANSA GERMAN AIRLINES, MALAYSIA AIRLINES,
NORTHWEST AIRLINES, PHILIPPINE AIRLINES, INC., QANTAS AIRWAYS, LTD.,
QATAR AIRLINES, ROYAL BRUNEI AIRLINES, SINGAPORE AIRLINES, SWISS
INTERNATIONAL AIRLINES, LTD., SAUDI ARABIAN AIRLINES, AND THAI
INTERNATIONAL AIRWAYS), RESPONDENTS.
DECISION
CARPIO, J.:
The Cases
Before the Court are two petitions for review[1] assailing the Decision[2] promulgated on 9 July
2009 by the Court of Appeals in CA-G.R. SP No. 103250.
135

In G.R. No. 193247, petitioners Sergio I. Carbonilla, Emilio Y. Legaspi IV, and Adonais Y.
Rejuso (Carbonilla, et al.) assail the Resolution[3] promulgated on 5 August 2010 by the Court of
Appeals in CA-G.R. SP No. 103250.
In G.R. No. 194276, petitioners Office of the President, represented by Paquito N. Ochoa in his
capacity as Executive Secretary, Department of Finance, represented by Cesar V. Purisima in his
capacity as Secretary of Finance, and the Bureau of Customs (BOC), represented by Angelito A.
Alvarez in his capacity as Commissioner of Customs (Office of the President, et al.), assail the
Resolution[4] promulgated on 26 October 2010 by the Court of Appeals in CA-G.R. SP No.
103250.
The Antecedent Facts
The facts, as gathered from the assailed Decision of the Court of Appeals, are as follows:
The Bureau of Customs[5] issued Customs Administrative Order No. 1-2005 (CAO 1-2005)
amending CAO 7-92.[6] The Department of Finance[7] approved CAO 1-2005 on 9 February
2006. CAO 7-92 and CAO 1-2005 were promulgated pursuant to Section 3506[8] in relation to
Section 608[9] of the Tariff and Customs Code of the Philippines (TCCP).
Petitioners Office of the President, et al. alleged that prior to the amendment of CAO 7-92, the
BOC created on 23 April 2002 a committee to review the overtime pay of Customs personnel in
Ninoy Aquino International Airport (NAIA) and to propose its adjustment from the exchange
rate of P25 to US$1 to the then exchange rate of P55 to US$1. The Office of the President, et al.
alleged that for a period of more than two years from the creation of the committee, several
meetings were conducted with the agencies concerned, including respondent Board of Airlines
Representatives (BAR), to discuss the proposed rate adjustment that would be embodied in an
Amendatory Customs Administrative Order.
On the other hand, BAR alleged that it learned of the proposed increase in the overtime rates
only sometime in 2004 and only through unofficial reports.
On 23 August 2004, BAR wrote a letter addressed to Edgardo L. De Leon, Chief, Bonded
Warehouse Division, BOC-NAIA, informing the latter of its objection to the proposed increase in
the overtime rates. BAR further requested for a meeting to discuss the matter.
BAR wrote the Secretary of Finance on 31 January 2005 and 21 February 2005 reiterating its
concerns against the issuance of CAO 1-2005. In a letter dated 3 March 2005, the Acting District
Collector of BOC informed BAR that the Secretary of Finance already approved CAO 1-2005 on
9 February 2005. As such, the increase in the overtime rates became effective on 16 March 2005.
BAR still requested for an audience with the Secretary of Finance which was granted on 12
October 2005.
The BOC then sent a letter to BAR's member airlines demanding payment of overtime services
to BOC personnel in compliance with CAO 1-2005. The BAR's member airlines refused and
manifested their intention to file a petition with the Commissioner of Customs and/or the
Secretary of Finance to suspend the implementation of CAO 1-2005.
In a letter dated 31 August 2006,[10] Undersecretary Gaudencio A. Mendoza, Jr. (Usec. Mendoza),
136

Legal and Revenue Operations Group, Department of Finance informed BAR, through its
Chairman Felix J. Cruz (Cruz), that they "find no valid ground to disturb the validity of CAO 12005, much less to suspend its implementation or effectivity" and that its implementation
effective 16 March 2005 is legally proper.
In separate letters both dated 4 December 2006,[11] Cruz requested the Office of the President and
the Office of the Executive Secretary to review the decision of Usec. Mendoza. Cruz manifested
the objection of the International Airlines operating in the Philippines to CAO 1-2005. On 13
December 2006, Deputy Executive Secretary Manuel B. Gaite (Deputy Exec. Sec. Gaite) issued
an Order[12]requiring BAR to pay its appeal fee and submit an appeal memorandum within 15
days from notice. BAR paid the appeal fee and submitted its appeal memorandum on 19 January
2007.
The Decision of the Office of the President
In a Decision[13] dated 12 March 2007, the Office of the President denied the appeal of BAR and
affirmed the Decision of the Department of Finance.
The Office of the President ruled that the BOC was merely exercising its rule-making or quasilegislative power when it issued CAO 1-2005. The Office of the President ruled that since CAO
1-2005 was issued in the exercise of BOC's rule-making or quasi-legislative power, its validity
and constitutionality may only be assailed through a direct action before the regular courts. The
Office of the President further ruled that, assuming that BAR's recourse before the Office of the
President was proper and in order, the appeal was filed out of time because BAR received the
letter-decision of the Secretary of Finance on 4 September 2006 but it filed its appeal only on 4
December 2006, beyond the 30-day period provided under Administrative Order No. 18 dated 12
February 1987.
The Office of the President also ruled that the grounds raised by BAR, namely, (1) the failure to
comply with the publication requirement; (2) that the foreign exchange cannot be a basis for rate
increase; and (3) that increase in rate was ill-timed, were already deliberated during the meetings
held between the BOC and the stakeholders and were also considered by the Secretary of
Finance. The Office of the President further adopted the position of the BOC that several public
hearings and consultations were conducted by the BOC-NAIA Collection District, which were in
substantial compliance with Section 9, Chapter I, Book VII of the Administrative Code of 1987.
BAR did not oppose the exchange rate used in CAO 7-92 which was the exchange rate at that
time and thus, the BOC-NAIA Collection District found it strange that BAR was questioning the
fixing of the adjusted pay rates which were lower than the rate provided under Section 3506 of
the TCCP. The Office of the President ruled that there is a legal presumption that the rates fixed
by an administrative agency are reasonable, and that the fixing of the rates by the Government,
through its authorized agents, involved the exercise of reasonable discretion.
BAR filed a motion for reconsideration. In its Resolution[14] dated 14 March 2008, the Office of
the President denied BAR's motion for reconsideration.
BAR filed a petition for review under Rule 45 before the Court of Appeals.
Petitioners Carbonilla, et al. filed an Omnibus Motion to Intervene before the Court of Appeals
on the ground that as customs personnel, they would be directly affected by the outcome of the
137

case. Petitioners Carbonilla, et al. also adopted the Comment filed by the Office of the Solicitor
General (OSG).
The Decision of the Court of Appeals
In its 26 February 2009 Resolution,[15] the Court of Appeals denied the motion for intervention
filed by Carbonilla, et al. The Court of Appeals ruled that the petition before it involved the
resolution of whether the decision of the Office of the President was correctly rendered. The
Court of Appeals held that the intervenors' case was for collection of their unpaid overtime
services and their interests could not be protected or addressed in the resolution of the case. The
Court of Appeals ruled that Carbonilla, et al. should pursue their case in a separate proceeding
against the proper respondents.
Carbonilla, et al. filed a motion for reconsideration of the 26 February 2009 resolution.
Without resolving Carbonilla, et al.'s motion for reconsideration, the Court of Appeals
promulgated the assailed 9 July 2009 Decision which set aside the 12 March 2007 Decision and
14 March 2008 Resolution of the Office of the President and declared Section 3506 of the TCCP,
CAO 7-92 and CAO 1-2005 unenforceable against BAR.
Ruling that it could take cognizance of BAR's appeal, the Court of Appeals held that BAR could
not be faulted for not filing a case before the Court of Tax Appeals (CTA) because the Office of
the President admitted that it preempted any action before the CTA. Deputy Exec. Sec. Gaite
treated the letters of BAR as an appeal and required it to pay appeal fee and to submit an appeal
memorandum. The Court of Appeals further ruled that what the Office of the President treated as
a decision of the Department of Finance was merely an advisory letter dated 31 August 2006 and
to treat it as a decision from which an appeal could be taken and then rule that it was not
perfected on time would deprive BAR of its right to due process.
The Court of Appeals further ruled that it has the power to resolve the constitutional issue raised
against CAO 7-92 and CAO 1-2005. The Court of Appeals ruled that Section 8, Article IX(B) of
the Constitution prohibits an appointive public officer or employee from receiving additional,
double or indirect compensation, unless specifically authorized by law. The Court of Appeals
ruled that Section 3506 of the TCCP only authorized payment of additional compensation for
overtime work, and thus, the payment of traveling and meal allowances under CAO 7-92 and
CAO 1-2005 are unconstitutional and could not be enforced against BAR members.
The Court of Appeals ruled that Section 3506 of the TCCP failed the completeness and sufficient
standard tests to the extent that it attempted to cover BAR members through CAO 7-92 and CAO
1-2005. The Court of Appeals ruled that the phrase "other persons served" did not provide for
descriptive terms and conditions that might be completely understood by the BOC. The Court of
Appeals ruled that devoid of common distinguishable characteristic, aircraft owners and
operators should not have been lumped together with importers and shippers. The Court of
Appeals also ruled that Section 3506 of the TCCP failed the sufficient standard test because it
does not contain adequate guidelines or limitations needed to map out the boundaries of the
delegate's authority.
The dispositive portion of the Court of Appeals' Decision reads:

138

WHEREFORE, the petition is GRANTED. Declaring Section 3506 of the TCCP as well as CAO
7-92 and CAO 1-2005 to be unenforceable as against the petitioners, the appealed Decision dated
March 12, 2007 and Resolution dated March 14, 2008 are hereby SET ASIDE.
SO ORDERED.[16]
Petitioners Carbonilla, et al. filed their motion for reconsideration of the 9 July 2009 Decision. In
its 5 August 2010 Resolution, the Court of Appeals, among others, denied Carbonilla, et al.'s
motion for reconsideration.
Carbonilla, et al. came to this Court via a petition for review, docketed as G.R. No. 193247, on
the following grounds:
I.
II.

The Honorable Court of Appeals seriously erred in law in ruling that the Court of Tax
Appeals did not have jurisdiction on the subject controversy.
The Honorable Court of Appeals seriously erred in law in ruling that Section 3506 of the
TCCP failed the completeness and sufficient standard tests.

III.

The Honorable Court of Appeals seriously erred in law in ruling that CAO 7-92 as
amended by CAO 1-2005 as well as Section 3506 of the TCCP are not enforceable against
BAR's members.

IV.

The Honorable Court of Appeals seriously erred in law in not ruling that estoppel and/or
laches should have prevented the BAR from questioning CAO 1-2005.

V.

The Honorable Court of Appeals seriously erred in law in issuing the decision dated July
9, 2009 in denying petitioners' intervention and motion for reconsideration dated August 3, 2009.
[17]

The Office of the President, et al. also filed a motion for reconsideration dated 28 July 2009
assailing the 9 July 2009 Decision of the Court of Appeals.
Meanwhile, in a Resolution promulgated on 12 May 2010,[18] the Court of Appeals directed BAR
to continue complying with the 12 March 2007 Decision of the Office of the President. The
Court of Appeals ruled that BAR unlawfully withheld the rightful overtime payment of BOC
employees when it stopped paying its obligations under CAO 7-92, as amended by CAO 1-2005,
since the Court of Appeals' 9 July 2009 Decision had not attained finality pending the resolution
of the motion for reconsideration filed by the Office of the President, et al. BAR filed a motion
for reconsideration dated 26 May 2010 for the reversal of the 12 May 2010 Resolution of the
Court of Appeals.
In a Resolution promulgated on 26 October 2010, the Court of Appeals granted BAR's 26 May
2010 motion for reconsideration and denied the 28 July 2009 motion for reconsideration of the
Office of the President, et al.
The Office of the President, et al. filed a petition for review before this Court, docketed as G.R.
No. 194276, raising the following grounds:
139

I. The Court of Appeals erred in giving due course to respondents BAR and its member airlines'
petition for review because it had no jurisdiction over the issues raised therein by respondents, to
wit:
1.

CAO No. 1-2005 is invalid as the increased overtime pay rates and meal and
transportation allowances fixed therein are unreasonable and confiscatory; and

2.

The act of the Bureau of Customs charging and/or collecting from BAR's member
airlines the cost of the overtime pay and meal and transportation allowances of Bureau of
Customs (BOC) personnel in connection with the discharge of their government duties, functions
and responsibilities is legally impermissible and, therefore, invalid.
These issues involve the validity and collection of money charges authorized by the Customs
Law and thus the Court of Tax Appeals (CTA) has exclusive jurisdiction thereof.

I.

Granting arguendo that the Court of Appeals has jurisdiction over the said issues raised
by the BAR and its member airlines, the Court of Appeals should have dismissed their petition
for review filed under Rule 45 of the Rules of Court on the following grounds:

1.

A petition for review under Ruled 43 of the Rules of Court cannot be filed to
question the quasi-legislative or rule-making power of the Commissioner of Customs;

2.

BAR's appeal to the Office of the President questioning the 31 August 2006
Decision of the Department of Finance (DOF), finding that CAO No. 1-2005 is valid, was filed
out of time;

3.

Some of respondents BAR member airlines' country managers who executed the
verification and certification of non-forum shopping of their petition for review did not have the
necessary authorization of the said member airlines for them to execute the same; and

4.

Administrative procedural due process was observed in the promulgation by the


Commissioner of Customs of the questioned CAO No. 1-2005.

II.

Respondents BAR and its member airlines are guilty of laches and estoppel and thus are
effectively barred from questioning the authority of the Commissioner of Customs to promulgate
pursuant to Section 608 in relation to Section 3506 of the Tariff and Customs Code (TCCP), as
amended, not only CAO No. 1-2005, but also CAO No. 7-92.

III.

The Court of Appeals erred in going beyond the issues raised by respondents BAR and its
member airlines not only in the pleadings filed by them in the proceedings below but also in their
petition for review.

IV.

Section 3506 of the TCCP, CAO No. 1-2005 and CAO No. 7-92 are valid. Said law and
its implementing regulations neither constitute undue delegation of legislative power nor
authorize overpayment of BOC personnel.[19]

140

The Issues
For resolution in these cases are the following issues:
1.

Whether the Court of Appeals committed a reversible error in denying the intervention of
Carbonilla, et al.;

2.

Whether the Court of Appeals has jurisdiction over BAR's petition;

3.

Whether BAR's appeal before the Office of the President was filed on time;

4.
5.
6.

Whether the officers of some of BAR's member airlines who executed the verification
and certification of non-forum shopping have the necessary authorization to execute them;
Whether BAR was guilty of laches and/or estoppel; and
Whether the Court of Appeals committed a reversible error in declaring Section 3506 of
the TCCP, CAO 7-92, and CAO 1-2005 unenforceable against BAR.
The Ruling of this Court
The petition in G.R. No. 193247 has no merit while the petition in G.R. No. 194276 is
meritorious.
Intervention in G.R. No. 193247
On the matter of the intervention of Carbonilla, et al., Section 1, Rule 19 of the 1997 Rules of
Civil Procedure provides:
Section 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in
the success of either of the parties, or an interest against both, or is so situated as to be adversely
affected by a distribution or other disposition of property in the custody of the court or of an
officer thereof may, with leave of court, be allowed to intervene in the action. The court shall
consider whether or not the intervention will unduly delay or prejudice the adjudication of the
rights of the original parties, and whether or not the intervenor's rights may be fully protected in
a separate proceeding.
Intervention is not a matter of right but it may be permitted by the courts when the applicant
shows facts which satisfy the requirements authorizing intervention.[20] In G.R. No. 193247, the
Court of Appeals denied Carbonilla, et al.'s motion for intervention in its 26 February 2009
Resolution on the ground that the case was for collection of unpaid overtime services and thus
should be pursued in a separate proceeding against the proper respondents. A reading of the
Carbonilla, et al.'s Omnibus Motion[21] supports the ground invoked by the Court of Appeals in
denying the motion. The Omnibus Motion states:

141

1.

The said movants-intervenors all held offices or were stationed at the Ninoy Aquino
International Airport [NAIA] and who have all been rendering overtime services thereat for so
many years.

2.

Movant-Intervenor Carbonilla has retired from government service last September 2007
without his being paid the additional rates set by CAO No. 1-2005 which became effective on
March 16, 2007. The effectivity and implementation of the said CAO No. 1-2005 is the main
issue in this case.

3.

Thus, it is noteworthy to mention that all the movants-intervenors all rendered overtime
services since March 16, 2005 or for all the time material to the issue in this case.

4.

Movants-Intervenors urgently need their respective [differential]/back payments


representing overtime services rendered from 16 March 2005 to the present pursuant to the
implementation of CAO No. 1-2005.

5.

Said differential/back payments pursuant to CAO No. 1-2005 would be of great help to
the movants-intervenors considering that as of 24 January 2008, herein movants-intervenors
were stripped of their respective overtime duties by the District Collector of Customs at NAIA
for reasons only known to the latter.

6.

