TAXATION LAW i
G.R. No. 163835 July 7, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
EASTERN TELECOMMUNICATIONS PHILIPPINES, INC.,
Respondent.
DECISION
BRION, J.:
Through a petition for review on certiorari,1 petitioner
Commissioner of Internal Revenue (CIR) seeks to set aside the
decision dated October 1, 20032 and the resolution dated May 26,
20043 of the Court of Appeals (CA) in CA G.R. SP No. 61157. The
assailed CA rulings affirmed the decision dated July 17, 20004 of
the Court of Tax Appeals (CTA) in CTA Case No. 5551, partially
granting respondent Eastern Telecommunications Philippines, Inc.s
(Easterns) claim for refund of unapplied input tax from its purchase
and importation of capital goods.
THE FACTUAL ANTECEDENTS
Eastern is a domestic corporation granted by Congress with a
telecommunications franchise under Republic Act (RA) No. 7617 on
June 25, 1992. Under its franchise, Eastern is allowed to install,
operate, and maintain telecommunications system throughout the
Philippines.
From July 1, 1995 to December 31, 1996, Eastern purchased
various imported equipment, machineries, and spare parts
necessary in carrying out its business activities. The importations
were subjected to a 10% value-added tax (VAT) by the Bureau of
Customs, which was duly paid by Eastern.
On September 19, 1997, Eastern filed with the CIR a written
application for refund or credit of unapplied input taxes it paid on
the imported equipment during the taxable years 1995 and 1996
AL Ilagan-Malipol. AB. MD
amounting to P22,013,134.00. In claiming for the tax refund,
Eastern principally relied on Sec. 10 of RA No. 7617, which allows
Eastern to pay 3% of its gross receipts in lieu of all taxes on this
franchise or earnings thereof.5 In the alternative, Eastern cited
Section 106(B) of the National Internal Revenue Code of 19776
(Tax Code) which authorizes a VAT-registered taxpayer to claim for
the issuance of a tax credit certificate or a tax refund of input taxes
paid on capital goods imported or purchased locally to the extent
that such input taxes7 have not been applied against its output
taxes.8
To toll the running of the two-year prescriptive period under the
same provision, Eastern filed an appeal with the CTA on September
25, 1997 without waiting for the CIRs decision on its application for
refund. The CIR filed an Answer to Easterns appeal in which it
raised the following special and affirmative defenses:
6. [Easterns] claim for refund/tax credit is pending
administrative investigation;
xxxx
8. [Easterns] exempting clause under its legislative
franchise x x x should be understood or interpreted as
written, meaning, the 3% franchise tax shall be collected as
substitute for any internal revenue taxes x x x imposed on
its franchise or gross receipts/earnings thereof x x x;
9. The [VAT] on importation under Section 101 of the [1977]
Tax Code is neither a tax on franchise nor on gross receipts
or earnings thereof. It is a tax on the privilege of importing
goods whether or not the taxpayer is engaged in business,
and regardless of whether the imported goods are intended
for sale, barter or exchange;
10. The VAT under Section 101(A) of the Tax Code x x x
replaced the advance sales tax and compensating tax x x x.
Accordingly, the 3% franchise tax did not substitute the 10%
1
TAXATION LAW i
[VAT] on [Easterns] importation of equipment, machineries
and spare parts for the use of its telecommunication system;
11. Tax refunds are in the nature of tax exemptions. As
such, they are regarded in derogation of sovereign authority
and to be construed in strictissimi juris against the person or
entity claiming the exemption. The burden is upon him who
claims the exemption in his favour and he must be able to
justify his claim by the clearest grant of organic or statute
law and cannot be permitted to exist upon vague implication
x x x;
12. Taxes paid and collected are presumed to have been
made in accordance with the laws and regulations; and
13. It is incumbent upon the taxpayer to establish its right to
the refund and failure to sustain the burden is fatal to the
claim for refund.9
Ruling in favor of Eastern, the CTA found that Eastern has a valid
claim for the refund/credit of the unapplied input taxes, not on the
basis of the "in lieu of all taxes" provision of its legislative
franchise,10 but rather, on Section 106(B) of the Tax Code, which
states:
SECTION 106. Refunds or tax credits of input tax.
xxxx
(b) Capital goods. - A VAT-registered person may apply for the
issuance of a tax credit certificate or refund of input taxes paid on
capital goods imported or locally purchased, to the extent that such
input taxes have not been applied against output taxes. The
application may be made only within two (2) years after the close
of the taxable quarter when the importation or purchase was
made.11 [Emphases supplied.]
AL Ilagan-Malipol. AB. MD
The CTA ruled that Eastern had satisfactorily shown that it was
entitled to the claimed refund/credit as all the elements of the
above provision were present: (1) Eastern was a VAT-registered
entity which paid 10% input taxes on its importations of capital
equipment; (2) this input VAT remained unapplied as of the first
quarter of 1997; and (3) Eastern seasonably filed its application for
refund/credit within the two-year period stated in the law.
However, the CTA noted that Eastern was able to substantiate only
P21,487,702.00 of its claimed amount of P22,013,134.00. The
difference represented input taxes that were allegedly paid but
were not supported by the corresponding receipts, as found by an
independent auditor. Moreover, it excluded P5,360,634.00 in input
taxes on imported equipment for the year 1995, even when these
were properly documented as they were already booked by Eastern
as part of the cost. Once input tax becomes part of the cost of
capital equipment, it necessarily forms part of depreciation. Thus,
to grant the refund of the 1995 creditable input tax amounts to
twice giving Eastern the tax benefit. Thus, in its July 17, 2000
decision, the CTA granted in part Easterns appeal by declaring it
entitled to a tax refund of P16,229,100.00, representing unapplied
input taxes on imported capital goods for the taxable year 1996.12
The CIR filed, on August 3, 2000, a motion for reconsideration 13 of
the CTAs decision. About a month and a half later, it filed a
supplemental motion for reconsideration dated September 15,
2000.14 The CTA denied the CIRs motion for reconsideration in its
resolution dated September 20, 2000.15 The CIR then elevated the
case to the CA through a petition for review under Rule 43 of the
Rules of Court. The CA affirmed the CTA ruling through its decision
dated October 1, 200316 and its resolution dated May 26, 2004,17
denying the motion for reconsideration. Hence, the present
petition.
THE PETITIONERS ARGUMENTS
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The CIR takes exception to the CAs ruling that Eastern is entitled 1st
to the full amount of unapplied input taxes paid for its purchase of 820,673.70 --- ---
Quarter
imported capital goods that were substantiated by the
corresponding receipts and invoices. The CIR posits that, applying 2nd 3,361,618. 225,088,899.0 140,111,655.
Section 104(A) of the Tax Code on apportionment of tax credits, Quarter 59 7 85
Eastern is entitled to a tax refund of only P8,814,790.15, instead of
the P16,229,100.00 adjudged by the CTA and the CA. Taxable Sales + Zero-rated
Section 104(A) of the Tax Code states: Sales x Input Tax as found by the = Refundable input
CTA tax
SEC. 104. Tax Credits. Total Sales

(a) Creditable Input tax. - 7,924,403.96 +

557,445,384.97
x 16,229,100.00 = P8,814,790.15
xxxx
1,040,907,129.77
A VAT-registered person who is also engaged in transactions not 3rd 2,607,168. 169,821,537.8 187,712,657.
subject to the value-added tax shall be allowed input tax credit as Quarter 96 0 16
follows:
4th 1,134,942. 162,530,947.4 147,717,028.
(A) Total input tax which can be directly attributed to Quarter 71 0 53
transactions subject to value-added tax; and 7,924,403. 557,441,384.2 475,541,341.
TOTAL
96 7 54
(B) A ratable portion of any input tax which cannot be
directly attributed to either activity.18 [Emphases supplied.] 1,040,907,12
Total Amount of Sales
9.77
To be entitled to a tax refund of the full amount of P16,229,100.00,
the CIR asserts that Eastern must prove that (a) it was engaged in The taxable sales and zero-rated sales are considered transactions
purely VAT taxable transactions and (b) the unapplied input taxes it subject to VAT,20 while exempt sales refer to transactions not
claims as refund were directly attributable to transactions subject subject to VAT.
to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th
quarters of 1996, however, showed that it earned income from Since the VAT returns clearly reflected income from exempt sales,
both transactions subject to VAT and transactions exempt from the CIR asserts that this constitutes as an admission on Easterns
VAT;19 the returns reported income earned from taxable sales, part that it engaged in transactions not subject to VAT. Hence, the
zero-rated sales, and exempt sales in the following amounts: proportionate allocation of the tax credit to VAT and non-VAT
transactions provided in Section 104(A) of the Tax Code should
Taxable Zero-Rated apply. Eastern is then entitled to only P8,814,790.15 as the ratable
1996 Exempt Sales portion of the tax credit, computed in the following manner:
Sales Sales