The full implementation of CAO No. 1-2005 would not only benefit the cause and
financial needs of herein movants-intervenors but also that of the other 900 or so employees of
the Bureau of Customs-NAIA who are rendering overtime services thereat up to the present.[22]
Clearly, Carbonilla, et al. were really after the payment of their differential or back payments for
services rendered. Hence, the Court of Appeals correctly denied the motion for intervention.
It should be stressed that the allowance or disallowance of a motion for intervention is addressed
to the sound discretion of the courts.[23] The permissive tenor of the Rules of Court shows the
intention to give the courts the full measure of discretion in allowing or disallowing the
intervention.[24] Once the courts have exercised this discretion, it could not be reviewed by
certiorari or controlled by mandamus unless it could be shown that the discretion was exercised
in an arbitrary or capricious manner.[25] Carbonilla, et al. failed to show that the Court of Appeals
rendered its resolution in an arbitrary or capricious manner.
In addition, Carbonilla, et al. admitted in their petition that their motion for reconsideration of the
26 February 2009 Resolution of the Court of Appeals had been denied in open court during the
oral arguments held by the Court of Appeals on 16 December 2009.[26] Carbonilla, et al. did not
act on the denial of this motion but only pursued their motion for reconsideration of the 9 July
2009 Decision of the Court of Appeals. Hence, the denial of Carbonilla, et al.'s motion for
intervention had already attained finality.
Having ruled against the right of Carbonilla, et al. to intervene, we see no reason to rule on the
other issues they raise unless raised in G.R. No. 194276.
We now discuss the issues raised in G.R. No. 194276.

142

Jurisdiction of the Court of Appeals


The Office of the President, et al. argue that the Court of Appeals should have denied BAR's
petition because it had no jurisdiction over the issues raised, involving the validity and collection
of money charges authorized by Customs Law, which are under the jurisdiction of the CTA.
We do not agree.
The jurisdiction of the Court of Appeals over BAR's petition stems from Section 1 in relation to
Section 3, Rule 43 of the 1997 Rules of Civil Procedure which states that appeals from "awards,
judgments, final orders or resolutions of or authorized by any quasi-judicial agency in the
exercise of its quasi judicial functions[,]" which includes the Office of the President, may be
taken to the Court of Appeals. BAR's petition for review to the Court of Appeals from the 12
March 2007 Decision and 14 March 2008 Resolution of the Office of the President falls within
the jurisdiction of the Court of Appeals.
As noted by the Court of Appeals, the Office of the President took cognizance of Cruz's letter
dated 4 December 2006 requesting for a review of the 31 August 2006 letter of Usec. Mendoza.
Deputy Exec. Sec. Gaite required BAR to pay the appeal fee and submit its appeal memorandum.
Thereafter, the Office of the President issued its 12 March 2007 Decision affirming the decision
of the Department of Finance and then denied BAR's motion for reconsideration in its 14 March
2008 Resolution. BAR's only recourse is to file a petition for review before the Court of Appeals
under Rule 43 of the 1997 Rules on Civil Procedure. The exercise by the Court of Appeals of its
appellate jurisdiction over the decision of the Office of the President is entirely distinct from the
issue of whether BAR committed a procedural error in elevating the case before the Office of the
President instead of filing its appeal before the CTA.
Timeliness of the Appeal before the Office of the President
The Court of Appeals ruled that the question of whether BAR's appeal before the Office of the
President was filed on time was rendered academic when BAR paid the appeal fee and submitted
its appeal memorandum on time. The Court of Appeals held that Deputy Exec. Sec. Gaite could
not validly require BAR to perfect its appeal in his 13 December 2006 Order and then rule, after
its perfection, that the appeal was not filed on time. The Court of Appeals ruled that the 13
December 2006 Order of Deputy Exec. Sec. Gaite stopped BAR from pursuing any recourse
with the CTA. The Court of Appeals further ruled that the Office of the President did not explain
how the 31 August 2006 letter of Usec. Mendoza became a decision of the Secretary of Finance
when it was only an advisory letter.
We do not agree with the Court of Appeals.
The Office of the President is not precluded from issuing the assailed decision in the same way
that this Court is not proscribed from accepting a petition before it, requiring the payment of
docket fees, directing the respondent to comment on the petition, and after studying the case,
from ruling that the petition was filed out of time or that it lacks merit.
However, Cruz's 4 December 2006 letters to then President Gloria Macapagal Arroyo and then
Exec. Sec. Eduardo Ermita are not in the nature of an appeal provided for under Administrative
Order No. 18, series of 1987 (AO 18).[27] Section 1 of AO 18 provides that an appeal to the Office
of the President shall be taken within 30 days from receipt by the aggrieved party of the decision,
143

resolution or order complained of or appealed from. Section 2 of AO 18 cites caption, docket


number of the case as presented in the office of origin, and addresses of the parties. Section 3
mentions pauper litigants. In sum, the appeal provided under AO 18 refers to adversarial cases. It
does not refer to a review of administrative rules and regulations, as what BAR asked the Office
of the President to do in this case. BAR, in writing the Office of the President, was exhausting its
administrative remedies. BAR could still go to the regular courts after the Office of the President
acted on its request for a review of Usec. Mendoza's 31 August 2006 letter. The decision of the
Office of the President did not foreclose BAR's remedy to bring the matter to the regular courts.
BAR is assailing the issuance and implementation of CAO 1-2005. CAO 1-2005 is an
amendment to CAO 7-92. CAO 7-92 was issued "[b]y authority of Section 608, in relation to
Section 3506, of the Tariff and Customs Code of the Philippines x x x." On this score, we do not
agree with the Office of the President that BAR, instead of filing an appeal before its office,
should have filed an appeal before the CTA in accordance with Section 7 of Republic Act No.
9282[28] (RA 9282) which reads:
Section 7. Jurisdiction. - The CTA shall exercise:
(a) Exclusive appellate jurisdiction, to review by appeal, as herein provided:
xxxx
4. Decisions of the Commissioner of Customs in vases involving liability for customs duties, fees
and other money charges, seizure, detention or release of property affected, fines forfeitures or
other penalties in relation thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs.
Under Section 11 of RA 9282, an appeal to the CTA should be taken within 30 days from receipt
of the assailed decision or ruling.
However, Section 2313, Book II of Republic Act No. 1937 (RA 1937)[29] provides:
Section 2313. Review of Commissioner. - The person aggrieved by the decision or action of the
Collector in any matter presented upon protest or by his action in any case of seizure may, within
fifteen (15) days after notification on writing by the Collector of his action or decision, file a
written notice to the Collector with a copy furnished to the Commissioner of his intention to
appeal the action or decision of the Collector to the Commissioner. Thereupon the Collector shall
forthwith transmit all the records of the proceedings to the Commissioner, who shall approve,
modify or reverse the action or decision of the Collector and take such steps and make such
orders as may be necessary to give effect to his decision. Provided, That when an appeal is filed
beyond the period herein prescribed, the same shall be deemed dismissed.
If in any seizure proceedings, the Collector renders a decision adverse to the Government, such
decision shall automatically be reviewed by the Commissioner and the records of the case shall
be elevated within five (5) days from the promulgation of the decision of the Collector. The
Commissioner shall render a decision on the automatic appeal within thirty (30) days from
receipts of the records of the case. If the Collector's decision is reversed by the Commissioner,
the decision of the Commissioner shall be final and executory. However, if the Collector's
decision is affirmed, or if within thirty (30) days from receipt of the record of the case by the
Commissioner no decision is rendered of the decision involves imported articles whose
144

published value is five million pesos (P5,000,000) or more, such decision shall be deemed
automatically appealed to the Secretary of Finance and the records of the proceedings shall be
elevated within five (5) days from the promulgation of the decision of the Commissioner or of
the Collector under appeal, as the case may be. Provided, further, That if the decision of the
Commissioner or of the Collector under appeal, as the case may be, is affirmed by the Secretary
of Finance, or if within thirty (30) days from receipt of the records of the proceedings by the
Secretary of Finance, no decision is rendered, the decision of the Secretary of Finance, or of the
Commissioner, or of the Collector under appeal, as the case may be, shall become final and
executory.
xxxx
Section 2402 of RA 1937 further provides:
Section 2402. Review by Court of Appeals. - The party aggrieved by a ruling of the
Commissioner in any matter brought before him upon protest or by his action or ruling in any
case of seizure may appeal to the Court of Tax Appeals, in the manner and within the period
prescribed by law and regulations.
Clearly, what is appealable to the CTA are cases involving protest or seizure, which is not the
subject of BAR's appeal in these cases. BAR's actions, including seeking an audience with the
Secretary of Finance,[30] as well as writing to the Executive Secretary and the Office of the
President, are part of the administrative process to question the validity of the issuance of an
administrative regulation, that is, of CAO 1-2005, entitled Amendments to Customs
Administrative Order No. 7-92 (Rules and Regulations Governing the Overtime Pay and Other
Compensations Related Thereto Due to Customs Personnel at the NAIA).
CAO 1-2005 was issued pursuant to Section 608 of the TCCP which provides:
Section 608. Commissioner to Make Rules and Regulations. - The Commissioner shall, subject to
the approval of the Secretary of Finance, promulgate all rules and regulations necessary to
enforce the provisions of this Code. x x x
The jurisdiction over the validity and constitutionality of rules and regulations issued by the
Commissioner under Section 608 of the TCCP lies before the regular courts. It is not within the
jurisdiction of the Office of the President or the CTA. Hence, the Office of the President erred in
holding that BAR's appeal was filed late because BAR can still raise the issue before the regular
courts.
Verification and Certification
of Non-Forum Shopping
The Office of the President, et al. allege that the Court of Appeals should have dismissed the
petition because of BAR's failure to comply fully with the requirements of verification and
certification of non-forum shopping.
We agree with the Court of Appeals in its liberal interpretation of the Rules. Verification of a
pleading is a formal, not jurisdictional, requirement.[31] The requirement is simply a condition
affecting the form of the pleading and non-compliance with the requirement does not render the
pleading fatally defective.[32]
145

As regards the certification of non-forum shopping, this Court may relax the rigid application of
the rules to afford the parties the opportunity to fully ventilate their cases on the merits.[33] This is
in line with the principle that cases should be decided only after giving all parties the chance to
argue their causes and defenses.[34] Technicality and procedural imperfections should not serve as
basis of decisions and should not be used to defeat the substantive rights of the other party.[35]
Estoppel and Laches
The Office of the President, et al. allege that BAR is guilty of estoppel and laches because it did
not question CAO 7-92 which had been in effect since 1992. The Office of the President, et al.
argue that a direct attack of CAO 1-2005 is a collateral attack of CAO 7-92 since CAO 7-92 is
the main administrative regulation enacted to implement Section 3506 of the TCCP.
The argument has no merit.
BAR is not questioning the validity of CAO 7-92 or Section 3506 of the TCCP. BAR is
questioning the validity of CAO 1-2005 on the following grounds: (1) that it was approved in
violation of BAR's right to due process because its approval did not comply with the required
publication notice under Section 9(2), Chapter I, Book VII, of the Administrative Code of the
Philippines; (2) that CAO 1-2005 inappropriately based its justification on the declining value of
the Philippine peso versus the U.S. dollar when services of the BOC are rendered without
spending any foreign currency; and (3) that the increase in BOC rates aggravates the already
high operating cost paid by the airlines which are still reeling from the impact of consecutive
negative events such as SARS, Iraqi war, avian flu and the unprecedented increase in fuel prices.
BAR's objection to CAO 1-2005 could not be considered a direct attack on CAO 7-92 because
BAR was merely objecting to the amendments to CAO 7-92. BAR did not question the validity
of CAO 7-92 itself. Even during the pendency of these cases before the Court of Appeals, BAR
members continued to pay the rates prescribed under CAO 7-92. It was only upon the
promulgation of the Court of Appeals' Decision declaring CAO 7-92 and CAO 1-2005
unconstitutional that BAR recommended to its members to stop paying the charges imposed by
the BOC.
Hence, BAR is not estopped from questioning CAO 1-2005 on the ground alone that it did not
question the validity of CAO 7-92.
Constitutionality of CAO 7-92, CAO 1-2005
and Section 3506 of the TCCP
The Office of the President, et al. allege that the Court of Appeals acted beyond its jurisdiction
when it passed upon the validity of CAO 7-92 and Section 3506 of the TCCP.
We do not agree with the Office of the President, et al.
Section 8, Rule 51 of the 1997 Rules of Civil Procedure also states:
Section 8. Questions that may be decided. - No error which does not affect the jurisdiction over
the subject matter or the validity of the judgment appealed from or the proceedings therein, will
be considered unless stated in the assignment of errors, or closely related to or dependent on an
146

assigned error and properly argued in the brief, save as the court may pass upon plain errors and
clerical errors.
The Court of Appeals deemed it necessary to rule on the issue for the proper determination of
these cases. The Court has ruled that the Court of Appeals is imbued with sufficient authority and
discretion to review matters, not otherwise assigned as errors on appeal, if it finds that their
consideration is necessary in arriving at a complete and just resolution of the case or to serve the
interests of justice or to avoid dispensing piecemeal justice.[36] Further, while it is true that the
issue of constitutionality must be raised at the first opportunity, this Court, in the exercise of
sound discretion, can take cognizance of the constitutional issues raised by the parties in
accordance with Section 5(2)(a), Article VII of the 1987 Constitution.[37]
The Court has further ruled:
When an administrative regulation is attacked for being unconstitutional or invalid, a party may
raise its unconstitutionality or invalidity on every occasion that the regulation is being enforced.
For the Court to exercise its power of judicial review, the party assailing the regulation must
show that the question of constitutionality has been raised at the earliest opportunity. This
requisite should not be taken to mean that the question of constitutionality must be raised
immediately after the execution of the state action complained of. That the question of
constitutionality has not been raised before is not a valid reason for refusing to allow it to be
raised later. A contrary rule would mean that a law, otherwise unconstitutional, would lapse into
constitutionality by the mere failure of the proper party to promptly file a case to challenge the
same.[38]
Section 3506 of the TCCP provides:
Section 3506. Assignment of Customs Employees to Overtime Work. - Customs employees may
be assigned by a Collector to do overtime work at rates fixed by the Commissioner of Customs
when the service rendered is to be paid by the importers, shippers or other persons served. The
rates to be fixed shall not be less than that prescribed by law to be paid to employees of private
enterprise.
We do not agree with the Court of Appeals in excluding airline companies, aircraft owners, and
operators from the coverage of Section 3506 of the TCCP. The term "other persons served" refers
to all other persons served by the BOC employees. Airline companies, aircraft owners, and
operators are among other persons served by the BOC employees. As pointed out by the OSG,
the processing of embarking and disembarking from aircrafts of passengers, as well as their
baggages and cargoes, forms part of the BOC functions. BOC employees who serve beyond the
regular office hours are entitled to overtime pay for the services they render.
The Court of Appeals ruled that, applying the principle of ejusdem generis, airline companies,
aircraft owners, and operators are not in the same category as importers and shippers because an
importer "brings goods to the country from a foreign country and pays custom duties" while a
shipper is "one who ships goods to another; one who engages the services of a carrier of goods;
one who tenders goods to a carrier for transportation." However, airline passengers pass through
the BOC to declare whether they are bringing goods that need to be taxed. The passengers cannot
leave the airport of entry without going through the BOC. Clearly, airline companies, aircraft
owners, and operators are among the persons served by the BOC under Section 3506 of the
TCCP.
147

The overtime pay of BOC employees may be paid by any of the following: (1) all the taxpayers
in the country; (2) the airline passengers; and (3) the airline companies which are expected to
pass on the overtime pay to passengers. If the overtime pay is taken from all taxpayers, even
those who do not travel abroad will shoulder the payment of the overtime pay. If the overtime
pay is taken directly from the passengers or from the airline companies, only those who benefit
from the overtime services will pay for the services rendered. Here, Congress deemed it proper
that the payment of overtime services shall be shouldered by the "other persons served" by the
BOC, that is, the airline companies. This is a policy decision on the part of Congress that is
within its discretion to determine. Such determination by Congress is not subject to judicial
review.
We do not agree with the Court of Appeals that Section 3506 of the TCCP failed the
completeness and sufficient standard tests. Under the first test, the law must be complete in all its
terms and conditions when it leaves the legislature such that when it reaches the delegate, the
only thing he will have to do is to enforce it.[39] The second test requires adequate guidelines or
limitations in the law to determine the boundaries of the delegate's authority and prevent the
delegation from running riot.[40] Contrary to the ruling of the Court of Appeals, Section 3506 of
the TCCP complied with these requirements. The law is complete in itself that it leaves nothing
more for the BOC to do: it gives authority to the Collector to assign customs employees to do
overtime work; the Commissioner of Customs fixes the rates; and it provides that the payments
shall be made by the importers, shippers or other persons served. Section 3506 also fixed the
standard to be followed by the Commissioner of Customs when it provides that the rates shall not
be less than that prescribed by law to be paid to employees of private enterprise.
Contrary to the ruling of the Court of Appeals, BOC employees rendering overtime services are
not receiving double compensation for the overtime pay, travel and meal allowances provided for
under CAO 7-92 and CAO 1-2005. Section 3506 provides that the rates shall not be less than that
prescribed by law to be paid to employees of private enterprise. The overtime pay, travel and
meal allowances are payment for additional work rendered after regular office hours and do not
constitute double compensation prohibited under Section 8, Article IX(B) of the 1987
Constitution[41] as they are in fact authorized by law or Section 3506 of the TCCP.
BAR raises the alleged failure of BOC to publish the required notice of public hearing and to
conduct public hearings to give all parties the opportunity to be heard prior to the issuance of
CAO 1-2005 as required under Section 9(2), Chapter I, Book VII of the Administrative Code of
the Philippines. Section 9(2) provides:
Sec. 9. Public Participation. - (1) If not otherwise required by law, an agency shall, as far as
practicable, publish or circulate notices of proposed rules and afford interested parties the
opportunity to submit their views prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have
been published in a newspaper of general circulation at least two (2) weeks before the first
hearing thereon.
(3) In cases of opposition, the rules on contested cases shall be observed.
BAR's argument has no merit.
148

The BOC created a committee to re-evaluate the proposed increase in the rate of overtime pay
and for two years, several meetings were conducted with the agencies concerned to discuss the
proposal.BAR and the Airline Operators Council participated in these meetings and
discussions. Hence, BAR cannot claim that it was denied due process in the imposition of the
increase of the overtime rate. CAO 1-2005 was published in the Manila Standard, a newspaper of
general circulation in the Philippines on 18 February 2005[42] and while it was supposed to take
effect on 5 March 2005, or 15 days after its publication, the BOC-NAIA still deferred BAR's
compliance until 16 March 2005.
WHEREFORE, we DENY the petition in G.R. No. 193247. We GRANT the petition in G.R.
No. 194276 and SET ASIDE the 9 July 2009 Decision and 26 October 2010 Resolution of the
Court of Appeals in CA-G.R. SP No. 103250. Petitioner Bureau of Customs is DIRECTED to
implement CAO 1-2005 immediately.
SO ORDERED.
Carpio, (Chairperson), Brion,Del Castillo,*** Perez, and Sereno, JJ.
Endnotes:
*

Originally represented by Hon. Eduardo Ermita.

**

Originally represented by Hon. Margarito B. Teves.

***

Designated as Acting Member per Special Order No. 1077 dated 12 September 2011.

****

[1]

Originally represented by Hon. Napoleon Morales.

Under Rule 45 of the 1997 Rules of Civil Procedure.

[2]

Rollo (G.R. No. 193247), pp. 41-70. Penned by Associate Justice Vicente S.E. Veloso with Associate
Justices Jose L. Sabio, Jr. and Ricardo R. Rosario, concurring.
[3]

Id. at 79-80. Penned by Associate Justice Vicente S.E. Veloso with Associate Justices Normandie B.
Pizarro and Ricardo R. Rosario, concurring.
[4]

Rollo (G.R. No. 194276), pp. 134-139. Penned by Associate Justice Vicente S.E. Veloso with Associate
Justices Normandie B. Pizarro and Francisco P. Acosta, concurring.
[5]

Id. at 198. Through then Commissioner George M. Jereos.

[6]

Rules and Regulations Governing the Overtime Services and Pay, Travelling, Board and Lodging
Expenses and/or Meal Allowance at the Ninoy Aquino International Airport.
[7]

Through then Secretary Juanita P. Amatong.

[8]

Section 3506. Assignment of Customs Employees to Overtime Work. - Custom employees may be
assigned by a Collector to do overtime work at rates fixed by the Commissioner of Customs when the
service rendered is to be paid for by importers, shippers, or other persons served. The rates to be fixed
shall not be less than that prescribed by law to be paid to employees of private enterprise.
[9]

Section 608. Commissioner to Make Rules and Regulations. - The Commissioner shall, subject to the
approval of the Secretary of Finance, promulgate all rules and regulations necessary to enforce the
149

provisions of this Code. x x x


[10]

Rollo (G.R. No. 194276), pp. 167-168.

[11]

Id. at 664-665, 211-218.

[12]

Id. at 220-221.

[13]

Id. at 159-166. Signed by Manuel B. Gaite, Deputy Executive Secretary for Legal Affairs by authority
of the Executive Secretary.
[14]

Id. at 156-157.

[15]

Rollo (G.R. No. 193247), pp. 653-655. Penned by Associate Justice Vicente S.E. Veloso with Associate
Justice Edgardo P. Cruz and Ricardo R. Rosario, concurring.
[16]

Rollo (G.R. No. 194276), p. 132.

[17]

Rollo (G.R. No. 193247), pp. 22-23.

[18]

Rollo (G.R. No. 194276), pp. 241-243. Penned by Associate Justice Vicente S.E. Veloso with Associate
Justices Normandie B. Pizarro and Ricardo R. Rosario, concurring.
[19]

Id. at 41-43.

[20]

Francisco, Jr. v. The House of Representatives, 460 Phil. 830 (2003).

[21]

Rollo (G.R. No. 193247), pp. 642-647.

[22]

Id. at 643-644.

[23]

Heirs of Geronimo Restivera v. De Guzman, 478 Phil. 592 (2004).

[24]

Id.

[25]

Id.

[26]

Rollo (G.R. No. 193247), p. 20.

[27]

Prescribing Rules and Regulations Governing Appeals to the Office of the President of the Philippines.

[28]

An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level
of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose
Certain Sections of Republic Act No. 1125, as Amended, Otherwise Known as The Law Creating the
Court of Tax Appeals, And For Other Purposes.
[29]

An Act to Revise and Codify the Tariff and Customs Law of the Philippines.

[30]

Rollo (G.R. No. 194276), p. 107.

[31]

Millennium Erectors Corporation v. Magallanes, G.R. No. 184362, 15 November 2010, 634 SCRA
708.
[32]

Id.
150

[33]

Benedicto v. Lacson, G.R. No. 141508, 5 May 2010, 620 SCRA 82.

[34]

Id.

[35]

Id.

[36]

Demafelis v. Court of Appeals, G.R. No. 152164, 23 November 2007, 538 SCRA 305.

[37]

Section 5. The Supreme Court shall have the following powers:

xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement,
law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
xxxx
[38]

Moldex Realty, Inc. v. Housing and Land Use Regulatory Board, G.R. No. 149719, 21 June 2007, 525
SCRA 198, 204.
[39]

Gerochi v. Department of Energy, G.R. No. 159796, 17 July 2007, 527 SCRA 696.

[40]

Id.

[41]

Section 8. No elective or appointive public officer or employee shall receive additional, double, or
indirect compensation, unless specifically authorized by law, nor accept without the consent of the
Congress, any present, emolument, office or title of any kind from any foreign government.
xxxx
[42]

Rollo (G.R. No. 194276), p. 198.

151

SECOND DIVISION
[G.R. No. 180006 : September 28, 2011]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. FORTUNE
TOBACCO CORPORATION, RESPONDENT.
DECISION
BRION, J.:
Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of Court
by petitioner Commissioner of Internal Revenue (CIR), assailing the decision dated July 12,
2007[1] and the resolution dated October 4, 2007,[2] both issued by the Court of Tax Appeals
(CTA) en banc in CTA E.B. No. 228.
BACKGROUND FACTS
Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products.
Prior to January 1, 1997, the excises taxes on these products were in the form of ad
valorem taxes, pursuant to Section 142 of the 1977 National Internal Revenue Code (1977 Tax
Code).
Beginning January 1, 1997, Republic Act No. (RA) 8240[3] took effect and a shift from ad
valorem to specific taxes was made. Section 142(c) of the 1977 Tax Code, as amended by RA
8240, reads in part:
Sec. 142. Cigars and cigarettes. -- x x x.
(c) Cigarettes packed by machine. -- There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:
(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 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;
(3) If the net retail price (excluding the excise tax and the value-added 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;
(4) If the net retail price (excluding the excise tax and the [value]-added tax) is below Five pesos
(P5.00) per pack, the tax shall be One peso (P1.00) per pack.
xxxx
The specific tax from any brand of cigarettes within the next three (3) years of effectivity of
this Act shall not be lower than the tax [which] is due from each brand on October 1, 1996:
152

Provided, however, That in cases where the specific 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.
xxxx
The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4)
hereof, shall be increased by twelve percent (12%) on January 1, 2000. [emphases ours]
To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue
Regulation No. (RR) 1-97 whose Section 3(c) and (d) echoed the above-quoted portion of
Section 142 of the 1977 Tax Code, as amended.[4]
The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue Code of
1997 (1997 Tax Code), and Section 142, as amended by RA 8240, was renumbered as Section
145.
This time, to implement the 12% increase in specific taxes mandated under Section 145 of the
1997 Tax Code and again pursuant to its rule-making powers, the CIR issued RR 17-99, which
reads:
Section 1. New Rates of Specific Tax. The specific tax rates imposed under the following sections
are hereby increased by twelve percent (12%) and the new rates to be levied, assessed, and
collected are as follows:
Section Description of Articles
145

Present Specific Tax


Rates (Prior to January
1, 2000)

New Specific Tax Rates


(Effective January 1,
2000)

CIGARS and CIGARETTES


B) Cigarettes Packed by Machine
(1) Net Retail Price (excluding VAT
P12.00/pack
& Excise) exceeds P10.00 per pack
(2) Net Retail Price (excluding VAT
& Excise) is P6.51 up to P10.00 per P8.00/pack
pack
(3) Net Retail Price (excluding VAT
& Excise) is P5.00 to P6.50 per
P5.00/pack
pack
(4) Net Retail Price (excluding VAT
P1.00/pack
& Excise) is below P5.00 per pack

P13.44/pack
P8.96/pack
P5.60/pack
P1.12/pack

Provided, however, that the new specific tax rate for any existing brand of cigars [and]
cigarettes packed by machine, distilled spirits, wines and fermented liquors shall not be
lower than the excise tax that is actually being paid prior to January 1, 2000. [emphasis
ours]
153

THE FACTS OF THE CASE


Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco) paid in
advance excise taxes for the year 2003 in the amount of P11.15 billion, and for the period
covering January 1 to May 31, 2004 in the amount of P4.90 billion.[5]
In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR for
erroneously and/or illegally collected taxes in the amount of P491 million.[6] Without waiting
for the CIR's action on its claim, Fortune Tobacco filed with the CTA a judicial claim for tax
refund.[7]
In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune Tobacco and
granted its claim for refund.[8] The CTA First Division's ruling was upheld on appeal by the
CTA en banc in its decision dated July 12, 2007.[9] The CIR's motion for reconsideration of the
CTA en banc'sdecision was denied in a resolution dated October 4, 2007.[10]
THE ISSUE
Fortune Tobacco's claim for refund of overpaid excise taxes is based primarily on what it
considers as an "unauthorized administrative legislation" on the part of the CIR.
Specifically,it assails the proviso in Section 1 of RR 17-99 that requires the payment of the
"excise tax actually being paid prior to January 1, 2000" if this amount is higher than the new
specific tax rate,i.e., the rates of specific taxes imposed in 1997 for each category of cigarette,
plus 12%. It claimed that by including the proviso, the CIR went beyond the language of the law
and usurped Congress' power. As mentioned, the CTA sided with Fortune Tobacco and allowed
the latter to claim the refund.
The CIR disagrees with the CTA's ruling and assails it before this Court through the present
petition for review on certiorari. The CIR posits that the inclusion of the proviso in Section 1
of RR 17-99 was made to carry into effect the law's intent and is well within the scope of his
delegated legislative authority.[11] He claims that the CTA's strict interpretation of the law
ignored Congress' intent "to increase the collection of excise taxes by increasing specific tax
rates on `sin' products."[12] He cites portions of the Senate's deliberation on House Bill No. 7198
(the precursor of RA 8240) that conveyed the legislative intent to increase the excise taxes being
paid.[13]
The CIR points out that Section 145(c) of the 1997 Tax Code categorically declares that "[t]he
excise tax from any brand of cigarettes within the [three-year transition period from January 1,
1997 to December 31, 1999] shall not be lower than the tax, which is due from each brand on
October 1, 1996." He posits that there is no plausible reason why the new specific tax rates due
beginning January 1, 2000 should not be subject to the same rule as those due during the
transition period. To the CIR, the adoption of the "higher tax rule" during the transition period
unmistakably shows the intent of Congress not to lessen the excise tax collection. Thus, the CTA
should have construed the ambiguity or omission in Section 145(c) in a manner that would
uphold the law's policy and intent.
Fortune Tobacco argues otherwise. To it, Section 145(c) of the 1997 Tax Code read and
interpreted as it is written; it imposes a 12% increase on the rates of excise taxes provided under
sub-paragraphs (1), (2), (3), and (4) only; it does not say that the tax due during the transition
154

period shall continue to be collected if the amount is higher than the new specific tax rates. It
contends that the "higher tax rule" applies only to the three-year transition period to offset the
burden caused by the shift from ad valorem to specific taxes.
THE COURT'S RULING
Except for the tax period and the amounts involved,[14] the case at bar presents the same issue that
the Court already resolved in 2008 in CIR v. Fortune Tobacco Corporation.[15] In the
2008 Fortune Tobacco case, the Court upheld the tax refund claims of Fortune Tobacco after
finding invalid the proviso in Section 1 of RR 17-99. We ruled:
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 thead 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.[16]
Following the principle of stare decisis,[17] our ruling in the present case should no longer come
as a surprise. The proviso in Section 1 of RR 17-99 clearly went beyond the terms of the law it
was supposed to implement, and therefore entitles Fortune Tobacco to claim a refund of the
overpaid excise taxes collected pursuant to this provision.
The amount involved in the present case and the CIR's firm insistence of its arguments
nonetheless compel us to take a second look at the issue, but our findings ultimately lead us to
the same conclusion. Indeed, we find more reasons to disagree with the CIR's construction of
the law than those stated in our 2008 Fortune Tobacco ruling, which was largely based on the
application of the rules of statutory construction.
Raising government revenue is not the
sole objective of RA 8240
That RA 8240 (incorporated as Section 145 of the 1997 Tax Code) was enacted to raise
government revenues is a given fact, but this is not the sole and only objective of the law.[18]
Congressional deliberations show that the shift from ad valorem to specific taxes introduced by
the law was also intended to curb the corruption that became endemic to the imposition of ad
valorem taxes.[19] Since ad valorem taxes were based on the value of the goods, the prices of the
goods were often manipulated to yield lesser taxes. The imposition of specific taxes, which are
based on the volume of goods produced, would prevent price manipulation and also cure the
unequal tax treatment created by the skewed valuation of similar goods.
155

Rule of uniformity of taxation violated by


the proviso in Section 1, RR 17-99
The Constitution requires that taxation should be uniform and equitable.[20] Uniformity in
taxation requires that all subjects or objects of taxation, similarly situated, are to be treated alike
both in privileges and liabilities.[21] This requirement, however, is unwittingly violated when the
proviso in Section 1 of RR 17-99 is applied in certain cases. To illustrate this point, we consider
three brands of cigarettes, all classified as lower-priced cigarettes under Section 145(c)(4) of the
1997 Tax Code, since their net retail price is below P5.00 per pack:

Brand[22]

(E)
(A)
(B)
(D)
(C)
Net
Retail
Ad
New Specific New Specific
Specific Tax
Price per ValoremTax Specific Tax
Tax imposing Tax Due by
Due Jan 1997
pack Due prior to under Section
12% increase Jan 2000 per
to Dec 1999
Jan 1997
145(C)(4)
by Jan 2000 RR 17-99

Camel KS
4.71
Champion M 4.56
100
Union
4.64
American
Blend

5.50
3.30

1.00/pack
1.00/pack

5.50
3.30

1.12/pack
1.12/pack

5.50
3.30

1.09

1.00/pack

1.09

1.12/pack

1.12

Although the brands all belong to the same category, the proviso in Section 1, RR 17-99
authorized the imposition of different (and grossly disproportionate) tax rates (see column [D]).
It effectively extended the qualification stated in the third paragraph of Section 145(c) of the
1997 Tax Codethat was supposed to apply only during the transition period:
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[.]
In the process, the CIR also perpetuated the unequal tax treatment of similar goods that was
supposed to be cured by the shift from ad valorem to specific taxes.
The omission in the law in fact reveals the legislative
intent not to adopt the "higher tax rule"
The CIR claims that the proviso in Section 1 of RR 17-99 was patterned after the third
paragraph of Section 145(c) of the 1997 Tax Code. Since the law's intent was to increase
revenue, it found no reason not to apply the same "higher tax rule" to excise taxes due after the
transition period despite the absence of a similar text in the wording of Section 145(c). What the
CIR misses in his argument is that he applied the rule not only for cigarettes, but also for cigars,
distilled spirits, wines and fermented liquors:

156

Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes
packed by machine, distilled spirits, wines and fermented liquors shall not be lower than the
excise tax that is actually being paid prior to January 1, 2000.
When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these products are
read, however, there is nothing similar to the third paragraph of Section 145(c) that can be found
in the provisions imposing excise taxes on distilled spirits (Section 141[23]) and wines (Section
142[24]). In fact, the rule will also not apply to cigars as these products fall under Section 145(a).
[25]

Evidently, the 1997 Tax Code's provisions on excise taxes have omitted the adoption of certain
tax measures. To our mind, these omissions are telling indications of the intent of
Congress not to adopt the omitted tax measures; they are not simply unintended lapses in the
law's wording that, as the CIR claims, are nevertheless covered by the spirit of the law. Had the
intention of Congress been solely to increase revenue collection, a provision similar to the third
paragraph of Section 145(c) would have been incorporated in Sections 141 and 142 of the 1997
Tax Code. This, however, is not the case.
We note that Congress was not unaware that the "higher tax rule" is a proviso that should ideally
apply to the increase after the transition period (as the CIR embodied in the proviso in Section 1
of RR 17-99). During the deliberations for the law amending Section 145 of the 1997 Tax Code
(RA 9334), Rep. Jesli Lapuz adverted to the "higher tax rule" after December 31, 1999 when he
stated:
This bill serves as a catch-up measure as government attempts to collect additional revenues due
it since 2001. Modifications are necessary indeed to capture the loss proceeds and prevent further
erosion in revenue base. x x x. As it is, it plugs a major loophole in the ambiguity of the law as
evidenced by recent disputes resulting in the government being ordered by the courts to refund
taxpayers. This bill clarifies that the excise tax due on the products shall not be lower than the
tax due as of the date immediately prior to the effectivity of the act or the excise tax due as of
December 31, 1999.[26]
This remark notwithstanding, the final version of the bill that became RA 9334 contained no
provision similar to the proviso in Section 1 of RR 17-99 that imposed the tax due as of
December 31, 1999 if this tax is higher than the new specific tax rates. Thus, it appears that
despite its awareness of the need to protect the increase of excise taxes to increase government
revenue, Congress ultimately decided against adopting the "higher tax rule.
WHEREFORE, in view of the foregoing, the petition is DENIED. The decision dated July 12,
2007 and the resolution dated October 4, 2007 of the Court of Tax Appeals in CTA E.B. No. 228
areAFFIRMED. No pronouncement as to costs.
SO ORDERED.
Del Castillo,** Perez, Mendoza,*** and Sereno, JJ., concur.
Brion,* J., Acting Chairperson.