AL Ilagan-Malipol. AB. MD 3
TAXATION LAW i
THE RESPONDENTS ARGUMENTS
Eastern objects to the arguments raised in the petition, alleging
that these have not been raised in the Answer filed by the CIR
before the CTA. In fact, the CIR only raised the applicability of
Section 104(A) of the Tax Code in his supplemental motion for
reconsideration of the CTAs ruling which, notably, was filed a
month and a half after the original motion was filed, and thus
beyond the 15-day reglementary period.21 Accordingly, the
applicability of Section 104(A) was never validly presented as an
issue before the CTA; this, Eastern presumes, is the reason why it
was not discussed in the CTAs resolution denying the motion for
reconsideration. Eastern claims that for the CIR to raise such an
issue now would constitute a violation of its right to due process;
following settled rules of procedure and fair play, the CIR should
not be allowed at the appeal level to change his theory of the case.
Moreover, in raising the question of whether Eastern was in fact
engaged in transactions not subject to VAT and whether the
unapplied input taxes can be directly attributable to transactions
subject to VAT, Eastern posits that the CIR is effectively raising
factual questions that cannot be the subject of an appeal by
certiorari before the Court.
Even if the CIRs arguments were considered, Eastern insists that
the petition should nevertheless be denied since the CA found that
there was no evidence in the claim that it was engaged in non-VAT
transactions. The CA has ruled that:
The following requirements must be present before [Section
104(A)] of the [1977 Tax Code] can be applied, to wit:
1. The person claiming the creditable input tax must be VAT-
registered;
2. Such person is engaged in a transaction subject to VAT;
AL Ilagan-Malipol. AB. MD
3. The person is also engaged in other transactions not
subject to VAT; and
4. The ratable portion of any input tax cannot be directly
attributed to either activity.
In the case at bar, the third and fourth requisites are not extant. It
is undisputed that [Eastern] is VAT-registered and the importation
of [Easterns] telecommunications equipment, machinery, spare
parts, fiber optic cables, and the like, as found by the CTA, is a
transaction subject to VAT. However, there is no evidence on record
that would evidently show that respondent is also engaged in other
transactions that are not subject to VAT. [Emphasis supplied.]22
Given the parties arguments, the issue for resolution is whether
the rule in Section 104(A) of the Tax Code on the apportionment of
tax credits can be applied in appreciating Easterns claim for tax
refund, considering that the matter was raised by the CIR only
when he sought reconsideration of the CTA ruling?
THE COURTS RULING
We find the CIRs petition meritorious.
The Rules of Court prohibits raising new issues on appeal; the
question of the applicability of Section 104(A) of the Tax Code was
already raised but the tax court did not rule on it
Section 15, Rule 44 of the Rules of Court embodies the rule against
raising new issues on appeal:
SEC. 15. Questions that may be raised on appeal. Whether or not
the appellant has filed a motion for new trial in the court below, he
may include in his assignment of errors any question of law or fact
that has been raised in the court below and which is within the
issues framed by the parties.
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The general rule is that appeals can only raise questions of law or
fact that (a) were raised in the court below, and (b) are within the
issues framed by the parties therein.23 An issue which was neither
averred in the pleadings nor raised during trial in the court below
cannot be raised for the first time on appeal.24 The rule was made
for the benefit of the adverse party and the trial court as well.
Raising new issues at the appeal level is offensive to the basic rules
of fair play and justice and is violative of a partys constitutional
right to due process of law. Moreover, the trial court should be
given a meaningful opportunity to consider and pass upon all the
issues, and to avoid or correct any alleged errors before those
issues or errors become the basis for an appeal.25
Eastern posits that since the CIR raised the applicability of Section
104(A) of the Tax Code only in his supplemental motion for
reconsideration of the CTA decision (which was even belatedly
filed), the issue was not properly and timely raised and, hence,
could not be considered by the CTA. By raising the issue in his
appeal before the CA, the CIR has violated the above-cited
procedural rule.
Contrary to Easterns claim, we find that the CIR has previously
questioned the nature of Easterns transactions insofar as they
affected the claim for tax refund in his motion for reconsideration of
the CTA decision, although it did not specifically refer to Section
104(A) of the Tax Code. We quote relevant portions of the motion:
[W]e maintain that [Easterns] claims are not creditable input taxes
under [Section 104(A) of the Tax Code]. What the law
contemplates as creditable input taxes are only those paid on
purchases of goods and services specifically enumerated under
[Section 104 (A)] and that such input tax must have been paid by a
VAT[-]registered person/entity in the course of trade or business. It
must be noted that [Eastern] failed to prove that such purchases
were used in their VAT[-]taxable business. [Easterns pieces of]
evidence are not purchases of capital goods and do not fall under
the enumeration x x x.
AL Ilagan-Malipol. AB. MD
It is significant to point out here that refund of input taxes on
capital goods shall be allowed only to the extent that such capital
goods are used in VAT[-]taxable business. x x x a perusal of the
evidence submitted before [the CTA] does not show that the
alleged capital goods were used in VAT[-]taxable business of
[Eastern] x x x. [Emphases supplied.]26
In raising these matters in his motion for reconsideration, the CIR
put forward the applicability of Section 104(A) because, essentially,
the applicability of the provision boils down to the question of
whether the purchased capital goods which a taxpayer paid input
taxes were also used in a VAT-taxable business, i.e., transactions
that were subject to VAT, in order for them to be
refundable/creditable. Once proved that the taxpayer used the
purchased capital goods in a both VAT taxable and non-VAT taxable
business, the proportional allocation of tax credits stated in the law
necessarily applies. This rule is also embodied in Section 4.106-1 of
Revenue Regulation No. 7-95, entitled Consolidated Value-Added
Tax Regulations, which states:
SEC. 4.106-1. Refunds or tax credits of input tax. x x x x
(b) Capital Goods. Only a VAT-registered person may apply for
issuance of a tax credit certificate or refund of input taxes paid on
capital goods imported or locally purchased. The refund shall be
allowed to the extent that such input taxes have not been applied
against output taxes. The application should be made within two
(2) years after the close of the taxable quarter when the
importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the
extent that such capital goods are used in VAT taxable business. If
it is also used in exempt operations, the input tax refundable shall
only be the ratable portion corresponding to the taxable operations.
[Emphasis supplied.]
That the CTA failed to rule on this question when it resolved the
CIRs motion for reconsideration should not be taken against the
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TAXATION LAW i
CIR. It was the CTA which committed an error when it failed to
avail of that "meaningful opportunity to avoid or correct any alleged
errors before those errors become the basis for an
appeal."271avvphi1
Exceptions to the general rule; Easterns VAT returns reporting
income from exempt sales are matters of record that the tax court
should have considered
The rule against raising new issues on appeal is not without
exceptions; it is a procedural rule that the Court may relax when
compelling reasons so warrant or when justice requires it. What
constitutes good and sufficient cause that would merit suspension
of the rules is discretionary upon the courts.28 Former Senator
Vicente Francisco, a noted authority in procedural law, cites an
instance when the appellate court may take up an issue for the first
time:
The appellate court may, in the interest of justice, properly take
into consideration in deciding the case matters of record having
some bearing on the issue submitted which the parties failed to
raise or the lower court ignored, although they have not been
specifically raised as issues by the pleadings. This is in consonance
with the liberal spirit that pervades the Rules of Court, and the
modern trend of procedure which accord the courts broad
discretionary power, consistent with the orderly administration of
justice, in the decision of cases brought before them.29 [Emphasis
supplied.]
As applied in the present case, even without the CIR raising the
applicability of Section 104(A), the CTA should have considered it
since all four of Easterns VAT returns corresponding to each
taxable quarter of 1996 clearly stated that it earned income from
exempt sales, i.e., non-VAT taxable sales. Easterns quarterly VAT
returns are matters of record. In fact, Eastern included them in its
formal offer of evidence before the CTA "to prove that [it is]
engaged in VAT taxable, VAT exempt, and VAT zero-rated sales."
By declaring income from exempt sales, Eastern effectively
AL Ilagan-Malipol. AB. MD
admitted that it engaged in transactions not subject to VAT. In
VAT-exempt sales, the taxpayer/seller shall not bill any output tax
on his sales to his customers and, corollarily, is not allowed any
credit or refund of the input taxes he paid on his purchases. 30 This
non-crediting of input taxes in exempt transactions is the
underlying reason why the Tax Code adopted the rule on
apportionment of tax credits under Section 104(A) whenever a
VAT-registered taxpayer engages in both VAT taxable and non-VAT
taxable sales. In the face of these disclosures by Eastern, we thus
find the CAs the conclusion that "there is no evidence on record
that would evidently show that [Eastern] is also engaged in other
transactions that are not subject to VAT" to be questionable.31
Also, we disagree with the CAs declaration that:
The mere fact that [Easterns] Quarterly VAT Returns confirm that
[Easterns] transactions involved zero-rated sales and exempt sales
do not sufficiently establish that the same were derived from
[Easterns] transactions that are not subject to VAT. On the
contrary, the transactions from which [Easterns] sales were
derived are subject to VAT but are either zero[-]rated (0%) or
otherwise exempted for falling within the transactions enumerated
in [Section 102(B) or Section 103] of the Tax Code.32 [Emphasis
supplied.]
Section 103 of the Tax Code33 is an enumeration of transactions
exempt from VAT. Explaining the relation between exempt
transactions in Section 103 and claims for tax refunds, the Court
declared in CIR v. Toshiba Equipment (Phils.), Inc. that:
Section 103 x x x of the Tax Code of 1977, as amended, relied
upon by petitioner CIR, relates to VAT-exempt transactions. These
are transactions exempted from VAT by special laws or
international agreements to which the Philippines is a signatory.
Since such transactions are not subject to VAT, the sellers cannot
pass on any output VAT to the purchasers of goods, properties, or
services, and they may not claim tax credit/refund of the input VAT
they had paid thereon.34
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The mere declaration of exempt sales in the VAT returns, whether
based on Section 103 of the Tax Code or some other special law,
should have prompted the CA to apply Section 104(A) of the Tax
Code to Easterns claim. It was thus erroneous for the appellate
court to rule that the declaration of exempt sales in Easterns VAT
return, which may correspond to exempt transactions under
Section 103, does not indicate that Eastern was also involved in
non-VAT transactions.
Exception to general rule; taxpayer claiming refund has the duty to
prove entitlement thereto
Another exemption from the rule against raising new issues on
appeal is when the question involves matters of public
importance.35
The power of taxation is an inherent attribute of sovereignty; the
government chiefly relies on taxation to obtain the means to carry
on its operations. Taxes are essential to its very existence;36 hence,
the dictum that "taxes are the lifeblood of the government." For
this reason, the right of taxation cannot easily be surrendered;
statutes granting tax exemptions are considered as a derogation of
the sovereign authority and are strictly construed against the
person or entity claiming the exemption. Claims for tax refunds,
when based on statutes granting tax exemption or tax refund,
partake of the nature of an exemption; thus, the rule of strict
interpretation against the taxpayer-claimant similarly applies.37
Code, considering that the arguments were based on the reported
exempt sales in the VAT returns that Eastern itself prepared and
formally offered as evidence. Even if we were to consider the CIRs
act as a lapse in the observance of procedural rules, such lapse
does not work to entitle Eastern to a tax refund when the
established and uncontested facts have shown otherwise. Lapses in
the literal observance of a rule of procedure may be overlooked
when they have not prejudiced the adverse party and especially
when they are more consistent with upholding settled principles in
taxation.
WHEREFORE, we GRANT the petitioners petition for review on
certiorari, and REVERSE the decision of the Court of Appeals in CA
G.R. SP No. 61157, promulgated on October 1, 2003, as well as its
resolution of May 26, 2004. We order the REMAND of the case to
the Court of Tax Appeals to determine the proportionate amount of
tax credit that respondent is entitled to, consistent with our ruling
above. Costs against the respondent.
SO ORDERED.

The taxpayer is charged with the heavy burden of proving that he

has complied with and satisfied all the statutory and administrative
requirements to be entitled to the tax refund. This burden cannot
be offset by the non-observance of procedural technicalities by the
governments tax agents when the non-observance of the remedial
measure addressing it does not in any manner prejudice the
taxpayers due process rights, as in the present case.