157

Endnotes:
*

Designated as Acting Chairperson in lieu of Associate Justice Antonio T. Carpio, per Special
Order No. 1083 dated September 13, 2011.
**

Designated as Additional Member of the Second Division in lieu of Associate Justice Antonio
T. Carpio, per Special Order No. 1084 dated September 13, 2011.
***

Designated as Additional Member of the Second Division in lieu of Associate Justice


Bienvenido L. Reyes, per Special Order No. 1107 dated September 27, 2011.
[1]

Penned by CTA Justice Juanito C. Castaeda, Jr., and concurred in by CTA Justices Lovell R.
Bautista, Erlina P. Uy, Caesar A. Casanova, and Olga Palanca-Enriquez; rollo, pp. 41-54. CTA
Presiding Justice Ernesto D. Acosta dissented from the majority; id. at 55-63.
[2]

Id. at 64-66. CTA Justice Ernesto D. Acosta reiterated his dissent from the majority
opinion; id. at 67-70.
[3]

An Act Amending Sections 138, 139, 140 and 142 of the National Internal Revenue Code, as
amended, and For Other Purposes.
[4]

SEC. 3. Rates and Bases of Tax. - There shall be levied, assessed and collected on cigars and
cigarettes excise tax as follows:
(c) Cigarettes Packed by Machine:
(1) Per pack - P12.00 if the net retail price per pack (exclusive of VAT and excise tax) is over
P10.00;
(2) Per pack - P8.00 if the net retail price per pack (exclusive of VAT and excise tax) is over
P6.50 but not over P10.00;
(3) Per pack - P5.00 if the net retail price per pack (exclusive of VAT and excise tax) is P5.00 but
not over P6.50;
(4) Per pack - P1.00 if the net retail price per pack (exclusive of VAT and excise tax) is below
P5.00.
The specific tax from any brand of cigarettes within the next three (3) years of effectivity of this
Act shall not be lower than the tax which is due from each brand on October 1, 1996: Provided,
however, That in cases where the specific tax rates imposed in paragraph (C), sub-paragraphs
(1), (2), (3) and (4) herein above, 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: (a) fifty
percent (50%) of the increase shall be effective in 1997; and (b) one hundred percent (100%) of
the increase shall be effective in 1998.
(d) Beginning January 1, 2000, the rates of specific tax on cigars and cigarettes under paragraphs
(A) and (C), sub-paragraphs (1), (2), (3) and (4) hereof, shall be increased by twelve percent
(12%).
158

[5]

Rollo, p. 45.

[6]

Ibid.

[7]

Id. at 46-47.

[8]

The CIR's motion for reconsideration of the CTA First Division's decision dated May 26, 2006
was denied in a resolution dated November 15, 2006; id. at 46-47.
[9]

Supra note 1.

[10]

Supra note 2.

[11]

Rollo, p. 209.

[12]

Ibid.

[13]

The CIR referred to the exchange between Senator Juan Ponce Enrile and Senators Neptali
Gonzales and Franklin Drilon; Records of the Senate, No. 33, Volume II, October 16, 1996.
[14]

The 2008 Fortune Tobacco case involved refund of excise taxes amounting to
P680,387,025.00 for the period of January 2000 to December 2001; and P355,385,920 for the
period of January to December 2002.
[15]

G.R. Nos. 167274-75, July 21, 2008, 559 SCRA 160.

[16]

Id. at 177.

[17]

Under this doctrine, Courts are "to stand by precedent and not to disturb settled point." Once
the Court has "laid down a principle of law as applicable to a certain state of facts, it will
adhere to that principle, and apply it to all future cases, where facts are substantially the
same; regardless of whether the parties or property are the same"; In the Matter of the
Charges of Plagiarism, etc., Against Associate Justice Mariano C. del Castillo, A.M. No. 10-717-SC, February 8, 2011. Also, in Ting v. Velez-Ting, G.R. No. 166562, March 31, 2009, 582
SCRA 694, 704-705, we said that "based on the principle that once a question of law has been
examined and decided, it should be deemed settled and closed to further argument. Basically, it is
a bar to any attempt to relitigate the same issues, necessary for two simple reasons: economy and
stability. In our jurisdiction, the principle is entrenched in Article 8 of the Civil Code."
[18]

Senator Enrile's sponsorship speech, in fact, identifies three objectives for the enactment of
RA 8240: (1) to evolve a tax structure which will promote fair competition among the players in
the industries concerned and generate buoyant and stable revenue for government; (2) to ensure
that the tax burden is equitably distributed; and (3) to simplify the tax administration and
compliance with the tax laws. Transcript of Senate Deliberations on House Bill No. 7198 dated
October 15, 1996.
[19]

Senate deliberations dated October 16, 1996.

159

[20]

CONSTITUTION, Article VI, Section 28(1).

[21]

British American Tobacco v. Camacho, G.R. No. 163583, April 15, 2009, 585 SCRA 36.

[22]

Camel and Champion are Fortune Tobacco brands; and Union American Blend is a brand of
Sterling Tobacco Corporation. See Annex "D" of the 1997 Tax Code.
[23]

SEC. 141. Distilled Spirits. - On distilled spirits, there shall be collected, subject to the
provisions of Section 133 of this Code, excise taxes as follows:
(a) If produced from the sap of nipa, coconut, cassava, camote, or buri palm or from the juice,
syrup or sugar of the cane, provided such materials are produced commercially in the country
where they are processed into distilled spirits, per proof liter, Eight pesos (P8.00): Provided, That
if produced in a pot still or other similar primary distilling apparatus by a distiller producing not
more than one hundred (100) liters a day, containing not more than fifty percent (50%) of alcohol
by volume, per proof liter, Four pesos (P4.00);
(b) If produced from raw materials other than those enumerated in the preceding paragraph, the
tax shall be in accordance with the net retail price per bottle of seven hundred fifty milliliter (750
ml.) volume capacity (excluding the excise tax and the value-added tax) as follows:
(1) Less than Two hundred and fifty pesos (P250) - Seventy-five pesos (P75), per proof liter;
(2) Two hundred and fifty pesos (P250) up to Six hundred and Seventy-Five pesos (P675) - One
hundred and fifty pesos (P150), per proof liter; and
(3) More than Six hundred and seventy-five pesos (P675) - Three hundred pesos (P300), per
proof liter.
(c) Medicinal preparations, flavoring extracts, and all other preparations, except toilet
preparations, of which, excluding water, distilled spirits for the chief ingredient, shall be subject
to the same tax as such chief ingredient.
This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits,
and the tax shall attach to this substance as soon as it is in existence as such, whether it be
subsequently separated as pure or impure spirits, or transformed into any other substance either
in the process of original production or by any subsequent process.
"Spirits or distilled spirits" is the substance known as ethyl alcohol, ethanol or spirits of wine,
including all dilutions, purifications and mixtures thereof, from whatever source, by whatever
process produced, and shall include whisky, brandy, rum, gin and vodka, and other similar
products or mixtures.
"Proof spirits" is liquor containing one-half (1/2) of its volume of alcohol of a specific gravity
of seven thousand nine hundred and thirty-nine ten thousandths (0.7939) at fifteen degrees
centigrade (15OC). A "proof liter" means a liter of proof spirits.
The rates of tax imposed under this Section shall be increased by twelve percent (12%) on
160

January 1, 2000.
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 distilled spirit is sold
on retail in ten (10) major supermarkets in Metro Manila, excluding the amount intended to
cover the applicable excise tax and the value-added tax as of October 1, 1996.
The classification of each brand of distilled spirits based on the average net retail price as of
October 1, 1996, as set forth in Annex "A," shall remain in force until revised by Congress.
[24]

SEC. 142. Wines. - On wines, there shall be collected per liter of volume capacity, the
following taxes:
(a) Sparkling wines/champagnes regardless of proof, if the net retail price per bottle (excluding
the excise tax and the value-added tax) is:
(1) Five hundred pesos (P500) or less - One hundred pesos (P100); and
(2) More than Five hundred pesos (P500) - Three hundred pesos (P300).
(b) Still wines containing fourteen percent (14%) of alcohol by volume or less, Twelve pesos
(P12.00); and
(c) Still wines containing more than fourteen percent (14%) but not more than twenty-five
percent (25%) of alcohol by volume, Twenty-four pesos (P24.00).
Fortified wines containing more than twenty-five percent (25%) of alcohol by volume shall be
taxed as distilled spirits. "Fortified wines" shall mean natural wines to which distilled spirits are
added to increase their alcoholic strength.
The rates of tax imposed under this Section shall be increased by twelve percent (12%) on
January 1, 2000.
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 wine is sold on retail in
ten (10) major supermarkets in Metro Manila, excluding the amount intended to cover the
applicable excise tax and the value-added tax as of October 1, 1996.
The classification of each brand of wines based on its average net retail price as of October 1,
1996, as set forth in Annex "B," shall remain in force until revised by Congress.
[25]

SEC. 145. Cigars and Cigarettes. - (A) Cigars. - There shall be levied, assessed and collected
on cigars a tax of One peso (P1.00) per cigar[.]
[26]

House Deliberations on RA 9334 (House Bill No. 3174), October 27, 2004, p. 19.

161

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 197228

October 8, 2014

DUTY FREE PHILIPPINES, Petitioner,


vs.
BUREAU OF INTERNAL REVENUE, represented by Hon. Anselmo G. Adriano, Acting
Regional Director, Revenue Region No. 8, Makati City, Respondent.
DECISION
SERENO, CJ:
Duty Free Philippines (petitioner) filed a Petition for Review on Certiorari1 under Rule 45 of the
1997 Rules of Civil Procedure assailing the Court of Tax Appeals (CTA) Special First Division's
Decision2 dated 4 June 2010 and Resolution3 dated 9 June 2011 in C.T.A. Case No. 7282.
Petitioner is a merchandising system established by the then Ministry of Tourism (now
Department of Tourism) through the Philippine Tourism Authority (PTA), pursuant to Executive
Order (E.O.) No. 46 dated 4 September 1986.
In a letter dated 7 June 1995,4 petitioner sought a clarification of its exemption from the
expanded withholding tax under Revenue Regulation (R.R.) No. 6-94. It alleged that this request
for clarification was a reiteration of its letter dated 19 October 1994. It argued that as a taxexempt establishment under E.O. No. 46, it should not be subjected to the 1.1/2% expanded
withholding taxes on certain income payments that were withheld by credit card companies in
compliance with R.R. No. 6-94. In relation thereto, petitioner also inquired on the procedure for
the refund of accumulated taxes withheld by credit card companies amounting to P1.8 million as
of 31 December 1994.
In response, respondent issued Bureau of Internal Revenue (BIR) Ruling No. 136-95 on 6
September 1995. Respondent opined that E.O. No. 93 dated 17 December 1986 withdrew all the
tax and duty incentives granted to government and public entities, including petitioner. Hence,
respondent denied the request of petitioner for a refund of the withholding tax on certain
payments made by credit card companies and remitted to the BIR.
Petitioner requested a reconsideration of BIR Ruling No. 136-95 on 10 April 2001 and later
reiterated its request in a letter dated 6 December 2001.

162

On 5 November 2002, respondent denied the request through BIR Ruling No. 38-20025 and ruled
that petitioner, as a division of PTA, was now subject to income tax. Respondent anchored its
ruling on the following grounds: (1) PTA, to which petitioner was attached, was a "government
instrumentality" which, under Section 27(C) of the Tax Code of 1997, was subject to income tax;
(2) PTA was not covered by the exception under Section 32(B)(7)(b) of the Tax Code, since the
term "Government of the Philippines" as used in that provision, did not include "government
instrumentality"; and (3) the exemption was limited only to the value-added tax (VAT) arising
from the importation/purchases of merchandise made by petitioner and subsequently sold
through authorized tax and duty-free shops; thus, the sales of services to petitioner were subject
to VAT pursuant to Section 108 of the Tax Code.
This ruling prompted petitioner to file an appeal with the Department of Finance (DOF) on 23
December 2002. In a Resolution dated 11 April 2003, the DOF, through then Secretary Jose
Isidro Camacho, affirmed BIR Ruling No. 38-2002. Subsequent requests for reconsideration
were likewise denied by the DOF through its then Under secretary Ma. Gracia M. Pulido Tan.
Meanwhile, several assessment notices were sent by respondent to petitioner for deficiency
income tax and VAT covering taxable years 1999 to 2002 in the total amount
ofP1,452,785,087.64. Petitioner filed its protest letters, but the protest was eventually denied by
respondent. Thus, on 4 July 2005, a Petition for Review was filed with the CTA questioning the
aforesaid assessments. The DOT, represented by then Secretary Joseph H. Durano, intervened
and maintained that petitioner was exempt from income tax and VAT.
After trial, the CTA Special First Division rendered the assailed Decision on 4 June 2010. On the
issue of the separate personality of petitioner from PTA, the court ruled that the DOT itself had
established that petitioner was a separate and autonomous sector of the PTA. The CTA Division
likewise found that petitioner was not a tax-exempt entity in the absence of an express grant of
tax exemption. Even prior to E.O. No. 46, the franchise of petitioner under Presidential Decree
(P.D.) No. 11936 required payment of 7% ofits annual sales in lieu of all other taxes. The CTA
Division held that P.D. Nos. 11777 and 19318 effectively withdrew PTAs exemptions under
Section 1 of P.D. No. 1400.9 The Fiscal Incentives Review Board (FIRB) restored some tax
incentives to petitioner, but limited these incentives only to "taxes and duties arising out of
merchandise imported/purchased by Duty Free Philippines and subsequently sold by it through
authorized tax and duty-free shops."10
As to the issue of the assessed tax deficiencies, the tax court found petitioner liable to pay the
aggregate amount of 1,036,956,477.90 representing income tax and VAT deficiencies, plus
deficiency and delinquency interests. The availment of tax amnesty by petitioner was noted by
the court. But in the absence of documents showing full compliance with the requirements of
Republic Act (R.A.) No. 9480,11 the court refused to affirm petitioners entitlement to the
immunities under the Amnesty Law.
Petitioner and intervenor DOT filed their respective Motions for Reconsideration. In its motion,
petitioner attached some documents to show compliance with the Amnesty Law. However, the
CTA Division found that petitioner had still failed topresent its Statement of Assets, Liabilities
163

and Networth (SALN) as of 31 December 2005, which was a requirement under R.A. No. 9480.
The court likewise found no merit in the motions filed by petitioner and intervenor
DOT.12 Petitioner directly appealed to this Court under Rule 45 of the 1997 Rules of Civil
Procedure, assailing the aforesaid Decision and Resolution of the CTA Division.
In its Petition, petitioner maintains that the CTA gravely erred in dismissing the formers Petition
for Review and requiring it to pay deficiency taxes, as well as deficiency and delinquency
interest, for the following reasons:
A. DFP is a mere merchandising systeme stablished by the DOT through the PTA to
generate foreign exchangeand revenue for the government. All income derived from its
merchandising operations accrue to DOT.
B. Assuming DFP has juridical personality, its tax-exempt status, which is derived from
EO 46 and PD 564,as amended by PD 1400, has not been revoked by PDs 1177 and
1931, as well as EO 93.
C. Assuming DFP has juridical personality, it is exempt from income tax pursuant to
Section 32-(B)-(7)-(B) of the National Internal Revenue Code.
D. Assuming DFP enjoys juridical personality, the sales of services to it are VAT-exempt
considering the nature of its business.
E. Granting that DFP has juridical personality, it must be tax-exempt based on equitable
grounds.
F. It was improper and erroneous for the CTA to rule on whether DFP has validly availed
of the tax amnesty.13
In its Comment, respondent BIR raised the issue of the mode of appeal of petitioner. Respondent
alleged that petitioner chose the wrong mode of appeal by directly availing itself of the remedies
before this Court without first elevating the case to the CTA en bancas provided under Rule 16 of
the Revised Rules of the CTA.
The Office of the Solicitor General (OSG), as a representative of the intervenor DOT in the CTA
Division case, alsofiled a Comment.
THE COURTS RULING
The Petition is flawed with procedural infirmity.
This Court has had a long-standing rule that a courts jurisdiction over the subject matter of an
action is conferred only by the Constitution or by statute.14 In this regard, we find that
petitioners direct appeal to this Court is fatal to its claim.
164

The CTA came into being with the passage of R.A. No. 112515 on 16 June 1954. Section 18 of
this law provides for the manner in which an appeal from the decision of the CTA to the Supreme
Court is made, to wit:
Section 18. Appeal to the Supreme Court. - No judicial proceeding against the Government
involving matters arising under the National Internal Revenue Code, the Customs Law or the
Assessment Law shall be maintained, except as herein provided, until and unless an appeal has
been previously filed with the Court of Tax Appeals and disposed of in accordance with the
provisions of this Act.
Any party adversely affected by any ruling, order or decision of the Court of Tax Appeals may
appeal there from to the Supreme Court by filing with the said Court a notice of appeal and with
the Supreme Court a petition for review, within thirty days from the date he receives notice of
said ruling, order or decision. If, within the aforesaid period, he fails to perfect his appeal, the
said ruling, order or decision shall become final and conclusive against him.
If no decision is rendered by the Court within thirty days from the date a case is submitted for
decision, the party adversely affected by said ruling, order or decision may file with said Court a
notice of his intention to appeal to the Supreme Court, and if, within thirty days from the filing of
said notice of intention to appeal, no decision has as yet been rendered by the Court, the
aggrieved party may filedirectly with the Supreme Court an appeal from said ruling, order
ordecision, notwithstanding the foregoing provisions of this section.
If any ruling, order or decision ofthe Court of Tax Appeals be adverse to the Government, the
Collector of Internal Revenue, the Commissioner of Customs, or the provincial or city Board of
Assessment Appeals concerned may likewise file anappeal therefrom to the Supreme Court in
the manner and within the same period as above prescribed for private parties.
Any proceeding directly affecting any ruling, order or decision of the Court of Tax Appeals shall
have preference over all other civil proceedings except habeas corpus, workmen's compensation
and election cases. (Emphasis supplied)
The enactment of R.A. No. 9282,16 which took effect on 23 April 2004, elevated the rank of the
CTA to the level of a collegiate court, making it a co-equal body of the Court of Appeals. The
appeal of a CTA decision under Section 18 of R.A. No. 1125 was also amended by R.A. No.
9282. Section 19 was added, and it reads as follows:
Section 11. Section 18 of the same Act is hereby amended as follows:
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matter
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except asherein provided, until and unless an appeal has
been previously filed with the CTA and disposed of in accordance with the provisions of this Act.

165

A party adversely affected by a resolution of a Division of the CTA on a motion for


reconsideration or new trial, may file a petition for review with the CTA en banc.
SEC. 19. Review by Certiorari. - A party adversely affected by a decision or ruling of the CTA
enbanc may file with the Supreme Court a verified petition for review on certiorari pursuant to
Rule 45 of the 1997 Rules of Civil Procedure. (Emphasis supplied)
Furthermore, Section 2, Rule 4 of the Revised Rules of the CTA17 reiterates the exclusive
appellate jurisdiction of the CTA en banc relative to the review of the court divisions decisions
or resolutions on motion for reconsideration or new trial in cases arising from administrative
agencies such as the BIR.
Clearly, this Court is without jurisdiction to review decisions rendered by a division of the CTA,
exclusive appellate jurisdiction over which is vested in the CTA en banc.18
In this case, petitioner filed with this Court on 29 July 2011 the instant Petition from the denial of
its Motion for Reconsideration by the Special First Division of the CTA. At thattime, R.A. 9282
was already in effect, and it evidently provides that the CTA en banc shall have exclusive
jurisdiction over appeals from the decision of its divisions. A party adversely affected by the
resolution of the CTA division may, on motion for reconsideration, file a petition for review with
the CTA en banc. Thereafter, the decision or ruling of the CTA en bancmay be elevated to this
Court. Simply stated, no decision of the CTA division may be elevated to this Court under Rule
45 of the 1997 Rules of Civil Procedure without passing through the CTA en banc.1wphi1
In sum, this Court has no jurisdiction to review the Decision and Resolution rendered by the
Special First Division of the CTA. Thus, the instant Petition must fail.
It is worth emphasizing that an appeal is neither a natural nor a constitutional right, but is merely
statutory. The implication of its statutory character is that the party who intends to appeal must
always comply with the procedures and rules governing appeals; or else, the right of appeal may
be lost or squandered.19 Neither is the right to appeal a component of due process. It is a mere
statutory privilege and may be exercised only in the manner prescribed by, and in accordance
with, the provisions of law.20
In light of the above findings, the Court finds no need to further discuss the other issues raised by
the parties.
WHEREFORE, premises considered, the instant Petition is DENIED.
SO ORDERED.
MARIA LOURDES P.A. SERENO
Chief Justice, Chairperson

166

WE CONCUR:
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
LUCAS P. BERSAMIN
Associate Justice

JOSE PORTUGAL PEREZ


Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Court's Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
1

Rollo, pp. 16-48.

Id. at 58-103; penned by Associate Justice Lovell R. Bautista and concurred in by


Associate Justice Caesar A. Casanova (Presiding Justice Ernesto D. Acosta was on leave.)
3

Id. at 106-112; penned by Associate Justice Lovell R. Bautista and concurred in by


Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A. Casanova.
4

ld. at 192.

Id. at 315-322.

Authorizing the Tourist Duty-Free Shops, Inc. toEstablish and Operate Duty and Tax
Free Shops and Requiring It to Pay Franchise Tax in Lieu of All Other Taxes.
7

Revising the Budget Process in Order to Institutionalize the Budgetary Innovations of


the New Society.
8

Directing the Rationalization of Duty and Tax Exemption Privileges Granted to


Government-Owned or Controlled Corporations and All Other Units of Government.

167

Further Amending Presidential Decree 564, as amended, otherwise known as the


Revised Charter of the Philippine Tourism Authority, and for Other Purposes.
10

CTA Special First Division Decision citing FIRB Resolution No. 10-87 dated 22 April
1987, rollo, p.86.
11

An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on


All Unpaid Internal Revenue Taxes imposed by the National Government for taxable year
2005 and prior years.
12

CTA Special First Division Resolution dated 9 June 2011, id. at 106-119.

13

Id. at 27.

14

Sevilleno v. Carilo, 559 Phil 789 (2007).

15

An Act Creating the Court of Tax Appeals.

16

An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating Its
Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging Its
Membership, amending for the purpose certain sections or Republic Act No. 1125, as
amended, otherwise known as the Law Creating the Court of Tax Appeals, and for other
purposes.
17

A.M. No. 05-11-07-CTA, 22 November 2005.

18

Commissioner of Customs v. Gelmart Industries Philippines, Inc., 598 Phil. 740 (2009).

19

Sps. Lebin v. Mirasol, G.R. No. 164255, 7 September 2011, 657 SCRA 35.

20

Boardwalk Business Ventures, Inc. v. Villareal Jr., G.R. No. 181182, 10 April 2013, 695
SCRA 468.

168

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 187485

October 8, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
SAN ROQUE POWER CORPORATION, Respondent.
x-----------------------x
G.R. No. 196113
TAGANITO MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CARPIO, J.:
This Resolution resolves the Motion for Reconsideration and the Supplemental Motion for
Reconsideration filed by San Roque Power Corporation (San Roque) in G.R. No. 187485, the
Comment to the Motion for Reconsideration filed by the Commissioner of Internal Revenue
(CIR) in G.R. No. 187485, the Motion for Reconsideration filed by the CIR in G.R.No. 196113,
and the Comment to the Motion for Reconsideration filed by Taganito Mining Corporation
(Taganito) in G.R. No. 196113.
San Roque prays that the rule established in our 12 February 2013 Decision be given only a
prospective effect, arguing that "the manner by which the Bureau of Internal Revenue (BIR) and
the Court of Tax Appeals(CTA) actually treated the 120 + 30 day periods constitutes an operative
fact the effects and consequences of which cannot be erased or undone."1

169

The CIR, on the other hand, asserts that Taganito Mining Corporation's (Taganito) judicial claim
for tax credit or refund was prematurely filed before the CTA and should be disallowed because
BIR Ruling No. DA-489-03 was issued by a Deputy Commissioner, not by the Commissioner of
Internal Revenue.
We deny both motions.
The Doctrine of Operative Fact
The general rule is that a void law or administrative act cannot be the source of legal rights or
duties. Article 7 of the Civil Code enunciates this general rule, as well as its exception: "Laws are
repealed only by subsequent ones, and their violation or non-observance shall not be excused by
disuse, or custom or practice to the contrary. When the courts declared a law to be inconsistent
with the Constitution, the former shall be void and the latter shall govern. Administrative or
executive acts, orders and regulations shall be valid only when they are not contrary to the laws
or the Constitution."
The doctrine of operative fact is an exception to the general rule, such that a judicial declaration
of invalidity may not necessarily obliterate all the effects and consequences of a void act prior to
such declaration.2 In Serrano de Agbayani v. Philippine National Bank,3 the application of the
doctrine of operative fact was discussed as follows:
The decision now on appeal reflects the orthodox view that an unconstitutional act, for that
matter an executive order or a municipal ordinance likewise suffering from that infirmity, cannot
be the source of any legal rights or duties. Nor can it justify any official act taken under it. Its
repugnancy to the fundamental law once judicially declared results in its being to all intents and
purposes a mere scrap of paper. As the new Civil Code puts it: "When the courts declare a law to
be inconsistent with the Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be valid only when they are not
contrary to the laws of the Constitution." It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or executive act contrary to its terms
cannot survive.
Such a view has support in logic and possesses the merit of simplicity. It may not however be
sufficiently realistic. It does not admit of doubt that prior to the declaration of nullity such
challenged legislative or executive act must have been in force and had to be complied with. This
is so as until after the judiciary, in an appropriate case, declares its invalidity, it is entitled to
obedience and respect. Parties may have acted under it and may have changed their positions.
What could be more fitting than that in a subsequent litigation regard be had to what has been
done while such legislative or executive act was in operation and presumed to be valid in all
respects. It is now accepted as a doctrine that prior to its being nullified, its existence as a fact
must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is
the governmental organ which has the final say on whether or not a legislative or executive
measure is valid, a period of time may have elapsed before it can exercise the power of judicial
170

review that may lead to a declaration of nullity. It would be to deprive the law of its quality of
fairness and justice then, if there be no recognition of what had transpired prior to such
adjudication.
In the language of an American Supreme Court decision: "The actual existence of a statute, prior
to such a determination of unconstitutionality, is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a new judicial declaration.
The effect of the subsequent ruling as to invalidity may have to be considered in various aspects,
with respect to particular relations, individual and corporate, and particular conduct, private and
official." This language has been quoted with approval in a resolution in Araneta v. Hill and the
decision in Manila Motor Co., Inc. v. Flores. An even more recent instance is the opinion of
Justice Zaldivar speaking for the Court in Fernandez v. Cuerva and Co. (Boldfacing and
italicization supplied)
Clearly, for the operative fact doctrine to apply, there must be a "legislative or executive
measure," meaning a law or executive issuance, that is invalidated by the court. From the
passage of such law or promulgation of such executive issuance until its invalidation by the
court, the effects of the law or executive issuance, when relied upon by the public in good faith,
may have to be recognized as valid. In the present case, however, there is no such law or
executive issuance that has been invalidated by the Court except BIR Ruling No. DA-489-03.
To justify the application of the doctrine of operative fact as an exemption, San Roque asserts
that "the BIR and the CTA in actual practice did not observe and did not require refund seekers to
comply with the120+30 day periods."4 This is glaring error because an administrative practice is
neither a law nor an executive issuance. Moreover, in the present case, there is even no such
administrative practice by the BIR as claimed by San Roque.
In BIR Ruling No. DA-489-03 dated 10 December 2003, the Department of Finances One-Stop
Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF-OSS) asked the BIR to rule on
the propriety of the actions taken by Lazi Bay Resources Development, Inc. (LBRDI). LBRDI
filed an administrative claim for refund for alleged input VAT for the four quarters of 1998.
Before the lapse of 120 days from the filing of its administrative claim, LBRDI also filed a
judicial claim with the CTA on 28March 2000 as well as a supplemental judicial claim on 29
September 2000.In its Memorandum dated 13 August 2002 before the BIR, the DOF-OSS
pointed out that LBRDI is "not yet on the right forum in violation of the provision of Section
112(D) of the NIRC" when it sought judicial relief before the CTA. Section 112(D) provides for
the 120+30 day periods for claiming tax refunds.
The DOF-OSS itself alerted the BIR that LBRDI did not follow the120+30 day periods. In BIR
Ruling No. DA-489-03, Deputy Commissioner Jose Mario C. Buag ruled that "a taxpayerclaimant need not wait for the lapse of the 120-day period before it could seek judicial relief with
the CTA by way of Petition for Review." Deputy Commissioner Buag, citing the 7February
2002 decision of the Court of Appeals (CA) in Commissioner of Internal Revenue v. Hitachi
171

Computer Products (Asia) Corporation5 (Hitachi), stated that the claim for refund with the
Commissioner could be pending simultaneously with a suit for refund filed before the CTA.
Before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003, there was no
administrative practice by the BIR that supported simultaneous filing of claims. Prior to BIR
Ruling No. DA-489-03, the BIR considered the 120+30 day periods mandatory and
jurisdictional.
Thus, prior to BIR Ruling No. DA-489-03, the BIRs actual administrative practice was to
contest simultaneous filing of claims at the administrative and judicial levels, until the CA
declared in Hitachi that the BIRs position was wrong. The CAs Hitachi decision is the basis of
BIR Ruling No. DA-489-03 dated 10 December 2003 allowing simultaneous filing. From then
on taxpayers could rely in good faith on BIR Ruling No. DA-489-03 even though it was
erroneous as this Court subsequently decided in Aichi that the 120+30 day periods were
mandatory and jurisdictional.
We reiterate our pronouncements in our Decision as follows:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section112(C) expressly grants the Commissioner 120 days
within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x x x the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents."
Following the verbalegis doctrine, this law must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting
for the Commissioners decision within the 120-daymandatory and jurisdictional period. The
CTA will have no jurisdiction because there will be no "decision" or "deemed a denial" decision
of the Commissioner for the CTA to review. In San Roques case, it filed its petition with the
CTA a mere 13 days after it filed its administrative claim with the Commissioner. Indisputably,
San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner x x x.
xxxx
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer.1wphi1 One of the conditions for a judicial claim of refund or credit under
the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus,
strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether
before, during, or after the effectivity of the Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi

172

doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and
jurisdictional.6
San Roques argument must, therefore, fail. The doctrine of operative fact is an argument for the
application of equity and fair play. In the present case, we applied the doctrine of operative fact
when we recognized simultaneous filing during the period between 10 December 2003, when
BIR Ruling No. DA-489-03 was issued, and 6 October 2010, when this Court promulgated Aichi
declaring the 120+30 day periods mandatory and jurisdictional, thus reversing BIR Ruling No.
DA-489-03.
The doctrine of operative fact is in fact incorporated in Section 246 of the Tax Code, which
provides:
SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance with the preceding Sections or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive application
if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the
following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or
any document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Under Section 246, taxpayers may rely upon a rule or ruling issued by the Commissioner from
the time the rule or ruling is issued up to its reversal by the Commissioner or this Court. The
reversal is not given retroactive effect. This, in essence, is the doctrine of operative fact. There
must, however, be a rule or ruling issued by the Commissioner that is relied upon by the taxpayer
in good faith. A mere administrative practice, not formalized into a rule or ruling, will not suffice
because such a mere administrative practice may not be uniformly and consistently applied. An
administrative practice, if not formalized as a rule or ruling, will not be known to the general
public and can be availed of only by those within formal contacts with the government agency.
Since the law has already prescribed in Section 246 of the Tax Code how the doctrine of
operative fact should be applied, there can be no invocation of the doctrine of operative fact
other than what the law has specifically provided in Section 246. In the present case, the rule or
ruling subject of the operative fact doctrine is BIR Ruling No. DA-489-03 dated 10 December
2003. Prior to this date, there is no such rule or ruling calling for the application of the operative
fact doctrine in Section 246. Section246, being an exemption to statutory taxation, must be
applied strictly against the taxpayer claiming such exemption.

173

San Roque insists that this Court should not decide the present case in violation of the rulings of
the CTA; otherwise, there will be adverse effects on the national economy. In effect, San Roques
doomsday scenario is a protest against this Courts power of appellate review. San Roque cites
cases decided by the CTA to underscore that the CTA did not treat the 120+30 day periods as
mandatory and jurisdictional. However, CTA or CA rulings are not the executive issuances
covered by Section 246 of the Tax Code, which adopts the operative fact doctrine. CTA or CA
decisions are specific rulings applicable only to the parties to the case and not to the general
public. CTA or CA decisions, unlike those of this Court, do not form part of the law of the land.
Decisions of lower courts do not have any value as precedents. Obviously, decisions of lower
courts are not binding on this Court. To hold that CTA or CA decisions, even if reversed by this
Court, should still prevail is to turn upside down our legal system and hierarchy of courts, with
adverse effects far worse than the dubious doomsday scenario San Roque has conjured.
San Roque cited cases7 in its Supplemental Motion for Reconsideration to support its position
that retroactive application of the doctrine in the present case will violate San Roques right to
equal protection of the law. However, San Roque itself admits that the cited cases never
mentioned the issue of premature or simultaneous filing, nor of compliance with the 120+30 day
period requirement. We reiterate that "any issue, whether raised or not by the parties, but not
passed upon by the Court, does not have any value as precedent."8 Therefore, the cases cited by
San Roque to bolster its claim against the application of the 120+30 day period requirement do
not have any value as precedents in the present case.
Authority of the Commissioner
to Delegate Power
In asking this Court to disallow Taganitos claim for tax refund or credit, the CIR repudiates the
validity of the issuance of its own BIR Ruling No. DA-489-03. "Taganito cannot rely on the
pronouncements in BIR Ruling No. DA-489-03, being a mere issuance of a Deputy
Commissioner."9
Although Section 4 of the 1997 Tax Code provides that the "power to interpret the provisions of
this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance," Section 7 of the same Code does
not prohibit the delegation of such power. Thus, "the Commissioner may delegate the powers
vested in him under the pertinent provisions of this Code to any or such subordinate officials
with the rank equivalent to a division chief or higher, subject to such limitations and restrictions
as may be imposed under rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner."
WHEREFORE, we DENY with FINALITY the Motions for Reconsideration filed by San Roque
Power Corporation in G.R. No. 187485,and the Commissioner of Internal Revenue in G.R. No.
196113.
SO ORDERED.
174

ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice
(Pls. see Dissenting Opinion)
PRESBITERO J. VELASCO, JR.
Associate Justice

TERESITA J. LEONARDO-DE
CASTRO
Associate Justice

ARTURO D. BRION
Associate Justice

DIOSDADO M. PERALTA
Associate Justice

LUCAS P. BERSAMIN
Associate Justice

MARIANO C. DEL CASTILLO


Associate Justice

ROBERTO A. ABAD
Associate Justice

(On leave)
MARTIN S. VILLARAMA, JR.*
Associate Justice

JOSE PORTUGAL PEREZ


Associate Justice

JOSE C. MENDOZA
Associate Justice

BIENVENIDO L. REYES
Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

See Separate dissenting & concurring opinion


MARVIC MARIO VICTOR F. LEONEN
Associate Justice
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Resolution had been reached in consultation before the case was assigned to the writer of the
opinion of the Court.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
175

On leave.