Eastern cannot validly claim to have been taken by surprise by the

CIRs arguments on the relevance of Section 104(A) of the Tax
AL Ilagan-Malipol. AB. MD 7
TAXATION LAW i
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS
SAMSON S. ALCANTARA and ED VINCENT S. ALBANO,
Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE
CESAR PURISIMA; and HONORABLE COMMISSIONER OF
INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA,
JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM,
JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V.
PURISIMA, SECRETARY OF FINANCE, GUILLERMO L.
PARAYNO, JR., COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by
its President, ROSARIO ANTONIO; PETRON DEALERS
ASSOCIATION represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF THE PHILIPPINES
represented by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style of "ANB NORTH
SHELL SERVICE STATION"; LOURDES MARTINEZ doing business
under the name and style of "SHELL GATE N. DOMINGO";
BETHZAIDA TAN doing business under the name and style of
"ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing
AL Ilagan-Malipol. AB. MD
business under the name and style of "NEW LAMUAN SHELL
SERVICE STATION"; EFREN SOTTO doing business under the name
and style of "RED FIELD SHELL SERVICE STATION"; DONICA
CORPORATION represented by its President, DESI TOMACRUZ;
RUTH E. MARBIBI doing business under the name and style of "R&R
PETRON STATION"; PETER M. UNGSON doing business under the
name and style of "CLASSIC STAR GASOLINE SERVICE STATION";
MARIAN SHEILA A. LEE doing business under the name and style of
"NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS
doing business under the name and style of "STARCARGA
ENTERPRISES"; ADORACION MAEBO doing business under the
name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA
doing business under the name and style of "LEONAS GASOLINE
STATION and SERVICE CENTER"; CARMELITA BALDONADO doing
business under the name and style of "FIRST CHOICE SERVICE
CENTER"; MERCEDITAS A. GARCIA doing business under the name
and style of "LORPED SERVICE CENTER"; RHEAMAR A. RAMOS
doing business under the name and style of "RJRAM PTT GAS
STATION"; MA. ISABEL VIOLAGO doing business under the name
and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS HEART
CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; MOTORISTS HARVARD CORPORATION
represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented
by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA; ROMEO
MANUEL doing business under the name and style of "ROMMAN
GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing business
under the name and style of
"TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the
Department of Finance and GUILLERMO L. PARAYNO, JR., in
his capacity as Commissioner of Internal Revenue,
Respondent.
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TAXATION LAW i

x-------------------------x advantages of society, the more he ought to hold himself honored

in contributing to those expenses.
G.R. No. 168463
-Anne Robert Jacques Turgot (1727-1781)
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO,
EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA, DARLENE French statesman and economist
ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. Mounting budget deficit, revenue generation, inadequate fiscal
CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. allocation for education, increased emoluments for health workers,
MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, and wider coverage for full value-added tax benefits these are
RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO the reasons why Republic Act No. 9337 (R.A. No. 9337)1 was
A. CASIO, Petitioners, enacted. Reasons, the wisdom of which, the Court even with its
vs. extensive constitutional power of review, cannot probe. The
CESAR V. PURISIMA, in his capacity as Secretary of Finance, petitioners in these cases, however, question not only the wisdom
GUILLERMO L. PARAYNO, JR., in his capacity as of the law, but also perceived constitutional infirmities in its
Commissioner of Internal Revenue, and EDUARDO R. passage.
ERMITA, in his capacity as Executive Secretary, Respondent.
Every law enjoys in its favor the presumption of constitutionality.
x-------------------------x Their arguments notwithstanding, petitioners failed to justify their
call for the invalidity of the law. Hence, R.A. No. 9337 is not
G.R. No. 168730 unconstitutional.

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner, LEGISLATIVE HISTORY

vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive
Secretary; HON. MARGARITO TEVES, in his capacity as
Secretary of Finance; HON. JOSE MARIO BUNAG, in his
capacity as the OIC Commissioner of the Bureau of Internal
Revenue; and HON. ALEXANDER AREVALO, in his capacity as
the OIC Commissioner of the Bureau of Customs,
Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of
all, should be borne by everyone, and the more man enjoys the
AL Ilagan-Malipol. AB. MD
R.A. No. 9337 is a consolidation of three legislative bills namely,
House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January
7, 2005. The House Committee on Ways and Means approved the
bill, in substitution of House Bill No. 1468, which Representative
(Rep.) Eric D. Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill
on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill
No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill
No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is
9
TAXATION LAW i
House Bill No. 3555. The House Committee on Ways and Means
approved the bill on February 2, 2005. The President also certified
it as urgent on February 8, 2005. The House of Representatives
approved the bill on second and third reading on February 28,
2005.
Meanwhile, the Senate Committee on Ways and Means approved
Senate Bill No. 19504 on March 7, 2005, "in substitution of
Senate Bill Nos. 1337, 1838 and 1873, taking into consideration
House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored
Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were
both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and
Francis N. Pangilinan. The President certified the bill on March 11,
2005, and was approved by the Senate on second and third reading
on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request
of the House of Representatives for a committee conference on the
disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing
Provisions of House Bill No. 3555, House Bill No. 3705, and Senate
Bill No. 1950, "after having met and discussed in full free and
conference," recommended the approval of its report, which the
Senate did on May 10, 2005, and with the House of
Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and
Senate version was transmitted to the President, who signed the
same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said
date came, the Court issued a temporary restraining order,
effective immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during
the hearing, the Court speaking through Mr. Justice Artemio V.
AL Ilagan-Malipol. AB. MD
Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your
presentation, let me just tell you a little background. You know
when the law took effect on July 1, 2005, the Court issued a TRO at
about 5 oclock in the afternoon. But before that, there was a lot of
complaints aired on television and on radio. Some people in a gas
station were complaining that the gas prices went up by 10%.
Some people were complaining that their electric bill will go up by
10%. Other times people riding in domestic air carrier were
complaining that the prices that theyll have to pay would have to
go up by 10%. While all that was being aired, per your presentation
and per our own understanding of the law, thats not true. Its not
true that the e-vat law necessarily increased prices by 10%
uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an
Executive Order that granted the Petroleum companies some
subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the
impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating
measures would be the elimination of the Excise Tax and the import
duties. That is why, it is not correct to say that the VAT as to
petroleum dealers increased prices by 10%.
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TAXATION LAW i
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for
increasing the retail price by 10% to cover the E-Vat tax. If you
consider the excise tax and the import duties, the Net Tax would
probably be in the neighborhood of 7%? We are not going into
exact figures I am just trying to deliver a point that different
industries, different products, different services are hit differently.
So its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies,
Mr. Counsel, are at present imposed a Sales Tax of 3%. When this
E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to
increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were
complaining on that first day, were being increased arbitrarily by
10%. And thats one reason among many others this Court had to
issue TRO because of the confusion in the implementation. Thats
why we added as an issue in this case, even if its tangentially
taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the
mercy of that confusion of an across the board increase of 10%,
which you yourself now admit and I think even the Government will
admit is incorrect. In some cases, it should be 3% only, in some
cases it should be 6% depending on these mitigating measures and
the location and situation of each product, of each service, of each
company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue
a TRO pending the clarification of all these and we wish the
AL Ilagan-Malipol. AB. MD
government will take time to clarify all these by means of a more
detailed implementing rules, in case the law is upheld by this Court.
. . .6
The Court also directed the parties to file their respective
Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party
List, et al., filed a petition for prohibition on May 27, 2005. They
question the constitutionality of Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). Section 4 imposes a 10%
VAT on sale of goods and properties, Section 5 imposes a 10% VAT
on importation of goods, and Section 6 imposes a 10% VAT on sale
of services and use or lease of properties. These questioned
provisions contain a uniform proviso authorizing the President,
upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the following
conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes
abandonment by Congress of its exclusive authority to fix the rate
of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
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TAXATION LAW i
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a
petition for certiorari likewise assailing the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the
President to increase the VAT rate to 12%, on the ground that it
amounts to an undue delegation of legislative power, petitioners
also contend that the increase in the VAT rate to 12% contingent
on any of the two conditions being satisfied violates the due
process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on
the people, in that: (1) the 12% increase is ambiguous because it
does not state if the rate would be returned to the original 10% if
the conditions are no longer satisfied; (2) the rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate
from year to year; and (3) the increase in the VAT rate, which is
supposed to be an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should
only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority
granted to the President by the Bicameral Conference Committee is
a violation of the "no-amendment rule" upon last reading of a bill
laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by
the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring
that the input tax on depreciable goods shall be amortized over a
60-month period, if the acquisition, excluding the VAT components,
exceeds One Million Pesos (P1, 000,000.00);
AL Ilagan-Malipol. AB. MD
2) Section 8, amending Section 110 (B) of the NIRC, imposing a
70% limit on the amount of input tax to be credited against the
output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing
the Government or any of its political subdivisions, instrumentalities
or agencies, including GOCCs, to deduct a 5% final withholding tax
on gross payments of goods and services, which are subject to
10% VAT under Sections 106 (sale of goods and properties) and
108 (sale of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for
being arbitrary, oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-
deprivation of life, liberty or property without due process of law
under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the
amount of input tax that may be claimed. Petitioners also argue
that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law.
Petitioners further contend that like any other property or property
right, the input tax credit may be transferred or disposed of, and
that by limiting the same, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners also believe that these provisions violate the
constitutional guarantee of equal protection of the law under Article
III, Section 1 of the Constitution, as the limitation on the creditable
input tax if: (1) the entity has a high ratio of input tax; or (2)
invests in capital equipment; or (3) has several transactions with
the government, is not based on real and substantial differences to
meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but
progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with higher input
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TAXATION LAW i
tax to output tax ratio that will suffer the consequences thereof for
it wipes out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep.
Francis Joseph G. Escudero filed this petition for certiorari on June
30, 2005. They question the constitutionality of R.A. No. 9337 on
the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue
delegation of legislative power, in violation of Article VI, Section
28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction
in deleting the no pass on provisions present in Senate Bill No.
1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections
27, 28, 34, 116, 117, 119, 121, 125,7 148, 151, 236, 237 and 288,
which were present in Senate Bill No. 1950, violates Article VI,
Section 24(1) of the Constitution, which provides that all
appropriation, revenue or tariff bills shall originate exclusively in
the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition
for certiorari and prohibition on July 20, 2005, alleging
unconstitutionality of the law on the ground that the limitation on
the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, thus
violating the principle that tax collection and revenue should be
solely allocated for public purposes and expenditures. Petitioner
Garcia further claims that allowing these establishments to pass on
the tax to the consumers is inequitable, in violation of Article VI,
Section 28(1) of the Constitution.
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RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf
of respondents. Preliminarily, respondents contend that R.A. No.
9337 enjoys the presumption of constitutionality and petitioners
failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by
petitioners, i.e., legality of the bicameral proceedings, exclusive
origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the
issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any
of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to
12%, as well as the 70% limitation on the creditable input tax, the
60-month amortization on the purchase or importation of capital
goods exceeding P1,000,000.00, and the 5% final withholding tax
by government agencies, is arbitrary, oppressive, and confiscatory,
and that it violates the constitutional principle on progressive
taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of
the governments fiscal reform agenda. A reform in the value-
added system of taxation is the core revenue measure that will tilt
the balance towards a sustainable macroeconomic environment
necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
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TAXATION LAW i