G.R. No. 187485, Motion for Reconsideration, p. 3.

See Republic v. Court of Appeals, G.R. No. 79732, 8 November 1993, 227 SCRA 509.

148 Phil. 443, 447-448 (1971). Emphasis added. Citations omitted.

Emphasis supplied. G.R. No. 187485, Motion for Reconsideration, p. 7.

CA-G.R. SP No. 63340.

Commissioner of Internal Revenue v. San Roque Power Corporation, G.R. No. 187485,
12February 2013, 690 SCRA 336, 387 and 398-399.
7

Western Mindanao Power Corporation v. Commissioner of Internal Revenue, G.R. No.


181136, 13June 2012, 672 SCRA 350; Southern Philippines Power Corporation v.
Commissioner of Internal Revenue, G.R. No. 179632, 19 October 2011, 659 SCRA 658;
Microsoft Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 180173, 6
April 2011, 647 SCRA 398; KEPCO Philippines Corporation v. Commissioner of Internal
Revenue, G.R. No. 179961, 31 January 2011,641 SCRA 70; Silicon Philippines, Inc. v.
Commissioner of Internal Revenue, G.R. No. 172378,17 January 2011, 639 SCRA 521;
Hitachi Global Storage Technologies Philippines Corp. v. Commissioner of Internal
Revenue, G.R. No. 174212, 20 October 2010, 634 SCRA 205; Intel Technology
Philippines, Inc. v. Commissioner of Internal Revenue, 550 Phil. 751 (2007);
Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, 535 Phil. 481
(2006);
Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.),
Inc., 503 Phil. 823(2005); Commissioner of Internal Revenue v. Cebu Toyo

176

THIRD DIVISION
[G.R. No. 179632 : October 19, 2011]
SOUTHERN PHILIPPINES POWER CORPORATION, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
ABAD, J.:
The case is about the sufficiency of sales invoices and receipts, which do not have the words
"zero-rated" imprinted on them, to evidence zero-rated transactions, a requirement in taxpayer's
claim for tax credit or refund.
The Facts and the Case
Petitioner Southern Philippines Power Corporation (SPP), a power company that generates and
sells electricity to the National Power Corporation (NPC), applied with the Bureau of Internal
Revenue (BIR) for zero-rating of its transactions under Section 108(B)(3) of the National
Internal Revenue Code (NIRC). The BIR approved the application for taxable years 1999 and
2000.
On June 20, 2000 SPP filed a claim with respondent Commissioner of Internal Revenue (CIR)
for a P5,083,371.57 tax credit or refund for 1999. On July 13, 2001 SPP filed a second claim of
P6,221,078.44 in tax credit or refund for 2000. The amounts represented unutilized input VAT
attributable to SPP's zero-rated sale of electricity to NPC.
On September 29, 2001, before the lapse of the two-year prescriptive period for such actions,
SPP filed with the Court of Tax Appeals (CTA) Second Division a petition for review covering
its claims for refund or tax credit. The petition claimed only the aggregate amount of
P8,636,126.75 which covered the last two quarters of 1999 and the four quarters in 2000.
In his Comment on the petition, the CIR maintained that SPP is not entitled to tax credit or
refund since (a) the BIR was still examining SPP's claims for the same; (b) SPP failed to
substantiate its payment of input VAT; (c) its right to claim refund already prescribed, and (d)
SPP has not shown compliance with Section 204(c) in relation to Section 229 of the NIRC as
amended and Revenue Regulation (RR) 5-87 as amended by RR 3-88.
In a Decision dated April 26, 2006, the Second Division[1] denied SPP's claims, holding that its
zero-rated official receipts did not correspond to the quarterly VAT returns, bearing a difference
of P800,107,956.61. Those receipts only support the amount of P118,945,643.88. Further, these
receipts do not bear the words "zero-rated" in violation of RR 7-95. The Second Division denied
SPP's motion for reconsideration on August 15, 2006.
On appeal, the CTA En Banc affirmed the Second Division's decision dated July 31, 2007.[2]
The CTAEn Banc rejected SPP's contention that its sales invoices reflected the words "zerorated," pointing out that it is on the official receipts that the law requires the printing of such
words. Moreover, SPP did not report in the corresponding quarterly VAT return the sales subject
177

of its zero-rated receipts. The CTA En Banc denied SPP's motion for reconsideration on
September 19, 2007.
The Issues Presented
The case presents the following issues:
1. Whether or not the CTA En Banc correctly rejected the invoices that SPP presented and, thus,
ruled that it failed to prove the zero-rated or effectively zero-rated sales that it made;
2. Whether or not the CTA En Banc correctly ruled that the words "BIR-VAT Zero Rate
Application Number 419.2000" imprinted on SPP's invoices did not comply with RR 7-95;
3. Whether or not the CTA En Banc correctly held that SPP should have declared its zero-rated
sales in its VAT returns for the subject period of the claim; and
4. Whether or not the CTA En Banc correctly ruled that SPP was not entitled to a tax refund or
credit.
The Court's Rulings
One and Two. The Court reiterated in San Roque Power Corporation v. Commissioner of
Internal Revenue[3] the following criteria governing claims for refund or tax credit under Section
112(A) of the NIRC:
(1) The taxpayer is VAT-registered;
(2) The taxpayer is engaged in zero-rated or effectively zero-rated sales;
(3) The input taxes are due or paid;
(4) The input taxes are not transitional input taxes;
(5) The input taxes have not been applied against output taxes during and in the succeeding
quarters;
(6) The input taxes claimed are attributable to zero-rated or effectively zero-rated sales;
(7) For zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds have been duly accounted for in accordance with
BSP rules and regulations;
(8) Where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales,
and the input taxes cannot be directly and entirely attributable to any of these sales, the input
taxes shall be proportionately allocated on the basis of sales volume; and
(9) The claim is filed within two years after the close of the taxable quarter when such sales were
made.
While acknowledging that SPP's sale of electricity to NPC is a zero-rated transaction,[4] the
CTA En Banc ruled that SPP failed to establish that it made zero-rated sales. True, SPP submitted
official receipts and sales invoices stamped with the words "BIR VAT Zero-Rate Application
Number 419.2000" but the CTA En Banc held that these were not sufficient to prove the fact of
sale.
But NIRC Section 110 (A.1) provides that the input tax subject of tax refund is to be evidenced
by a VAT invoice "or" official receipt issued in accordance with Section 113. Section 113 has
been amended by Republic Act (R.A.) 9337 but it is the unamended version that covers the
period when the transactions in this case took place. It reads:
178

Section 113. Invoicing and Accounting Requirements for VAT-Registered Persons. A. Invoicing Requirements. - A VAT-registered person shall, for every sale, issue aninvoice or
receipt. In addition to the information required under Section 237, the following information
shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. (Emphasis supplied)
The above does not distinguish between an invoice and a receipt when used as evidence of a
zero-rated transaction. Consequently, the CTA should have accepted either or both of these
documents as evidence of SPP's zero-rated transactions.
Section 237 of the NIRC also makes no distinction between receipts and invoices as evidence of
a commercial transaction:
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices.- All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or
commercial invoices, prepared at least in duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise or nature of service: Provided, however,
That in the case of sales, receipts or transfers in the amount of One hundred pesos (P100.00) or
more, or regardless of the amount, where the sale or transfer is made by a person liable to valueadded tax to another person also liable to value-added tax; or where the receipt is issued to cover
payment made as rentals, commissions, compensations or fees, receipts or invoices shall be
issued which shall show the name, business style, if any, and address of the purchaser, customer
or client: Provided, further, That where the purchaser is a VAT-registered person, in addition to
the information herein required, the invoice or receipt shall further show the Taxpayer
Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the purchaser, customer or client at the
time the transaction is effected, who, if engaged in business or in the exercise of profession, shall
keep and preserve the same in his place of business for a period of three (3) years from the close
of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept
and preserved by the issuer, also in his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax
from compliance with the provisions of this Section. (Emphasis supplied)
The Court held in Seaoil Petroleum Corporation v. Autocorp Group[5] that business forms like
sales invoices are recognized in the commercial world as valid between the parties and serve as
memorials of their business transactions. And such documents have probative value.
Three. The CTA also did not accept SPP's official receipts due to the absence of the words "zerorated" on it. The omission, said that court, made the receipts non-compliant with RR 7-95,
specifically Section 4.108.1. But Section 4.108.1 requires the printing of the words "zero-rated"
only on invoices, not on official receipts:
179

Section 4.108-1. Invoicing Requirements. -- All VAT-registered persons shall, for every sale or
lease of goods or properties or services, issue duly registered receipts or sales or commercial
invoices which must show:
1.

The name, TIN and address of seller;

2.

Date of transaction;

3.

Quantity, unit cost and description of merchandise or nature of service;

4.

The name, TIN, business style, if any, and address of the VAT-registered purchaser,
customer or client;

5.

The word "zero-rated" imprinted on the invoice covering zero-rated sales;and

6.

The invoice value or consideration.


x x x x (Emphasis supplied)
Actually, it is R.A. 9337 that in 2005 required the printing of the words "zero-rated" on receipts.
But, since the receipts and invoices in this case cover sales made from 1999 to 2000, what
applies is Section 4.108.1 above which refers only to invoices.
A claim for tax credit or refund, arising out of zero-rated transactions, is essentially based on
excess payment. In zero-rating a transaction, the purpose is not to benefit the person legally
liable to pay the tax, like SPP, but to relieve exempt entities like NPC which supplies electricity
to factories, offices, and homes, from having to shoulder the tax burden that ultimately would be
passed to the public.
The principle of solutio indebiti should govern this case since the BIR received something that it
was not entitled to. Thus, it has to return the same. The government should not use
technicalities to hold on to money that does not belong to it.[6] Only a preponderance of evidence
is needed to grant a claim for tax refund based on excess payment.[7]
Notably, SPP does no other business except sell the power it produces to NPC, a fact that the CIR
did not contest in the parties' joint stipulation of facts.[8] Consequently, the likelihood that SPP
would claim input taxes paid on purchases attributed to sales that are not zero-rated is close to
nil.
Four. The Court finds that SPP failed to indicate its zero-rated sales in its VAT returns. But this
is not sufficient reason to deny it its claim for tax credit or refund when there are other
documents from which the CTA can determine the veracity of SPP's claim.
Of course, such failure if partaking of a criminal act under Section 255 of the NIRC could
warrant the criminal prosecution of the responsible person or persons. But the omission does not
furnish ground for the outright denial of the claim for tax credit or refund if such claim is in fact
justified.

180

Five. The CTA denied SPP's claim outright for failure to establish the existence of zero-rated
sales, disregarding SPP's sales invoices and receipts which evidence them. That court did not
delve into the question of SPP's compliance with the other requisites provided under Section 112
of the NIRC.
Consequently, even as the Court holds that SPP's sales invoices and receipts would be sufficient
to prove its zero-rated transactions, the case has to be remanded to the CTA for determination of
whether or not SPP has complied with the other requisites mentioned. Such matter involves
questions of fact and entails the need to examine the records. The Court is not a trier of facts and
the competence needed for examining the relevant accounting books or records is undoubtedly
with the CTA.
WHEREFORE, the Court GRANTS the petition, SETS ASIDE the Court of Tax Appeals En
Bancdecision dated July 31, 2007 and resolution dated September 19, 2007, and REMANDS the
case to the Court of Tax Appeals Second Division for further hearing as stated above.
SO ORDERED.
Velasco, Jr., (Chairperson), Peralta, Abad, Mendoza, and Perlas-Bernabe, JJ.
Endnotes:
[1]

Penned by Associate Justice Juanito C. Castaeda, Jr. with the concurrence of Associate
Justices Erlinda P. Uy and Olga Palanca-Enriquez, rollo, pp. 115-127.
[2]

Penned by Associate Justice Lovell R. Bautista with the concurrence of Associate Justices
Juanito C. Castaeda, Jr., Erlinda P. Uy, Caesar A. Casanova and Olga Palanca-Enriquez.
Presiding Justice Ernesto D. Accosta dissented, id. at 77-101.
[3]

G.R. No. 180345, November 25, 2009, 605 SCRA 536, 555.

[4]

As provided in Section 108(B)(3) of the NIRC, as amended, and in Republic Act 6395, also
known as "An Act Revising the Charter of the National Power Corporation."
[5]

G.R. No. 164326, October 17, 2008, 569 SCRA 387, 395-396.

[6]

State Land Investment Corporation v. Commissioner of Internal Revenue, G.R. No. 171956,
January 18, 2008, 542 SCRA 114, 123.
[7]

Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, G.R. No. 172129,


September 12, 2008, 565 SCRA 154, 166.
[8]

Rollo, p. 113.

181

FIRST DIVISION
[G.R. No. 184428 : November 23, 2011]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. SAN MIGUEL
CORPORATION, RESPONDENT.
DECISION
VILLARAMA, JR., J.:
Elevated before us via a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, is the Decision[1] of the Court of Tax Appeals (CTA) En Banc in
C.T.A. EB No. 360 on a pure question of law, that is, whether the last paragraph of Section 1 of
Bureau of Internal Revenue (BIR) Revenue Regulations No. 17-99 faithfully complies with the
mandate of Section 143 of the Tax Reform Act of 1997.
The facts are undisputed:
Respondent San Miguel Corporation, a domestic corporation engaged in the manufacture and
sale of fermented liquor, produces as one of its products Red Horse beer which is sold in
500-ml. and 1-liter bottle variants.
On January 1, 1998, Republic Act (R.A.) No. 8424 or the Tax Reform Act of 1997 took effect. It
reproduced, as Section 143 thereof, the provisions of Section 140 of the old National Internal
Revenue Code as amended by R.A. No. 8240[2] which became effective on January 1, 1997.
Section 143 of the Tax Reform Act of 1997 reads:
SEC. 143. Fermented Liquor. - There shall be levied, assessed and collected an excise tax on
beer, lager beer, ale, porter and other fermented liquors except tuba, basi, tapuy and similar
domestic fermented liquors in accordance with the following schedule:
(a) If the net retail price (excluding the excise tax and value-added tax) per liter of volume
capacity is less than Fourteen pesos and fifty centavos (P14.50), the tax shall be Six pesos and
fifteen centavos (P6.15) per liter;
(b) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is Fourteen pesos and fifty centavos (P14.50) up to Twenty-two pesos (P22.00), the tax
shall be Nine pesos and fifteen centavos (P9.15) per liter;
(c) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is more than Twenty-two pesos (P22.00), the tax shall be Twelve pesos and fifteen
centavos (P12.15) per liter.
Variants of existing brands which are introduced in the domestic market after the effectivity of
Republic Act No. 8240 shall be taxed under the highest classification of any variant of that
brand.
Fermented liquor which are brewed and sold at micro-breweries or small establishments such as
182

pubs and restaurants shall be subject to the rate in paragraph (c) hereof.
The excise tax from any brand of fermented liquor within the next three (3) years from the
effectivity of Republic Act No. 8240 shall not be lower than the tax which was due from
each brand on October 1, 1996.
The rates of excise tax on fermented liquor under paragraphs (a), (b) and (c) hereof shall
be increased by twelve percent (12%) on January 1, 2000.
x x x x (Emphasis and underscoring supplied.)
Thereafter, on December 16, 1999, the Secretary of Finance issued Revenue Regulations No. 1799increasing the applicable tax rates on fermented liquor by 12% as follows:
SECTION

xxxx
143

DESCRIPTION PRESENT
NEW SPECIFIC
OF
SPECIFIC TAX TAX RATES
ARTICLES
RATES
(Effective
(Prior to January January 1, 2000)
1, 2000)

FERMENTED
LIQUORS
(a) Net Retail
Price per liter
(excluding VAT &
Excise) is less
than P14.50
P6.15/liter