Whether R.A. No. 9337 violates the following provisions of the the seller acting merely as a tax collector.10 The burden of VAT is
Constitution: intended to fall on the immediate buyers and ultimately, the end-
consumers.
a. Article VI, Section 24, and
In contrast, a direct tax is a tax for which a taxpayer is directly
b. Article VI, Section 26(2) liable on the transaction or business it engages in, without
transferring the burden to someone else.11 Examples are individual
SUBSTANTIVE ISSUES and corporate income taxes, transfer taxes, and residence taxes.12

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general
principles and concepts of value-added tax (VAT), as the confusion
and inevitably, litigation, breeds from a fallacious notion of its
nature.
The VAT is a tax on spending or consumption. It is levied on the
sale, barter, exchange or lease of goods or properties and
services.8 Being an indirect tax on expenditure, the seller of goods
or services may pass on the amount of tax paid to the buyer,9 with
In the Philippines, the value-added system of sales taxation has
long been in existence, albeit in a different mode. Prior to 1978, the
system was a single-stage tax computed under the "cost deduction
method" and was payable only by the original sellers. The single-
stage system was subsequently modified, and a mixture of the
"cost deduction method" and "tax credit method" was used to
determine the value-added tax payable.13 Under the "tax credit
method," an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.14
It was only in 1987, when President Corazon C. Aquino issued
Executive Order No. 273, that the VAT system was rationalized by
imposing a multi-stage tax rate of 0% or 10% on all sales using the
"tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT
Law,16 R.A. No. 8241 or the Improved VAT Law,17 R.A. No. 8424 or
the Tax Reform Act of 1997,18 and finally, the presently
beleaguered R.A. No. 9337, also referred to by respondents as the
VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.

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TAXATION LAW i
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the
Bicameral Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in
Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the
House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of
input tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No.
1950 regarding other kinds of taxes in addition to the value-added
tax.
Petitioners now beseech the Court to define the powers of the
Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and
discipline are intrinsic in any legislative body for, as unerringly
elucidated by Justice Story, "[i]f the power did not exist, it
would be utterly impracticable to transact the business of
the nation, either at all, or at least with decency,
deliberation, and order."19 Thus, Article VI, Section 16 (3) of the
Constitution provides that "each House may determine the rules of
its proceedings." Pursuant to this inherent constitutional power to
promulgate and implement its own rules of procedure, the
AL Ilagan-Malipol. AB. MD
respective rules of each house of Congress provided for the
creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of
Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House
does not agree with the Senate on the amendment to any bill or
joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall,
as much as possible, adhere to and support the House Bill. If the
differences with the Senate are so substantial that they materially
impair the House Bill, the panel shall report such fact to the House
for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall
contain a detailed, sufficiently explicit statement of the changes in
or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the
Conference Committee Report prior to the voting thereon. The
House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final
reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the
House of Representatives on the provision of any bill or joint
resolution, the differences shall be settled by a conference
committee of both Houses which shall meet within ten (10) days
after their composition. The President shall designate the members
of the Senate Panel in the conference committee with the approval
of the Senate.
15
TAXATION LAW i
Each Conference Committee Report shall contain a detailed and
sufficiently explicit statement of the changes in, or amendments to
the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate
provisions and a reconciled version thereof with the explanatory
statement of the conference committee shall be attached to the
report.
...
The creation of such conference committee was apparently in
response to a problem, not addressed by any constitutional
provision, where the two houses of Congress find themselves in
disagreement over changes or amendments introduced by the
other house in a legislative bill. Given that one of the most basic
powers of the legislative branch is to formulate and implement its
own rules of proceedings and to discipline its members, may the
Court then delve into the details of how Congress complies with its
internal rules or how it conducts its business of passing legislation?
Note that in the present petitions, the issue is not whether
provisions of the rules of both houses creating the bicameral
conference committee are unconstitutional, but whether the
bicameral conference committee has strictly complied with
the rules of both houses, thereby remaining within the
jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,20 the
Court En Banc, unanimously reiterated and emphasized its
adherence to the "enrolled bill doctrine," thus, declining therein
petitioners plea for the Court to go behind the enrolled copy of the
bill. Assailed in said case was Congresss creation of two sets of
bicameral conference committees, the lack of records of said
committees proceedings, the alleged violation of said committees
of the rules of both houses, and the disappearance or deletion of
one of the provisions in the compromise bill submitted by the
bicameral conference committee. It was argued that such
AL Ilagan-Malipol. AB. MD
irregularities in the passage of the law nullified R.A. No. 9006, or
the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the
Speaker of the House and the Senate President and the certification
of the Secretaries of both Houses of Congress that it was passed
are conclusive of its due enactment. A review of cases reveals the
Courts consistent adherence to the rule. The Court finds no
reason to deviate from the salutary rule in this case where
the irregularities alleged by the petitioners mostly involved
the internal rules of Congress, e.g., creation of the 2nd or 3rd
Bicameral Conference Committee by the House. This Court is
not the proper forum for the enforcement of these internal
rules of Congress, whether House or Senate. Parliamentary
rules are merely procedural and with their observance the
courts have no concern. Whatever doubts there may be as to
the formal validity of Rep. Act No. 9006 must be resolved in
its favor. The Court reiterates its ruling in Arroyo vs. De Venecia,
viz.:
But the cases, both here and abroad, in varying forms of
expression, all deny to the courts the power to inquire into
allegations that, in enacting a law, a House of Congress
failed to comply with its own rules, in the absence of
showing that there was a violation of a constitutional
provision or the rights of private individuals. In Osmea v.
Pendatun, it was held: "At any rate, courts have declared that the
rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting them.
And it has been said that "Parliamentary rules are merely
procedural, and with their observance, the courts have no
concern. They may be waived or disregarded by the
legislative body." Consequently, "mere failure to conform to
parliamentary usage will not invalidate the action (taken by
a deliberative body) when the requisite number of members
have agreed to a particular measure."21 (Emphasis supplied)
16
TAXATION LAW i

The foregoing declaration is exactly in point with the present cases, that there were indeed disagreements. As pointed out in the
where petitioners allege irregularities committed by the conference petitions, said disagreements were as follows:
committee in introducing changes or deleting provisions in the
House and Senate bills. Akin to the Farias case,22 the present House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950
petitions also raise an issue regarding the actions taken by the With regard to "Stand-By Authority" in favor of President
conference committee on matters regarding Congress compliance Provides for 12% VAT on Provides for 12% VAT in general Provides for a single
with its own internal rules. As stated earlier, one of the most basic every sale of goods or on sales of goods or properties 10% VAT on sale of g
properties (amending Sec. and reduced rates for sale of properties (amendin
and inherent power of the legislature is the power to formulate 106 of NIRC); 12% VAT on certain locally manufactured 106 of NIRC), 10%
rules for its proceedings and the discipline of its members. importation of goods goods and petroleum products sale of services includ
Congress is the best judge of how it should conduct its own (amending Sec. 107 of and raw materials to be used in of electricity by ge
NIRC); and 12% VAT on sale the manufacture thereof companies, transmiss
business expeditiously and in the most orderly manner. It is also of services and use or lease (amending Sec. 106 of NIRC); distribution companie
the sole of properties (amending Sec. 12% VAT on importation of use or lease of pr
108 of NIRC) goods and reduced rates for (amending Sec. 108 o
certain imported products
concern of Congress to instill discipline among the members of its including petroleum products
conference committee if it believes that said members violated any (amending Sec. 107 of NIRC);
of its rules of proceedings. Even the expanded jurisdiction of this and 12% VAT on sale of services
and use or lease of properties
Court cannot apply to questions regarding only the internal and a reduced rate for certain
operation of Congress, thus, the Court is wont to deny a review of services including power
the internal proceedings of a co-equal branch of government. generation (amending Sec. 108
of NIRC)
With regard to the "no pass-on" provision
Moreover, as far back as 1994 or more than ten years ago, in the No similar provision Provides that the VAT imposed Provides that the
case of Tolentino vs. Secretary of Finance,23 the Court already on power generation and on the imposed on sal
made the pronouncement that "[i]f a change is desired in the sale of petroleum products shall electricity by ge
be absorbed by generation companies and serv
practice [of the Bicameral Conference Committee] it must be
companies or sellers, transmission compan
sought in Congress since this question is not covered by any respectively, and shall not be distribution compani
constitutional provision but is only an internal rule of each passed on to consumers well as those of fr
house." 24 To date, Congress has not seen it fit to make such grantees of electric
shall not apply to resid
changes adverted to by the Court. It seems, therefore, that
Congress finds the practices of the bicameral conference committee end-users. VAT sh
to be very useful for purposes of prompt and efficient legislative absorbed by gen
action. transmission, and dist
companies.
With regard to 70% limit on input tax credit
Nevertheless, just to put minds at ease that no blatant irregularities
Provides that the input tax No similar provision Provides that the in
tainted the proceedings of the bicameral conference committees, credit for capital goods on credit for capital go
the Court deems it necessary to dwell on the issue. The Court which a VAT has been paid which a VAT has be
observes that there was a necessity for a conference committee shall be equally distributed shall be equally dis
over 5 years or the over 5 years o
because a comparison of the provisions of House Bill Nos. 3555 and depreciable life of such depreciable life of
3705 on one hand, and Senate Bill No. 1950 on the other, reveals capital goods; the input tax capital goods; the in