P6.89/liter

P9.15/liter

P10.25/liter

P12.15/liter

P13.61/liter

(b) Net Retail


Price per liter
(excluding VAT &
Excise) is P14.50
up to P22.00

(c) Net Retail


Price per liter
(excluding VAT &
Excise) is more
than P22.00

xxxx

183

This increase, however, was qualified by the last paragraph of Section 1 of Revenue Regulations
No. 17-99 which reads:
Provided, however, that the new specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquors shall not be lower than the
excise tax that is actually being paid prior to January 1, 2000. (Emphasis and underscoring
supplied.)
Now, for the period June 1, 2004 to December 31, 2004, respondent was assessed and paid
excise taxes amounting to P2,286,488,861.58[3] for the 323,407,194 liters of Red Horse beer
products removed from its plants. Said amount was computed based on the tax rate of P7.07/liter
or the tax rate which was being applied to its products prior to January 1, 2000, as the last
paragraph of Section 1 of Revenue Regulations No. 17-99 provided that the new specific tax rate
for fermented liquors "shall not be lower than the excise tax that is actually being paid prior to
January 1, 2000."[4] Respondent, however, later contended that the said qualification in the last
paragraph of Section 1 ofRevenue Regulations No. 17-99 has no basis in the plain wording of
Section 143. Respondent argued that the applicable tax rate was only the P 6.89/liter tax rate
stated in Revenue Regulations No. 17-99, and that accordingly, its excise taxes should have been
only P2,228,275,566.66.
On May 22, 2006, respondent filed before the BIR a claim for refund or tax credit of the amount
of P60,778,519.56[5] as erroneously paid excise taxes for the period of May 22, 2004 to
December 31, 2004. Later, said amount was reduced to P58,213,294.92 because of prescription.
As the petitioner Commissioner of Internal Revenue (CIR) failed to act on the claim, respondent
filed a petition for review with the CTA.[6]
On September 26, 2007,[7] the CTA Second Division granted the petition and ordered petitioner
to refund P58,213,294.92 to respondent or to issue in the latters favor a Tax Credit
Certificate for the said amount for the erroneously paid excise taxes. The CTA held that Revenue
Regulations No. 17-99 modified or altered the mandate of Section 143 of the Tax Reform Act of
1997. The CTA Second Division held,
A reading of Section 143 of the [Tax Reform Act] of 1997, as amended, clearly shows that the
law contemplated two periods with applicable excise tax rate for each one: the first is the threeyear transition period beginning January 1, 1997, the date when RA 8240 took effect, until
December 31, [1999]; and the second is the period thereafter. During the transition period, the
excise tax rate shall not be lower than the tax rate which is due from each brand on
October 1, 1996. After the transitory period, the excise tax rate shall be the figures provided
under paragraphs (a), (b) and (c) of Section 143 of the [Tax Reform Act] of 1997, as
amended, but increased by 12%, regardless of whether such rate is lower or higher than
the tax rate that is actually being paid prior to January 1, 2000.
On the other hand, an analysis of the last paragraph of [Revenue Regulations No.] 17-99 would
reveal that it created a new tax rate or a new requirement when it provided that the new
specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled
spirits, wines and fermented liquors shall not be lower than the excise tax that is actually
being paid prior to January 1, 2000. This is indeed a situation not intended by Section 143
of the [Tax Reform Act] of 1997, as amended, both in letter and in spirit. Rather, it is a clear
contradiction to the import of the law.[8] (Emphasis supplied.)
184

Petitioner sought reconsideration[9] of the above decision, but the CTA Second Division denied
petitioner's motion in a Resolution[10] dated January 17, 2008. Petitioner then filed a Petition for
Review[11] with the CTA En Banc.
On August 7, 2008,[12] the CTA En Banc affirmed the Decision and Resolution of the CTA
Second Division. The CTA En Banc held that "[c]onsidering that there is nothing in the law that
allows the BIR to extend the three-year transitory period, and considering further that there is no
provision in the law mandating that the new specific tax rate should not be lower than the excise
tax that is actually being paid prior to January 1, 2000, the last paragraph of [BIR Revenue
Regulations No.] 17-99 has no basis in law and is inconsistent with the situation contemplated
under the provisions of Section 143 of the [Tax Reform Act of 1997]. It is an unauthorized
administrative legislation and, therefore, invalid.[13]
Undaunted, petitioner filed the instant petition for review on certiorari, raising the sole issue of
whether the CTA committed reversible error in ruling that the provision in the last paragraph of
Section 1 of Revenue Regulations No. 17-99 is an invalid administrative interpretation of Section
143 of the Tax Reform Act of 1997.
Petitioner contends that the last paragraph of Section 1 of Revenue Regulations No. 1799 providing that "the new specific tax rate for any brand of cigars, cigarettes packed by
machine, distilled spirits, wines and fermented liquors shall not be lower than the excise tax that
is actually being paid prior to January 1, 2000," is a valid administrative interpretation of
Section 143 of the Tax Reform Act of 1997. It carries out the legislative intent behind the
enactment of R.A. No. 8240, which is to increase government revenues through the collection of
higher excise taxes on fermented liquor.
Petitioner further points out that Section 143 of the Tax Reform Act of 1997 provides that for 3
years after the effectivity of R.A. No. 8240, i.e., from January 1, 1997 to December 31, 1999, the
excise tax from any brand of fermented liquor shall not be lower than the tax due on October 1,
1996. In the case of respondent's Red Horse beer brand, the applicable tax rate was the
applicable tax rate as of October 1, 1996, i.e., P7.07/liter, which was higher than the rate of
P6.15/liter imposed under Section 143 of the Tax Reform Act of 1997. However, the CTA ruled
that after the 3-year transition period, the 12% increase in the excise tax on fermented liquors
should be based on the rates stated in paragraphs (a), (b), and (c) of Section 143. Applying this
interpretation, the rate of excise tax that may be collected on respondent's Red Horse beer brand
after the 3-year period would only be P6.89/liter, the figure arrived at after adding 12% to the
rate of P6.15/liter imposed in paragraph (a) of Section 143. Petitioner argues that said literal
interpretation of Section 143 defeats the legislative intent behind the shift from the ad valorem
system to the specific tax system, i.e., to raise more revenues from the collection of taxes on the
so-called sin products like alcohol and cigarettes.
Respondent, for its part, maintains the correctness of the CTA's interpretation and stresses that as
already held by this Court in Commissioner of Internal Revenue v. Fortune Tobacco Corporation,
[14]
the last paragraph of Section 1 of Revenue Regulations No. 17-99 finds no support in the clear
and plain wording of Section 143 of the Tax Reform Act of 1997.
We deny the petition for utter lack of merit.

185

Section 143 of the Tax Reform Act of 1997 is clear and unambiguous. It provides for two
periods: the first is the 3-year transition period beginning January 1, 1997, the date when R.A.
No. 8240 took effect, until December 31, 1999; and the second is the period thereafter. During
the 3-year transition period, Section 143 provides that "the excise tax from any brand of
fermented liquor"shall not be lower than the tax which was due from each brand on October 1,
1996." After the transitory period, Section 143 provides that the excise tax rate shall be the
figures provided under paragraphs (a), (b) and (c) of Section 143 but increased by 12%, without
regard to whether such rate is lower or higher than the tax rate that is actually being paid prior to
January 1, 2000 and therefore, without regard to whether the revenue collection starting January
1, 2000 may turn out to be lower than that collected prior to said date. Revenue Regulations No.
17-99, however, created a new tax rate when it added in the last paragraph of Section 1 thereof,
the qualification that the tax due after the 12% increase becomes effective shall not be lower
than the tax actually paid prior to January 1, 2000." As there is nothing in Section 143 of
the Tax Reform Act of 1997 which clothes the BIR with the power or authority to rule that the
new specific tax rate should not be lower than the excise tax that is actually being paid prior to
January 1, 2000, such interpretation is clearly an invalid exercise of the power of the Secretary of
Finance to interpret tax laws and to promulgate rules and regulations necessary for the effective
enforcement of the Tax Reform Act of 1997.[15] Said qualification must, perforce, be struck down
as invalid and of no effect.[16]
It bears reiterating that tax burdens are not to be imposed, nor presumed to be imposed beyond
what the statute expressly and clearly imports, tax statutes being construed strictissimi
juris against the government.[17] In case of discrepancy between the basic law and a rule or
regulation issued to implement said law, the basic law prevails as said rule or regulation cannot
go beyond the terms and provisions of the basic law.[18] It must be stressed that the objective of
issuing BIR Revenue Regulations is to establish parameters or guidelines within which our tax
laws should be implemented, and not to amend or modify its substantive meaning and import.
As held in Commissioner of Internal Revenue v. Fortune Tobacco Corporation,[19]
x x x 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. x x x As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax laws.[20]
Hence, while it may be true that the interpretation advocated by petitioner CIR is in furtherance
of its desire to raise revenues for the government, such noble objective must yield to the clear
provisions of the law, particularly since, in this case, the terms of the said law are clear and leave
no room for interpretation.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated August 7,
2008 of the Court of Tax Appeals in C.T.A. EB No. 360 is AFFIRMED.
No costs.
SO ORDERED.
Corona, C.J., Chairperson, Leonardo-De Castro, Bersamin, Del Castillo, and Villarama,
Jr., JJ.
186

Endnotes:
[1]

Rollo, pp. 30-48. Penned by Associate Justice Lovell R. Bautista with Presiding Justice
Ernesto D. Acosta and Associate Justices Juanito C. Castaneda, Jr., Erlinda P. Uy, Caesar A.
Casanova and Olga Palanca-Enriquez concurring.
[2]

Entitled, "An Act Amending Sections 138, 139, 140 and 142 of the National Internal Revenue
Code, As Amended, and for Other Purposes."
[3]

Rollo, pp. 12, 37; CTA records, pp. 5, 129-130.

[4]

Id. at 33.

[5]

BIR records, p. 30.

[6]

CTA records, pp. 1-13.

[7]

Rollo, pp. 60-73.

[8]

Id. at 70.

[9]

CTA records, pp. 188-215.

[10]

Id. at 234-238.

[11]

CTA En Banc records, pp. 6-36.

[12]

Supra note 1.

[13]

Id. at 46.

[14]

G.R. Nos. 167274-75, July 21, 2008, 559 SCRA 160.

[15]

SEC. 244. Authority of Secretary of Finance to Promulgate Rules and Regulations. - The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code.
[16]

See Commissioner of Internal Revenue v. Fortune Tobacco Corporation, supra note 14.

[17]

Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 107135, February 23, 1999,
303 SCRA 508, 516-517.
[18]

Hijo Plantation, Inc. v. Central Bank, No. L-34526, August 9, 1988, 164 SCRA 192, 199.

[19]

Supra note 14.

[20]

Id. at 185, citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 115349,
April 18, 1997, 271 SCRA 605, 613 and Commissioner of Internal Revenue v. Philippine
187

American Accident Insurance Company, Inc., G.R. No. 141658, March 18, 2005, 453 SCRA 668,
680.

FIRST DIVISION
[G.R. No. 172458 : December 14, 2011]
PHILIPPINE NATIONAL BANK, PETITIONER, VS. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.
DECISION
LEONARDO-DE CASTRO, J.:
This Petition for Review on Certiorari[1] seeks to reverse and set aside the January 27,
2006[2]and April 19, 2006[3] Resolutions of the Court of Tax Appeals En Banc (CTA En
Banc) in C.T.A. E.B. NO. 145, which dismissed outright the Petition for Review filed by the
Philippine National Bank (PNB) dated December 27, 2005 for being filed four days beyond the
additional 15 days granted to file such petition.cralaw
On April 15, 1999, petitioner PNB filed with the Bureau of Internal Revenue (BIR) its Tentative
Return for 1998 with the documents enumerated in the "List of Attachments to Annual Income
Tax Return Calendar Year Ended December 31, 1998" enclosed. On September 30, 1999, PNB
filed its Amended Income Tax Return for 1998, with the corresponding attachments to an
amended annual income tax return appended, including copies of the Certificates and Schedule
of Creditable Withholding Taxes for 1998. PNB likewise filed its Corporate Quarterly Returns
for the calendar year 1998.[4]
On February 8, 2001, PNB filed with respondent Commissioner of Internal Revenue (CIR) an
administrative claim for refund in the amount of ?6,028,594.00, which were payments made in
excess of its income tax liability for 1998.[5]
As BIR did not act upon PNB's claim for refund, PNB, on March 30, 2001, filed with the Second
Division of the Court of Tax Appeals (CTA Division) a Petition for Review,[6] and prayed that it
be refunded or issued a tax credit certificate in the amount of ?6,028,594.00, representing
creditable taxes withheld from PNB's income from the sale of real property, rental income,
commissions, and management fees for the taxable year 1998.
In his Answer,[7] the CIR alleged that PNB's claim for refund/tax credit is subject first to an
investigation and that it failed to establish its right to a refund.
After PNB had rested its case, the CIR manifested that he would not be presenting evidence. The
parties were thereafter required to submit their memoranda.[8]
188

On May 19, 2003, the BIR issued in PNB's favor Tax Credit Certificate No. SN 023837 for ?
4,154,353.42, leaving a balance of ?1,874,240.58 out of PNB's total claim of ?6,028,594.00.
PNB then informed the CTA Division of such tax credit certificate, and manifested that its
acceptance was without prejudice to recovering the balance of its total claim.[9]
Consequently, the CIR filed a Motion,[10] asking that he be allowed to present evidence on PNB's
excluded claim. The CIR argued that the amount of ?1,874,240.58 was disallowed because it
was not remitted to the BIR, as verified by its Regional Accounting Division.[11]
On August 11, 2005, the CTA Division rendered its Decision,[12] the dispositive portion of which
reads:
WHEREFORE, premises considered, the present Petition For Review is hereby
partiallyGRANTED. Respondent is hereby ORDERED to REFUND or ISSUE a Tax Credit
Certificate in favor of herein petitioner in the amount of ?1,428,661.66, representing the latter's
unutilized creditable withholding tax for the year 1998.[13]
The CTA Division held that payments of withholding taxes for a certain taxable year were
creditable to the payee's income tax liability as determined after it had filed its income tax returns
the following year. The CTA Division said that since PNB posted net losses, it was not liable for
any income tax and consequently, the taxes withheld during the course of the taxable year, which
was 1998, while collected legally under Revenue Regulations No. 02-98, Section 2.57 (B),
became untenable and took on the nature of erroneously collected taxes at the end of that year.
The CTA Division averred that while the right to a refund is not automatic and must be
established by sufficient evidence, there is nothing in the Tax Code that would suggest that the
actual remittance of the withholding tax is a condition precedent to claim for a tax refund.
Moreover, the CTA Division added, that the CIR failed to present the certification to prove his
contention of PNB's non-remittance of the disallowed amount. However, the CTA Division
affirmed the disallowance of eight transactions, amounting to ?445,578.92 as they had already
been reported as income for other years, had not been recorded, or were not supported by
pertinent documents.[14]
On September 14, 2005, PNB filed a Motion for Partial Reconsideration,[15] asserting its
entitlement to be refunded the amount of ?445,578.92, by explaining each transaction involved
and pinpointed by the CTA Division. This however was still denied by the CTA Division in its
Resolution[16] dated November 15, 2005, for lack of merit.
Aggrieved, PNB, filed a partial appeal by way of Petition for Review[17] under Section 18 of
Republic Act No. 9282[18] before the CTA En Banc, to review and modify the CTA Division's
August 11, 2005 Decision. This petition was received by the CTA En Banc on December 27,
2005, four days beyond the additional 15 days granted to PNB to file its petition.
Thus, on January 27, 2006, the CTA En Banc issued a Resolution[19] denying due course and
consequently dismissing PNB's petition for the following reasons:
1) The Petition For Review was filed four (4) days late on December 27, 2005, the reglementary
deadline for the timely filing of such petition being December 23, 2005.
Appeal is a statutory privilege and must be exercised in the manner provided by law. Therefore,
189

perfection of an appeal in the manner and within the period prescribed by law is not only
mandatory, but jurisdictional, and non-compliance is fatal having the effect of rendering the
judgment final and executory (Cabellan vs. Court of Appeals, 304 SCRA 119). Not only that, late
appeals deprives the appellate court of jurisdiction to alter the final judgment much less entertain
the appeal (Pedrosa vs. Hill, 257 SCRA 373).
2) The petition is not accompanied by the duplicate original or certified true copies of the
assailed Decision dated August 11, 2005 and Resolution dated November 15, 2005, in violation
of Section 2, Rule 6 of the Revised Rules of the Court of Tax Appeals, in relation to Section 6,
Rule 43 of the Rules of Court.
3) The Petition does not contain an Affidavit of Service, in violation of Section 13, Rule 13 of the
Rules of Court.
In the case of Policarpio vs. Court of Appeals, 269 SCRA 344, 351, the Supreme Court did not
hesitate to dismiss the petition for failure to attach an affidavit of service.
Lastly, Section 7 of Rule 43 of the Rules of Court provides that:
SEC. 7. Effect of failure to comply with requirements.- The failure of the petitioner to comply
with any of the foregoing requirements regarding the payment of the docket and other lawful
fees, the deposit for costs, proof of service of the petition, and the contents of and the documents
which should accompany the petition shall be sufficient ground for the dismissal thereof."
Persistent in its claim, PNB filed a Motion for Reconsideration with Manifestation of
Compliance[20] on February 23, 2006, and answered each ground propounded by the CTA En
Banc in its Resolution.
PNB asserted that its petition was filed on December 23, 2005, which was the last day of the
additional 15-day period granted by the CTA En Banc, via LBC Express, as shown by the copy
of LBC Official Receipt No. 12990350[21] dated December 23, 2005. PNB explained that its
counsel, Atty. Flerida P. Zaballa-Banzuela, accompanied by her administrative assistant, tried to
personally file the petition with the CTA En Banc on December 23, 2005. However, PNB
claimed, that due to heavy traffic, Atty. Zaballa-Banzuela arrived at the CTA office in Quezon
City at 4:30 p.m., just as the CTA personnel were leaving the CTA premises in their shuttle bus.
[22]