AL Ilagan-Malipol. AB. MD 17
TAXATION LAW i

credit for goods and services VAT rate would be retained until certain conditions arise, i.e., the
credit for goods and services
other than capital goods other than capital goods shall
value-added tax collection as a percentage of gross domestic
shall not exceed 5% of the not exceed 90% of the output
total amount of such goods VAT. product (GDP) of the previous year exceeds 2 4/5%, or National
and services; and for Government deficit as a percentage of GDP of the previous year
persons engaged in retail exceeds 1%, when the President, upon recommendation of the
trading of goods, the
allowable input tax credit Secretary of Finance shall raise the rate of VAT to 12% effective
shall not exceed 11% of the January 1, 2006.
total amount of goods
purchased.
2. With regard to the disagreement on whether only the VAT
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision No similar provision imposed onto electricity generation, transmission and distribution
Provided for amendments
companies
several NIRC provisions should not be passed on to consumers or whether both
regarding
corporate income,the VAT imposed on electricity generation, transmission and
percentage,
franchise and excise taxes
distribution companies and the VAT imposed on sale of petroleum
products may be passed on to consumers, the Bicameral
The disagreements between the provisions in the House bills and Conference Committee chose to settle such disagreement by
the Senate bill were with regard to (1) what rate of VAT is to be altogether deleting from its Report any no pass-on provision.
imposed; (2) whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be 3. With regard to the disagreement on whether input tax credits
passed on to consumers, as proposed in the Senate bill, or both the should be limited or not, the Bicameral Conference Committee
VAT imposed on electricity generation, transmission and decided to adopt the position of the House by putting a limitation
distribution companies and the VAT imposed on sale of petroleum on the amount of input tax that may be credited against the output
products should not be passed on to consumers, as proposed in the tax, although it crafted its own language as to the amount of the
House bill; (3) in what manner input tax credits should be limited; limitation on input tax credits and the manner of computing the
(4) and whether the NIRC provisions on corporate income taxes, same by providing thus:
percentage, franchise and excise taxes should be amended.
(A) Creditable Input Tax. . . .
There being differences and/or disagreements on the foregoing
provisions of the House and Senate bills, the Bicameral Conference
...
Committee was mandated by the rules of both houses of Congress
to act on the same by settling said differences and/or
disagreements. The Bicameral Conference Committee acted on the Provided, The input tax on goods purchased or imported in a
disagreeing provisions by making the following changes: calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months
1. With regard to the disagreement on the rate of VAT to be
if the aggregate acquisition cost for such goods, excluding the VAT
imposed, it would appear from the Conference Committee Report
component thereof, exceeds one million Pesos (P1,000,000.00):
that the Bicameral Conference Committee tried to bridge the gap in
PROVIDED, however, that if the estimated useful life of the capital
the difference between the 10% VAT rate proposed by the Senate,
good is less than five (5) years, as used for depreciation purposes,
and the various rates with 12% as the highest VAT rate proposed
then the input VAT shall be spread over such shorter period: . . .
by the House, by striking a compromise whereby the present 10%
AL Ilagan-Malipol. AB. MD 18
TAXATION LAW i
(B) Excess Output or Input Tax. If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters: PROVIDED that the input tax inclusive of input
VAT carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the output
VAT: PROVIDED, HOWEVER, THAT any input tax attributable to
zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC
on corporate income tax, franchise, percentage and excise taxes,
the conference committee decided to include such amendments and
basically adopted the provisions found in Senate Bill No. 1950, with
some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill. The
term "settle" is synonymous to "reconcile" and "harmonize."25 To
reconcile or harmonize disagreeing provisions, the Bicameral
Conference Committee may then (a) adopt the specific provisions
of either the House bill or Senate bill, (b) decide that neither
provisions in the House bill or the provisions in the Senate bill
would
be carried into the final form of the bill, and/or (c) try to arrive at a
compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant only
to reconcile and harmonize the disagreeing provisions for it did not
inject any idea or intent that is wholly foreign to the subject
embraced by the original provisions.
AL Ilagan-Malipol. AB. MD
The so-called stand-by authority in favor of the President, whereby
the rate of 10% VAT wanted by the Senate is retained until such
time that certain conditions arise when the 12% VAT wanted by the
House shall be imposed, appears to be a compromise to try to
bridge the difference in the rate of VAT proposed by the two houses
of Congress. Nevertheless, such compromise is still totally within
the subject of what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts
of the proceedings of the Bicameral Conference Committee held on
May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel,
explained the reason for deleting the no pass-on provision in this
wise:
. . . the thinking was just to keep the VAT law or the VAT bill
simple. And we were thinking that no sector should be a beneficiary
of legislative grace, neither should any sector be discriminated on.
The VAT is an indirect tax. It is a pass on-tax. And lets keep it
plain and simple. Lets not confuse the bill and put a no pass-on
provision. Two-thirds of the world have a VAT system and in this
two-thirds of the globe, I have yet to see a VAT with a no pass-
though provision. So, the thinking of the Senate is basically simple,
lets keep the VAT simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no
pass-on provision "never really enjoyed the support of either
House."27
With regard to the amount of input tax to be credited against
output tax, the Bicameral Conference Committee came to a
compromise on the percentage rate of the limitation or cap on such
input tax credit, but again, the change introduced by the Bicameral
Conference Committee was totally within the intent of both houses
to put a cap on input tax that may be
credited against the output tax. From the inception of the subject
revenue bill in the House of Representatives, one of the major
objectives was to "plug a glaring loophole in the tax policy and
19
TAXATION LAW i
administration by creating vital restrictions on the claiming of input
VAT tax credits . . ." and "[b]y introducing limitations on the
claiming of tax credit, we are capping a major leakage that has
placed our collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the
value-added tax proposed in Senate Bill No. 1950, since said
provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the
version of the Senate.
Thus, all the changes or modifications made by the Bicameral
Conference Committee were germane to subjects of the provisions
referred
to it for reconciliation. Such being the case, the Court does not see
any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs. Prado29 and
Tolentino vs. Secretary of Finance,30 the Court recognized the long-
standing legislative practice of giving said conference committee
ample latitude for compromising differences between the Senate
and the House. Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in
its report an entirely new provision that is not found either in the
House bill or in the Senate bill. If the committee can propose an
amendment consisting of one or two provisions, there is no reason
why it cannot propose several provisions, collectively considered as
an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act of
the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber
is thus without any basis.31 (Emphasis supplied)
AL Ilagan-Malipol. AB. MD
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the
Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof
in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the
necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral
conference committee is allowed to add or delete provisions in the
House bill and the Senate bill after these had passed three readings
is in effect a circumvention of the "no amendment rule" (Sec. 26
(2), Art. VI of the 1987 Constitution), fails to convince the Court to
deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in
these cases must have undergone three readings in each of the two
houses. If that be the case, there would be no end to negotiation
since each house may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring
only to bills introduced for the first time in either house of
Congress, not to the conference committee report.32
(Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers
only to the procedure to be followed by each house of
Congress with regard to bills initiated in each of said
respective houses, before said bill is transmitted to the other
house for its concurrence or amendment. Verily, to construe
said provision in a way as to proscribe any further changes to a bill
after one house has voted on it would lead to absurdity as this
20
TAXATION LAW i