PNB attached to its Motion the Affidavit[23] of Christopher Sarmiento, the Security Guard who
was then assigned at the CTA main gate. Sarmiento averred that he did not allow Atty. ZaballaBanzuela to enter the CTA compound because there was no one left to receive her document. He
also alleged that Atty. Zaballa-Banzuela even tried to ask some of the CTA personnel who were
on board the CTA shuttle that passed her by, if they could receive her document, but they
declined. This was corroborated by Atty. Zaballa-Banzuela's administrative assistant, Macrina J.
Cataniag, in her Affidavit,[24] also annexed to PNB's Motion.
PNB argued that while its petition was deposited with LBC Express on December 23, 2005, very
well within the reglementary period, CTA En Banc received it only on December 27, 2005, as
December 24 to 26, 2005 were holidays.[25]

190

Addressing the second ground that the CTA En Banc used to dismiss the petition, PNB said that
its non-submission of the duplicate original or certified true copy of the CTA Division's decision
and resolution was not intended for delay but was "mere inadvertence and unintentional, but an
honest mistake, an oversight, an unintentional omission, and a human error occasioned by too
much pressure of work."[26]
In compliance, PNB attached to its Motion the Affidavit of Service[27] and certified true copies of
the CTA Division's decision and resolution supposed to be attached to its petition before the
CTA En Banc.
On April 19, 2006, the CTA En Banc denied PNB's motion for lack of merit. The CTA En
Banc held that "absent any cogent explanation [to not] comply with the rules, the rules must
apply to the petitioner as they do to all."[28] The CTA En Banc ratiocinated in this wise:
It is a jurisprudential rule that the date [of] delivery of pleadings to a private letter-forwarding
agency is not to be considered as the date of filing thereof in court, and that in such cases, the
date of actual receipt by the court, and not the date of delivery to the private carrier, is deemed
the date of filing of that pleading (Benguet Electric Corporation, Inc. vs. NLRC, 209 SCRA 6061). Clearly, the present Petition For Review was filed four (4) days late.
The instant Petition For Review is an appeal from the decision of the Court in Division.
Accordingly, the applicable rule is that the fifteen-day reglementary period to perfect an appeal is
mandatory and jurisdictional in nature; that failure to file an appeal within the reglementary
period renders the assailed decision final and executory and no longer subject to review
(Armigos vs. Court of Appeals, 179 SCRA 1; Jocson vs. Baguio, 179 SCRA 550). Petitioner had
thus lost its right to appeal from the decision of this Court in Division.[29]
The CTA En Banc added:
Although petitioner subsequently attached to its present motion, certified true copies of the
assailed Decision, dated August 11, 2005, and Resolution, dated November 15, 2005, and the
Affidavit of Service, this did not stop the questioned decision from becoming final and
executory. It has been held that strict compliance with procedural requirements in taking an
appeal cannot be substituted by "good faith compliance". To rule otherwise would defeat the
very purpose of the rules of procedure, i.e., to "facilitate the orderly administration of justice"
(Santos vs. Court of Appeals, 198 SCRA 806, 810; Ortiz vs. Court of Appeals, 299 SCRA 712).[30]
PNB thereafter filed a Petition for Review[31] before this Court on June 16, 2006, which was the
last day of the additional thirty days it was granted[32] to file such petition.
In order to convince this Court to allow its petition, PNB posits the following arguments:
I
THE HONORABLE COURT OF TAX APPEALS EN BANC ERRED IN FAILING TO
CONSIDER THE EXPLANATION SUBMITTED BY PNB IN ITS MOTION FOR
RECONSIDERATION WITH MANIFESTATION OF COMPLIANCE WITH RESPECT TO
THE FILING OF THE PETITION ON DECEMBER 23, 2005 (THE DUE DATE FOR FILING
THEREOF) VIA LBC SERVICE INSTEAD OF REGISTERED MAIL WITH RETURN CARD.
191

II
THE PROCEDURAL LAPSE OBSERVED BY THE HONORABLE COURT OF TAX
APPEALS SHOULD BE LIBERALLY CONSTRUED IN THE INTEREST OF
SUBSTANTIAL JUSTICE, AS POSTULATED IN VARIOUS SUPREME COURT
DECISIONS.
III
THE PETITION FILED BY PNB BEFORE THE CTA EN BANC RAISES A MERITORIOUS
LEGAL DEFENSE WARRANTING JUDICIAL RESOLUTION.[33]
PNB once again narrated the circumstances leading to its counsel's decision to mail its petition
for review via LBC Express, a private letter-forwarding company, instead of registered mail. It
claims that since this Court has repeatedly pronounced the primacy of substantive justice over
technical rules, then its procedural lapses should likewise be excused, especially since no
substantial rights of the CIR are affected.
This Court's Ruling
The only issue to be resolved here is whether or not this Court should require the CTA En
Banc to give due course to C.T.A. E.B. No. 145 despite PNB's failure to comply with the formal
requirements of the Revised Rules of the Court of Tax Appeals and the Rules of Court in filing a
petition for review with the CTA En Banc.
Not having been successfully convinced by PNB, we answer the above issue in the negative.
This Court would like to underscore the fact that PNB failed to comply with not just one,
but threeprocedural rules when it filed its petition for review with the CTA En Banc.
Petition was filed late
It is stated under Section 3, Rule 1 of the Revised Rules of the Court of Tax Appeals that the
Rules of Court shall apply suppletorily. Thus, the manner in which petitions are filed before the
CTA is also covered by the relevant provision of the Rules of Court, to wit:
Rule 13. x x x.
xxxx
Sec. 3. Manner of filing. The filing of pleadings, appearances, motions, notices, orders,
judgments and all other papers shall be made by presenting the original copies thereof, plainly
indicated as such, personally to the clerk of court or by sending them by registered mail. In the
first case, the clerk of court shall endorse on the pleading the date and hour of filing. In the
second case, the date of the mailing of motions, pleadings, or any other papers or payments or
deposits, as shown by the post office stamp on the envelope or the registry receipt, shall be
considered as the date of their filing, payment, or deposit in court. The envelope shall be
attached to the record of the case. (Emphases ours.)
To recall, PNB filed its petition with the CTA En Banc four days beyond the extended period
192

granted to it to file such petition. PNB argues that it was filed on time since it was mailed on the
last day of the extended period, which was on December 23, 2005. It has been established that a
pleading "filed by ordinary mail or by private messengerial service x x x is deemed filed on the
day it is actually received by the court, and not on the day it was mailed or delivered to the
messengerial service."[34] In Benguet Electric Cooperative, Inc. v. National Labor Relations
Commission,[35] we said:
The established rule is that the date of delivery of pleadings to a private letter-forwarding agency
is not to be considered as the date of filing thereof in court, and that in such cases, the date of
actual receipt by the court, and not the date of delivery to the private carrier, is deemed the date
of filing of that pleading.[36]
It is worthy to note that PNB already asked for an additional period of 15 days within which to
file its petition for review with the CTA En Banc. This period expired on December 23, 2005.
Knowing fully well that December 23, 2005 not only fell on a Friday, followed by three
consecutive non-working days, but also belonged to the busiest holiday season of the year, PNB
should have exercised more prudence and foresight in filing its petition.
It is, however, curious why PNB chose to risk the holiday traffic in an effort to personally file its
petition with the CTA En Banc, when it already filed a copy to the other party, the
CIR, via registered mail.[37] Considering the circumstances, it would have been more logical for
PNB to send its petition to the CTA En Banc on the same occasion it sent a copy to the CIR,
especially since that day was already the last day given to PNB to file its petition. Moreover,
PNB offered no justification as to why it sent its petition via ordinary mail instead of registered
mail. "Service by ordinary mail is allowed only in instances where no registry service exists."[38]
Rule 13, Section 7 reads:
Sec. 7. Service by mail. Service by registered mail shall be made by depositing the copy in the
post office, in a sealed envelope, plainly addressed to the party or his counsel at his office, if
known, otherwise at his residence, if known, with postage fully pre-paid, and with instructions to
the postmaster to return the mail to the sender after ten (l0) days if undelivered. If no registry
service is available in the locality of either the sender or the addressee, service may be done
by ordinary mail. (Emphasis ours.)
Petition was not accompanied by the
required duplicate originals or certified
true copies of the decision and resolution
being assailed, and Affidavit of Service
The following provisions are instructive:
Section 2, Rule 6 of the Revised Rules of the Court of Tax Appeals:
SEC. 2. Petition for review; contents. - The petition for review shall contain allegations showing
the jurisdiction of the Court, a concise statement of the complete facts and a summary statement
of the issues involved in the case, as well as the reasons relied upon for the review of the
challenged decision. The petition shall be verified and must contain a certification against forum
shopping as provided in Section 3, Rule 46 of the Rules of Court. A clearly legible duplicate
original or certified true copy of the decision appealed from shall be attached to the
petition. (Emphasis supplied.)
193

Section 4(b), Rule 8 of the Revised Rules of the Court of Tax Appeals:
Sec. 4(b) An appeal from a decision or resolution of the Court in Division on a motion for
reconsideration or new trial shall be taken to the Court by petition for review as provided in Rule
43 of the Rules of Court. The Court en banc shall act on the appeal.
Sections 6, Rule 43 of the Rules of Court:
Sec. 6. Contents of the petition. The petition for review shall (a) state the full names of the
parties to the case, without impleading the court or agencies either as petitioners or respondents;
(b) contain a concise statement of the facts and issues involved and the grounds relied upon for
the review; (c) be accompanied by a clearly legible duplicate original or a certified true copy
of the award, judgment, final order or resolution appealed from, together with certified true
copies of such material portions of the record referred to therein and other supporting papers; and
(d) contain a sworn certification against forum shopping as provided in the last paragraph of
section 2, Rule 42. The petition shall state the specific material dates showing that it was filed
within the period fixed herein. (Emphasis ours.)
This Court has already upheld the mandatory character of attaching duplicate originals or
certified true copies of the assailed decision to a petition for review.[39] Moreover, pursuant to
Section 7, Rule 43 of the Rules of Court, non-compliance with such mandatory requirement is a
sufficient ground to dismiss the petition, viz:
Sec. 7. Effect of failure to comply with requirements. The failure of the petitioner to comply with
any of the foregoing requirements regarding the payment of the docket and other lawful fees, the
deposit for costs, proof of service of the petition, and the contents of and the documents
which should accompany the petition shall be sufficient ground for the dismissal
thereof. (Emphasis ours.)
Anent the failure to attach the Affidavit of Service, Section 13, Rule 13 of the Rules of Court
provides:
Sec. 13. Proof of service. Proof of personal service shall consist of a written admission of the
party served, or the official return of the server, or the affidavit of the party serving, containing a
full statement of the date, place and manner of service. If the service is by ordinary mail, proof
thereof shall consist of an affidavit of the person mailing of facts showing compliance with
section 7 of this Rule. If service is made by registered mail, proof shall be made by such affidavit
and the registry receipt issued by the mailing office. The registry return card shall be filed
immediately upon its receipt by the sender, or in lieu thereof the unclaimed letter together with
the certified or sworn copy of the notice given by the postmaster to the addressee.
Although the failure to attach the required affidavit of service is not fatal if the registry receipt
attached to the petition clearly shows service to the other party, [40] it must be remembered that
this was not the only rule of procedure PNB failed to satisfy. In Suarez v. Judge Villarama, Jr.
[41]
we said:
It is an accepted tenet that rules of procedure must be faithfully followed except only when, for
persuasive and weighting reasons, they may be relaxed to relieve a litigant of an injustice
commensurate with his failure to comply with the prescribed procedure. Concomitant to a
194

liberal interpretation of the rules of procedure, however, should be an effort on the part of the
party invoking liberality to adequately explain his failure to abide by the rules.[42]
This Court agrees with the CTA En Banc that PNB has not demonstrated any cogent reason for
this Court to take an exception and excuse PNB's blatant disregard of the basic procedural rules
in a petition for review. Furthermore, the timely perfection of an appeal is a mandatory
requirement. One cannot escape the rigid observance of this rule by claiming oversight, or in
this case, lack of foresight. Neither can it be trifled with as a "mere technicality" to suit the
interest of a party. Verily, the periods for filing petitions for review and for certiorari are to be
observed religiously. "Just as [the] losing party has the privilege to file an appeal within the
prescribed period, so does the winner have the x x x right to enjoy the finality of the
decision."[43] In Air France Philippines v. Leachon,[44]we held:
Procedural rules setting the period for perfecting an appeal or filing an appellate petition are
generally inviolable. It is doctrinally entrenched that appeal is not a constitutional right but a
mere statutory privilege. Hence, parties who seek to avail of the privilege must comply with the
statutes or rules allowing it. The requirements for perfecting an appeal within the reglementary
period specified in the law must, as a rule, be strictly followed. Such requirements are
considered indispensable interdictions against needless delays, and are necessary for the orderly
discharge of the judicial business. For sure, the perfection of an appeal in the manner and within
the period set by law is not only mandatory, but jurisdictional as well. Failure to perfect an
appeal renders the judgment appealed from final and executory.[45]
While it is true that the Court may deviate from the foregoing rule, this is true only if the appeal
is meritorious on its face. The Court has not hesitated to relax the procedural rules in order to
serve and achieve substantial justice. "In the circumstances obtaining in this case however, the
occasion does not warrant the desired relaxation."[46] PNB has not offered any meritorious legal
defense to justify the suspension of the rules in its favor. The CTA Division has taken into
consideration all of the evidence submitted by the PNB, and actually allowed it a refund of ?
1,428,661.66, in addition to the ?4,154,353.42 the BIR already gave. The CTA Division
explained why it disallowed the remaining balance of ?445,578.92 in its Decision dated August
11, 2005. When PNB moved to reconsider this decision, it did not offer the CTA any other
evidence or explanation aside from the ones the CTA Division had already evaluated.
Nevertheless, the CTA carefully considered and deliberated anew PNB's grounds, albeit they
found them lacking in merit. Thus, it cannot be said that PNB was deprived of its day in court,
as in fact, it was given all the time it had asked for.
While PNB may believe that it has a meritorious legal defense, this must be weighed against the
need to halt an abuse of the flexibility of procedural rules. It is well established that faithful
compliance with the Rules of Court is essential for the prevention and avoidance of unnecessary
delays and for the organized and efficient dispatch of judicial business.[47]cralaw
WHEREFORE, the petition is hereby DENIED for lack of merit.
SO ORDERED.
Corona, C.J., (Chairperson), Bersamin, Del Castillo, and Villarama, Jr., JJ., concur.
Endnotes:

195

[1] Rule 45 of the 1997 Rules of Court.


[2] Rollo, pp. 12-14; Ordered by Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C.
Castaeda, Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, and Olga Palanca-Enriquez.
[3] Id. at 8-11.
[4] Id. at 79.
[5] Records (CTA Division), p. 6.
[6] Id. at 1-5.
[7] Id. at 375-378.
[8] Rollo, p. 22.
[9] Records (CTA Division), pp. 579-580.
[10] Id. at 589-592.
[11] Rollo, p. 86.
[12] Id. at 77-92; penned by Associate Justice Olga Palanca-Enriquez with Associate Justices Juanito C.
Castaeda, Jr. and Erlinda P. Uy, concurring.
[13] Id. at 91.
[14] Id. at 84-90.
[15] Records (CTA Division), pp. 691-695.
[16] Rollo, pp. 93-94.
[17] Records (CTA En Banc), pp. 7-16.
[18] An act expanding the jurisdiction of the Court of Tax Appeals (CTA), elevating its rank to the level
of a collegiate court with special jurisdiction and enlarging its membership, amending for the purpose
certain sections of Republic Act No. 1125, as amended, otherwise known as the law creating the Court of
Tax Appeals, and for other purposes.
[19] Rollo, pp. 12-14.
[20] Id. at. 57-69.
[21] Records (CTA En Banc), p. 60.
[22] Id. at 47.
[23] Id. at 61.
[24] Id. at 62.
[25] Id. at 48.
196

[26] Id. at 48-49.


[27] Id. at 66-67.
[28] Rollo, p. 9.
[29] Id.
[30] Id. at 10.
[31] Id. at 18-38.
[32] Id. at 16.
[33] Id. at 24-25.
[34] Industrial Timber Corp. v. National Labor Relations Commission, G.R. No. 111985, June 30, 1994,
233 SCRA 597, 602.
[35] G.R. No. 89070, May 18, 1992, 209 SCRA 55.
[36] Id. at 60-61.
[37] Records (CTA En Banc), p. 66.
[38] Bank of the Philippine Islands v. Far East Molasses Corporation, G.R. No. 89125, July 2, 1991, 198
SCRA 689, 701.
[39] Spouses Lim v. Uni-Tan Marketing Corporation, 427 Phil. 762, 770-771 (2002).
[40] Philippine Amusement and Gaming Corporation v. Angara, 511 Phil. 486, 498 (2005).
[41] G.R. No. 124512, June 27, 2006, 493 SCRA 74.
[42] Id. at 83-84.
[43] Cuevas v. Bais Steel Corporation, 439 Phil. 793, 805 (2002).
[44] G.R. No. 134113, October 12, 2005, 472 SCRA 439.
[45] Id. at 442-443.
[46] Id. at 443.
[47] Saint Louis University v. Cordero, 478 Phil. 739 (2004).

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