would mean that the other house of Congress would be deprived of House bills are not intended to be amended by the House of
its constitutional power to amend or introduce changes to said bill. Representatives. Hence, they argue that since the proposed
Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to amendments did not originate from the House, such amendments
mean that the introduction by the Bicameral Conference Committee are a violation of Article VI, Section 24 of the Constitution.
of amendments and modifications to disagreeing provisions in bills
that have been acted upon by both houses of Congress is The argument does not hold water.
prohibited.
Article VI, Section 24 of the Constitution reads:
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills Sec. 24. All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private
Coming to the issue of the validity of the amendments made bills shall originate exclusively in the House of Representatives but
regarding the NIRC provisions on corporate income taxes and the Senate may propose or concur with amendments.
percentage, excise taxes. Petitioners refer to the following
provisions, to wit: In the present cases, petitioners admit that it was indeed House Bill
Nos. 3555 and 3705 that initiated the move for amending
Section 27 Rates of Income Tax on Domestic Corporation provisions of the NIRC dealing mainly with the value-added tax.
28(A)(1) Tax on Resident Foreign Corporation Upon transmittal of said House bills to the Senate, the Senate came
28(B)(1) Inter-corporate Dividends out with Senate Bill No. 1950 proposing amendments not only to
34(B)(1) Inter-corporate Dividends NIRC provisions on the value-added tax but also amendments to
NIRC provisions on other kinds of taxes. Is the introduction by the
116 Tax on Persons Exempt from VAT
Senate of provisions not dealing directly with the value- added tax,
117 Percentage Tax on domestic carriers and keepers of Garage
which is the only kind of tax being amended in the House bills, still
119 Tax on franchises within the purview of the constitutional provision authorizing the
121 Tax on banks and Non-Bank Financial Intermediaries Senate to propose or concur with amendments to a revenue bill
148 Excise Tax on manufactured oils and other fuels that originated from the House?
151 Excise Tax on mineral products
236 Registration requirements The foregoing question had been squarely answered in the
237 Issuance of receipts or sales or commercial invoices Tolentino case, wherein the Court held, thus:
288 Disposition of Incremental Revenue
. . . To begin with, it is not the law but the revenue bill which is
Petitioners claim that the amendments to these provisions of the required by the Constitution to "originate exclusively" in the House
NIRC did not at all originate from the House. They aver that House of Representatives. It is important to emphasize this, because a bill
Bill No. 3555 proposed amendments only regarding Sections 106, originating in the House may undergo such extensive changes in
107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 the Senate that the result may be a rewriting of the whole. . . . At
proposed amendments only to Sections 106, 107,108, 109, 110 this point, what is important to note is that, as a result of the
and 111 of the NIRC; thus, the other sections of the NIRC which Senate action, a distinct bill may be produced. To insist that a
the Senate amended but which amendments were not found in the revenue statute and not only the bill which initiated the
AL Ilagan-Malipol. AB. MD 21
TAXATION LAW i
legislative process culminating in the enactment of the law
must substantially be the same as the House bill would be to
deny the Senates power not only to "concur with
amendments" but also to "propose amendments." It would be
to violate the coequality of legislative power of the two houses of
Congress and in fact make the House superior to the Senate.
Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version even
with respect to bills which are required by the Constitution
to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as
they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected
at large, are expected to approach the same problems from
the national perspective. Both views are thereby made to
bear on the enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate was acting
within its
constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, excise and franchise taxes.
Verily, Article VI, Section 24 of the Constitution does not contain
any prohibition or limitation on the extent of the amendments that
may be introduced by the Senate to the House revenue bill.
AL Ilagan-Malipol. AB. MD
Furthermore, the amendments introduced by the Senate to the
NIRC provisions that had not been touched in the House bills are
still in furtherance of the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill No. 1468, the
very first House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the
urgent and daunting task of solving the countrys serious financial
problems. To do this, government expenditures must be strictly
monitored and controlled and revenues must be significantly
increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a
balanced budget by the year 2009. In fact, several measures that
will result to significant expenditure savings have been identified by
the administration. It is supported with a credible package of
revenue measures that include measures to improve tax
administration and control the leakages in revenues from
income taxes and the value-added tax (VAT). (Emphasis
supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No.
3555, declared that:
In the budget message of our President in the year 2005, she
reiterated that we all acknowledged that on top of our agenda must
be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit
and eventually achieve a balanced budget by the year 2009, we
need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove effective
and beneficial to the overall status of our economy. One
such opportunity is a review of existing tax rates, evaluating
the relevance given our present conditions.34 (Emphasis
supplied)
22
TAXATION LAW i
Notably therefore, the main purpose of the bills emanating from the
House of Representatives is to bring in sizeable revenues for the
government
to supplement our countrys serious financial problems, and
improve tax administration and control of the leakages in revenues
from income taxes and value-added taxes. As these house bills
were transmitted to the Senate, the latter, approaching the
measures from the point of national perspective, can introduce
amendments within the purposes of those bills. It can provide for
ways that would soften the impact of the VAT measure on the
consumer, i.e., by distributing the burden across all sectors instead
of putting it entirely on the shoulders of the consumers. The
sponsorship speech of Sen. Ralph Recto on why the provisions on
income tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means
will raise P64.3 billion in additional revenues annually even while by
mitigating prices of power, services and petroleum products.
However, not all of this will be wrung out of VAT. In fact, only
P48.7 billion amount is from the VAT on twelve goods and services.
The rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate
Philippines and the consumer. Why should the latter bear all the
pain? Why should the fiscal salvation be only on the burden of the
consumer?
The corporate worlds equity is in form of the increase in the
corporate income tax from 32 to 35 percent, but up to 2008 only.
This will raise P10.5 billion a year. After that, the rate will slide
back, not to its old rate of 32 percent, but two notches lower, to 30
percent.
Clearly, we are telling those with the capacity to pay, corporations,
to bear with this emergency provision that will be in effect for
AL Ilagan-Malipol. AB. MD
1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We
intend to keep the length of their sacrifice brief. We would like to
assure them that not because there is a light at the end of the
tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the
small man. Big business will be there to share the burden.35
As the Court has said, the Senate can propose amendments and in
fact, the amendments made on provisions in the tax on income of
corporations are germane to the purpose of the house bills which is
to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage
and excise taxes germane to the reforms to the VAT system, as
these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be paying the
VAT in addition to these taxes. Thus, there is a need to amend
these sections to soften the impact of VAT. Again, in his
sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero
the present excise tax on bunker fuel, to lessen the effect of a VAT
on this product.
For electric utilities like Meralco, we will wipe out the franchise tax
in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil
products, so as not to destroy the VAT chain, we will however bring
down the excise tax on socially sensitive products such as diesel,
bunker, fuel and kerosene.
23
TAXATION LAW i
...
What do all these exercises point to? These are not contortions of
giving to the left hand what was taken from the right. Rather, these
sprang from our concern of softening the impact of VAT, so that the
people can cushion the blow of higher prices they will have to pay
as a result of VAT.36
The other sections amended by the Senate pertained to matters of
tax administration which are necessary for the implementation of
the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to
the subject matter and purposes of the house bills, which is to
supplement our countrys fiscal deficit, among others. Thus, the
Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108 of the NIRC, violate the following provisions of
the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al.,
and Escudero, et al. contend in common that Sections 4, 5 and 6 of
R.A. No. 9337, amending Sections 106, 107 and 108, respectively,
of the NIRC giving the President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain condition is met,
constitutes undue delegation of the legislative power to tax.
AL Ilagan-Malipol. AB. MD
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further
amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%).
SEC. 5. Section 107 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on
every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges, such tax to be paid
by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined
24
TAXATION LAW i
on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%).
SEC. 6. Section 108 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties
(A) Rate and Base of Tax. There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of services:
provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%). (Emphasis supplied)
AL Ilagan-Malipol. AB. MD
Petitioners allege that the grant of the stand-by authority to the
President to increase the VAT rate is a virtual abdication by
Congress of its exclusive power to tax because such delegation is
not within the purview of Section 28 (2), Article VI of the
Constitution, which provides:
The Congress may, by law, authorize the President to fix within
specified limits, and may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the
government.
They argue that the VAT is a tax levied on the sale, barter or
exchange of goods and properties as well as on the sale or
exchange of services, which cannot be included within the purview
of tariffs under the exempted delegation as the latter refers to
customs duties, tolls or tribute payable upon merchandise to the
government and usually imposed on goods or merchandise
imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that
delegating to the President the legislative power to tax is contrary
to republicanism. They insist that accountability, responsibility and
transparency should dictate the actions of Congress and they
should not pass to the President the decision to impose taxes. They
also argue that the law also effectively nullified the Presidents
power of control, which includes the authority to set aside and
nullify the acts of her subordinates like the Secretary of Finance, by
mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample
powers to cause, influence or create the conditions provided by the
law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and
revolting the situation that the imposition of the 12% rate would be
subject to the whim of the Secretary of Finance, an unelected
25
TAXATION LAW i
bureaucrat, contrary to the principle of no taxation without
representation. They submit that the Secretary of Finance is not
mandated to give a favorable recommendation and he may not
even give his recommendation. Moreover, they allege that no
guiding standards are provided in the law on what basis and as to
how he will make his recommendation. They claim, nonetheless,
that any recommendation of the Secretary of Finance can easily be
brushed aside by the President since the former is a mere alter ego
of the latter, such that, ultimately, it is the President who decides
whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is
instructive.
The principle of separation of powers ordains that each of the three
great branches of government has exclusive cognizance of and is
supreme in matters falling within its own constitutionally allocated
sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of
non-delegation of powers, as expressed in the Latin maxim:
potestas delegata non delegari potest which means "what has been
delegated, cannot be delegated."38 This doctrine is based on the
ethical principle that such as delegated power constitutes not only a
right but a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the
intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the
Constitution provides that "the Legislative power shall be vested in
the Congress of the Philippines which shall consist of a Senate and
a House of Representatives." The powers which Congress is
prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power,
which can never be delegated, has been described as the
authority to make a complete law complete as to the time
when it shall take effect and as to whom it shall be
applicable and to determine the expediency of its
AL Ilagan-Malipol. AB. MD
enactment.40 Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely
legislative in nature that is, one appertaining exclusively to the
legislative department. It is the nature of the power, and not the
liability of its use or the manner of its exercise, which determines
the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative
powers is subject to the following recognized limitations or
exceptions:
(1) Delegation of tariff powers to the President under Section 28
(2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section
23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing
that the delegation itself is valid. It is valid only if the law (a) is
complete in itself, setting forth therein the policy to be executed,
carried out, or implemented by the delegate;41 and (b) fixes a
standard the limits of which are sufficiently determinate and
determinable to which the delegate must conform in the
performance of his functions.42 A sufficient standard is one which
defines legislative policy, marks its limits, maps out its boundaries
and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be
effected.43 Both tests are intended to prevent a total transference
of legislative authority to the delegate, who is not allowed to step
into the shoes of the legislature and exercise a power essentially
legislative.44
26
TAXATION LAW i
In People vs. Vera,45 the Court, through eminent Justice Jose P.
Laurel, expounded on the concept and extent of delegation of
power in this wise:
In testing whether a statute constitutes an undue delegation of
legislative power or not, it is usual to inquire whether the statute
was complete in all its terms and provisions when it left the hands
of the legislature so that nothing was left to the judgment of any
other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the
delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring an
authority or discretion as to its execution, to be exercised
under and in pursuance of the law. The first cannot be done;
to the latter no valid objection can be made.
...
It is contended, however, that a legislative act may be made to the
effect as law after it leaves the hands of the legislature. It is true
that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a
particular community. In Wayman vs. Southard, the Supreme Court
of the United States ruled that the legislature may delegate a
power not legislative which it may itself rightfully exercise. The
power to ascertain facts is such a power which may be
delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis
of the taking into effect of a law. That is a mental process
common to all branches of the government. Notwithstanding
the apparent tendency, however, to relax the rule prohibiting
delegation of legislative authority on account of the complexity
arising from social and economic forces at work in this modern
industrial age, the orthodox pronouncement of Judge Cooley in his
work on Constitutional Limitations finds restatement in Prof.
AL Ilagan-Malipol. AB. MD
Willoughby's treatise on the Constitution of the United States in the
following language speaking of declaration of legislative power to
administrative agencies: The principle which permits the
legislature to provide that the administrative agent may
determine when the circumstances are such as require the
application of a law is defended upon the ground that at the
time this authority is granted, the rule of public policy,
which is the essence of the legislative act, is determined by
the legislature. In other words, the legislature, as it is its
duty to do, determines that, under given circumstances,
certain executive or administrative action is to be taken, and
that, under other circumstances, different or no action at all
is to be taken. What is thus left to the administrative official
is not the legislative determination of what public policy
demands, but simply the ascertainment of what the facts of
the case require to be done according to the terms of the
law by which he is governed. The efficiency of an Act as a
declaration of legislative will must, of course, come from
Congress, but the ascertainment of the contingency upon
which the Act shall take effect may be left to such agencies
as it may designate. The legislature, then, may provide that
a law shall take effect upon the happening of future
specified contingencies leaving to some other person or
body the power to determine when the specified
contingency has arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to
make laws and to alter and repeal them; the test is the
completeness of the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine whether or not
there is an undue delegation of legislative power, the inquiry must
be directed to the scope and definiteness of the measure enacted.
The legislative does not abdicate its functions when it
describes what job must be done, who is to do it, and what
is the scope of his authority. For a complex economy, that may
be the only way in which the legislative process can go forward. A
27
TAXATION LAW i
distinction has rightfully been made between delegation of
power to make the laws which necessarily involves a
discretion as to what it shall be, which constitutionally may
not be done, and delegation of authority or discretion as to
its execution to be exercised under and in pursuance of the
law, to which no valid objection can be made. The Constitution
is thus not to be regarded as denying the legislature the necessary
resources of flexibility and practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies
the power to determine certain facts or conditions, or the
happening of contingencies, on which the operation of a statute is,
by its terms, made to depend, but the legislature must prescribe
sufficient standards, policies or limitations on their authority.49
While the power to tax cannot be delegated to executive agencies,
details as to the enforcement and administration of an exercise of
such power may be left to them, including the power to determine
the existence of facts on which its operation depends.50
The rationale for this is that the preliminary ascertainment of facts
as basis for the enactment of legislation is not of itself a legislative
function, but is simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is the kind of
subsidiary activity which the legislature may perform through its
members, or which it may delegate to others to perform. Intelligent
legislation on the complicated problems of modern society is
impossible in the absence of accurate information on the part of the
legislators, and any reasonable method of securing such
information is proper.51 The Constitution as a continuously
operative charter of government does not require that Congress
find for itself
every fact upon which it desires to base legislative action or that it
make for itself detailed determinations which it has declared to be
prerequisite to application of legislative policy to particular facts
and circumstances impossible for Congress itself properly to
investigate.52
AL Ilagan-Malipol. AB. MD
In the present case, the challenged section of R.A. No. 9337 is the
common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It
is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law
is contingent. The legislature has made the operation of the 12%
rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the
12% rate upon factual matters outside of the control of the
executive.
No discretion would be exercised by the President. Highlighting the
absence of discretion is the fact that the word shall is used in the
common proviso. The use of the word shall connotes a mandatory
order. Its use in a statute denotes an imperative obligation and is
inconsistent with the idea of discretion.53 Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and
courts have no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately
impose the 12% rate upon the existence of any of the conditions
specified by Congress. This is a duty which cannot be evaded by
the President. Inasmuch as the law specifically uses the word shall,
the exercise of discretion by the President does not come into play.
It is a clear directive to impose the 12% VAT rate when the
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TAXATION LAW i
specified conditions are present. The time of taking into effect of
the 12% VAT rate is based on the happening of a certain specified
contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA
GURO Party List, et al. that the law effectively nullified the
Presidents power of control over the Secretary of Finance by
mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also
subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean
may in view of the phrase "upon the recommendation of the
Secretary of Finance." Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any recommendation
by the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the
President, it simply means that as head of the Department of
Finance he is the assistant and agent of the Chief Executive. The
multifarious executive and administrative functions of the Chief
Executive are performed by and through the executive
departments, and the acts of the secretaries of such departments,
such as the Department of Finance, performed and promulgated in
the regular course of business, are, unless disapproved or
reprobated by the Chief Executive, presumptively the acts of the
Chief Executive. The Secretary of Finance, as such, occupies a
political position and holds office in an advisory capacity, and, in
the language of Thomas Jefferson, "should be of the President's
bosom confidence" and, in the language of Attorney-General
Cushing, is "subject to the direction of the President."55
In the present case, in making his recommendation to the President
on the existence of either of the two conditions, the Secretary of
Finance is not acting as the alter ego of the President or even her
subordinate. In such instance, he is not subject to the power of
AL Ilagan-Malipol. AB. MD
control and direction of the President. He is acting as the agent of
the legislative department, to determine and declare the event
upon which its expressed will is to take effect.56 The Secretary of
Finance becomes the means or tool by which legislative policy is
determined and implemented, considering that he possesses all the
facilities to gather data and information and has a much broader
perspective to properly evaluate them. His function is to gather and
collate statistical data and other pertinent information and verify if
any of the two conditions laid out by Congress is present. His
personality in such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the
President, the President cannot alter or modify or nullify, or set
aside the findings of the Secretary of Finance and to substitute the
judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to
ascertain the existence of a fact, namely, whether by December 31,
2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-
fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half
percent (1%). If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be
imposed by the President effective January 1, 2006. There is no
undue delegation of legislative power but only of the
discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its
functions or unduly delegate power when it describes what job
must be done, who must do it, and what is the scope of his
authority; in our complex economy that is frequently the only way
in which the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et al.
that delegating to the President the legislative power to tax is
contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the
mere implementation of the law. The intent and will to increase the
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TAXATION LAW i
VAT rate to 12% came from Congress and the task of the President
is to simply execute the legislative policy. That Congress chose to
do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has
ample powers to cause, influence or create the conditions to bring
about either or both the conditions precedent does not deserve any
merit as this argument is highly speculative. The Court does not
rule on allegations which are manifestly conjectural, as these may
not exist at all. The Court deals with facts, not fancies; on realities,
not appearances. When the Court acts on appearances instead of
realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and
Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT
rate imposes an unfair and additional tax burden on the people.
Petitioners also argue that the 12% increase, dependent on any of
the 2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the
original 10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No.
9337, if any of the two conditions set forth therein are satisfied, the
President shall increase the VAT rate to 12%. The provisions of the
law are clear. It does not provide for a return to the 10% rate nor
does it empower the President to so revert if, after the rate is
increased to 12%, the VAT collection goes below the 24/5 of the
GDP of the previous year or that the national government deficit as
a percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none is
AL Ilagan-Malipol. AB. MD
provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.60
Thus, in the absence of any provision providing for a return to the
10% rate, which in this case the Court finds none, petitioners
argument is, at best, purely speculative. There is no basis for
petitioners fear of a fluctuating VAT rate because the law itself
does not provide that the rate should go back to 10% if the
conditions provided in Sections 4, 5 and 6 are no longer present.
The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking
the legislative intent, the law must be taken as it is, devoid of
judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which
was allegedly an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should
be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is
not the only condition. There is another condition, i.e., the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative
conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT or
that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such
action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
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TAXATION LAW i
The condition set for increasing VAT when deficit/GDP is 1.5% or
less means the fiscal condition of government has reached a
relatively sound position or is towards the direction of a balanced
budget position. Therefore, there is no need to increase the VAT
rate since the fiscal house is in a relatively healthy position.
Otherwise stated, if the ratio is more than 1.5%, there is indeed a
need to increase the VAT rate.62
That the first condition amounts to an incentive to the President to
increase the VAT collection does not render it unconstitutional so
long as there is a public purpose for which the law was passed,
which in this case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax
system was originally stated by Adam Smith in his Canons of
Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to
keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state.63
It simply means that sources of revenues must be adequate to
meet government expenditures and their variations.64
The dire need for revenue cannot be ignored. Our country is in a
quagmire of financial woe. During the Bicameral Conference
Committee hearing, then Finance Secretary Purisima bluntly
depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in
right now. We are in a position where 90 percent of our revenue is
used for debt service. So, for every peso of revenue that we
currently raise, 90 goes to debt service. Thats interest plus
amortization of our debt. So clearly, this is not a sustainable
situation. Thats the first fact.
AL Ilagan-Malipol. AB. MD
The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from that
international financial markets. Our debt to GDP is approximately
equal to our GDP. Again, that shows you that this is not a
sustainable situation.
The third thing that Id like to point out is the environment that we
are presently operating in is not as benign as what it used to be the
past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating
in a period of basically global growth and low interest rates. The
past few months, we have seen an inching up, in fact, a rapid
increase in the interest rates in the leading economies of the world.
And, therefore, our ability to borrow at reasonable prices is going to
be challenged. In fact, ultimately, the question is our ability to
access the financial markets.
When the President made her speech in July last year, the
environment was not as bad as it is now, at least based on the
forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then
convince them to improve our ability to borrow at lower rates. But
conditions have changed on us because the interest rates have
gone up. In fact, just within this room, we tried to access the
market for a billion dollars because for this year alone, the
Philippines will have to borrow 4 billion dollars. Of that amount, we
have borrowed 1.5 billion. We issued last January a 25-year bond
at 9.7 percent cost. We were trying to access last week and the
market was not as favorable and up to now we have not accessed
and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe
that we really need to front-end our deficit reduction. Because it is
deficit that is causing the increase of the debt and we are in what
we call a debt spiral. The more debt you have, the more deficit you
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TAXATION LAW i
have because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way, I
think, we can get out of this debt spiral is really have a front-end
adjustment in our revenue base.65
The image portrayed is chilling. Congress passed the law hoping for
rescue from an inevitable catastrophe. Whether the law is indeed
sufficient to answer the states economic dilemma is not for the
Court to judge. In the Farias case, the Court refused to consider
the various arguments raised therein that dwelt on the wisdom of
Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing
that:
. . . policy matters are not the concern of the Court. Government
policy is within the exclusive dominion of the political branches of
the government. It is not for this Court to look into the wisdom or
propriety of legislative determination. Indeed, whether an
enactment is wise or unwise, whether it is based on sound
economic theory, whether it is the best means to achieve the
desired results, whether, in short, the legislative discretion within
its prescribed limits should be exercised in a particular manner are
matters for the judgment of the legislature, and the serious conflict
of opinions does not suffice to bring them within the range of
judicial cognizance.66
In the same vein, the Court in this case will not dawdle on the
purpose of Congress or the executive policy, given that it is not for
the judiciary to "pass upon questions of wisdom, justice or
expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2)
and 110(B) of the NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
AL Ilagan-Malipol. AB. MD
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue
that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2),
110 (B), and Section 12 of R.A. No. 9337, amending Section 114
(C) of the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the constitutional right
against deprivation of life, liberty of property without due process
of law, as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection
clauses are invoked, considering that they are not fixed rules but
rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC
imposes a limitation on the amount of input tax that may be
credited against the output tax. It states, in part: "[P]rovided, that
the input tax inclusive of the input VAT carried over from the
previous quarter that may be credited in every quarter shall not
exceed seventy percent (70%) of the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as
amended, as the value-added tax due from or paid by a VAT-
registered person on the importation of goods or local purchase of
good and services, including lease or use of property, in the course
of trade or business, from a VAT-registered person, and Output Tax
is the value-added tax due on the sale or lease of taxable goods or
properties or services by any person registered or required to
register under the law.
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TAXATION LAW i
Petitioners claim that the contested sections impose limitations on
the amount of input tax that may be claimed. In effect, a portion of
the input tax that has already been paid cannot now be credited
against the output tax.
Petitioners argument is not absolute. It assumes that the input tax
exceeds 70% of the output tax, and therefore, the input tax in
excess of 70% remains uncredited. However, to the extent that the
input tax is less than 70% of the output tax, then 100% of such
input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a
businesss books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section 110(B),
which provides that "if the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters."
In addition, Section 112(B) allows a VAT-registered person to apply
for the issuance of a tax credit certificate or refund for any unused
input taxes, to the extent that such input taxes have not been
applied against the output taxes. Such unused input tax may be
used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is
not ad infinitum, as petitioners exaggeratedly contend. Their
analysis of the effect of the 70% limitation is incomplete and one-
sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not
proceed further to the fact that such unapplied/unutilized input tax
may be credited in the subsequent periods as allowed by the carry-
over provision of Section 110(B) or that it may later on be refunded
through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to
comprehend the operation of the 70% limitation on the input tax.
According to petitioner, the limitation on the creditable input tax in
effect allows VAT-registered establishments to retain a portion of
AL Ilagan-Malipol. AB. MD
the taxes they collect, which violates the principle that tax
collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person, passed
on to him by the seller, when he buys goods. Output tax meanwhile
is the tax due to the person when he sells goods. In computing the
VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by
the seller are equal to the input taxes that he paid and passed on
by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person
shall be liable for the excess, which has to be paid to the Bureau of
Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue
taxes, at the taxpayers option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on
the input tax. Thus, a person can credit his input tax only up to the
extent of 70% of the output tax. In laymans term, the value-added
taxes that a person/taxpayer paid and passed on to him by a seller
can only be credited up to 70% of the value-added taxes that is
due to him on a taxable transaction. There is no retention of any
tax collection because the person/taxpayer has already previously
paid the input tax to a seller, and the seller will subsequently remit
such input tax to the BIR. The party directly liable for the payment
of the tax is the seller.71 What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as evidenced
by receipts, against his output taxes.
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TAXATION LAW i
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also
argue that the input tax partakes the nature of a property that may
not be confiscated, appropriated, or limited without due process of
law.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
persons entitlement to the creditable input tax is a mere statutory
privilege.
The distinction between statutory privileges and vested rights must
be borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away
property, which was vested by virtue of such rights.72
Under the previous system of single-stage taxation, taxes paid at
every level of distribution are not recoverable from the taxes
payable, although it becomes part of the cost, which is deductible
from the gross revenue. When Pres. Aquino issued E.O. No. 273
imposing a 10% multi-stage tax on all sales, it was then that the
crediting of the input tax paid on purchase or importation of goods
and services by VAT-registered persons against the output tax was
introduced.73 This was adopted by the Expanded VAT Law (R.A. No.
7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424).75 The
right to credit input tax as against the output tax is clearly a
privilege created by law, a privilege that also the law can remove,
or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and
confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A)
of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
AL Ilagan-Malipol. AB. MD
Provided, That the input tax on goods purchased or imported in a
calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months
if the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (P1,000,000.00):
Provided, however, That if the estimated useful life of the capital
goods is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such a shorter period:
Provided, finally, That in the case of purchase of services, lease or
use of properties, the input tax shall be creditable to the purchaser,
lessee or license upon payment of the compensation, rental, royalty
or fee.
The foregoing section imposes a 60-month period within which to
amortize the creditable input tax on purchase or importation of
capital goods with acquisition cost of P1 Million pesos, exclusive of
the VAT component. Such spread out only poses a delay in the
crediting of the input tax. Petitioners argument is without basis
because the taxpayer is not permanently deprived of his privilege
to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out
of the creditable input tax in this case amounts to a 4-year interest-
free loan to the government.76 In the same breath, Congress also
justified its move by saying that the provision was designed to raise
an annual revenue of 22.6 billion.77 The legislature also dispelled
the fear that the provision will fend off foreign investments, saying
that foreign investors have other tax incentives provided by law,
and citing the case of China, where despite a 17.5% non-creditable
VAT, foreign investments were not deterred.78 Again, for whatever
is the purpose of the 60-month amortization, this involves
executive economic policy and legislative wisdom in which the
Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions,
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Section 12 of R.A. No. 9337, which amended Section 114 of the
NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of
its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods and
services which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold a final
value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or use of
properties or property rights to nonresident owners shall be subject
to ten percent (10%) withholding tax at the time of payment. For
purposes of this Section, the payor or person in control of the
payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made.
Section 114(C) merely provides a method of collection, or as stated
by respondents, a more simplified VAT withholding system. The
government in this case is constituted as a withholding agent with
respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates
of value-added taxes to be withheld -- 3% on gross payments for
purchases of goods; 6% on gross payments for services supplied by
contractors other than by public works contractors; 8.5% on gross
payments for services supplied by public work contractors; or 10%
on payment for the lease or use of properties or property rights to
nonresident owners. Under the present Section 114(C), these
different rates, except for the 10% on lease or property rights
payment to nonresidents, were deleted, and a uniform rate of 5%
is applied.
AL Ilagan-Malipol. AB. MD
The Court observes, however, that the law the used the word final.
In tax usage, final, as opposed to creditable, means full. Thus, it is
provided in Section 114(C): "final value-added tax at the rate of
five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424
(The Tax Reform Act of 1997), the concept of final withholding tax
on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system
the amount of income tax withheld by the withholding agent is
constituted as 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 underwithholding, the
deficiency tax shall be collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding
tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee
on said income. Taxes withheld on income payments covered by
the expanded withholding tax (referred to in Sec. 2.57.2 of these
regulations) and compensation income (referred to in Sec. 2.78
also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions
with the government are subject to a 5% rate, which constitutes as
full payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. The other 5% effectively
accounts for the standard input VAT (deemed input VAT), in lieu of
the actual input VAT directly or attributable to the taxable
transaction.79
The Court need not explore the rationale behind the provision. It is
clear that Congress intended to treat differently taxable
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transactions with the government.80 This is supported by the fact
that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller
or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The
Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each
purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-
added tax due at the rate of three percent (3%) of the gross
payment for the purchase of goods and six percent (6%) on gross
receipts for services rendered by contractors on every sale or
installment payment which shall be creditable against the value-
added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors,
the withholding rate shall be eight and one-half percent (8.5%):
Provided, further, That the payment for lease or use of properties
or property rights to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be
considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word
creditable exhibits Congresss intention to treat transactions with
the government differently. Since it has not been shown that the
class subject to the 5% final withholding tax has been unreasonably
narrowed, there is no reason to invalidate the provision.
Petitioners, as petroleum dealers, are not the only ones subjected
AL Ilagan-Malipol. AB. MD
to the 5% final withholding tax. It applies to all those who deal with
the government.
Moreover, the actual input tax is not totally lost or uncreditable, as
petitioners believe. Revenue Regulations No. 14-2005 or the
Consolidated Value-Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5% of gross
payments, the excess may form part of the cost. Equally, should
the actual input tax be less than 5%, the difference is treated as
income.81
Petitioners also argue that by imposing a limitation on the
creditable input tax, the government gets to tax a profit or value-
added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again,
one-sided. The Court will not engage in a legal joust where
premises are what ifs, arguments, theoretical and facts, uncertain.
Any disquisition by the Court on this point will only be, as
Shakespeare describes life in Macbeth,82 "full of sound and fury,
signifying nothing."
Whats more, petitioners contention assumes the proposition that
there is no profit or value-added. It need not take an astute
businessman to know that it is a matter of exception that a
business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for
profit.
The equal protection clause under the Constitution means that "no
person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."83
The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind
of property, the rates to be levied, or the amounts to be raised, the
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methods of assessment, valuation and collection, the States power
is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if
the entity has a high ratio of input tax, or invests in capital
equipment, or has several transactions with the government, is not
based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law does not
make any classification in the subject of taxation, the kind of
property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners
alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield
varying end results depending on ones profit margin and value-
added, the Court cannot go beyond what the legislature has laid
down and interfere with the affairs of business.
The equal protection clause does not require the universal
application of the laws on all persons or things without distinction.
This might in fact sometimes result in unequal protection. What the
clause requires is equality among equals as determined according
to a valid classification. By classification is meant the grouping of
persons or things similar to each other in certain particulars and
different from all others in these same particulars.85
Petitioners brought to the Courts attention the introduction of
Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana
Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493
by Rep. Eric D. Singson. The proposed legislation seeks to amend
the 70% limitation by increasing the same to 90%. This, according
to petitioners, supports their stance that the 70% limitation is
arbitrary and confiscatory. On this score, suffice it to say that these
are still proposed legislations. Until Congress amends the law, and
AL Ilagan-Malipol. AB. MD
absent any unequivocal basis for its unconstitutionality, the 70%
limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided that
the rate is uniform on the same class everywhere with all people at
all times.86
In this case, the tax law is uniform as it provides a standard rate of
0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on
sale of goods and properties, importation of goods, and sale of
services and use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry
or trade that will bear the 70% limitation on the creditable input
tax, 5-year amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the government. It must
be stressed that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only
demands uniformity within the particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a
threshold margin. The VAT rate of 0% or 10% (or 12%) does not
apply to sales of goods or services with gross annual sales or
receipts not exceeding P1,500,000.00.88 Also, basic marine and
agricultural food products in their original state are still not subject
to the tax,89 thus ensuring that prices at the grassroots level will
37
TAXATION LAW i
remain accessible. As was stated in Kapatiran ng mga Naglilingkod
sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales
of goods or services by persons engaged in business with an
aggregate gross annual sales exceeding P200,000.00. Small corner
sari-sari stores are consequently exempt from its application.
Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities,
spared as they are from the incidence of the VAT, are expected to
be relatively lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses
with low profit margins, and unduly favors those with high profit
margins. Congress was not oblivious to this. Thus, to equalize the
weighty burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons under
Section 109(v), i.e., transactions with gross annual sales and/or
receipts not exceeding P1.5 Million. This acts as a equalizer because
in effect, bigger businesses that qualify for VAT coverage and VAT-
exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the
impact of the imposition of the tax on those previously exempt.
Excise taxes on petroleum products91 and natural gas92 were
reduced. Percentage tax on domestic carriers was removed.93
Power producers are now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of
corporations, in order to distribute the burden of taxation.
Domestic, foreign, and non-resident corporations are now subject
to a 35% income tax rate, from a previous 32%.95 Intercorporate
dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the
corporations domicile was increased to 20%.96 The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from
income taxes anymore.97 Even the sale by an artist of his works or
AL Ilagan-Malipol. AB. MD
services performed for the production of such works was not
spared.
All these were designed to ease, as well as spread out, the burden
of taxation, which would otherwise rest largely on the consumers.
It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable
input tax is anything but regressive. It is the smaller business with
higher input tax-output tax ratio that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayers ability
to pay. This principle was also lifted from Adam Smiths Canons of
Taxation, and it states:
I. The subjects of every state ought to contribute towards the
support of the government, as nearly as possible, in proportion to
their respective abilities; that is, in proportion to the revenue which
they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the
resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very nature,
it is regressive. The principle of progressive taxation has no relation
with the VAT system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed is the same
regardless of income. In
other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by a
person or profit margin marked by a business, such that the higher
the income or profit margin, the smaller the portion of the income
or profit that is eaten by VAT. A converso, the lower the income or
profit margin, the bigger the part that the VAT eats away. At the
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end of the day, it is really the lower income group or businesses
with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply provides is
that Congress shall "evolve a progressive system of taxation." The
Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean simply that
direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized. (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977))
Indeed, the mandate to Congress is not to prescribe, but to evolve,
a progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been prohibited
with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution
from which the present Art. VI, 28 (1) was taken. Sales taxes are
also regressive.
Resort to indirect taxes should be minimized but not avoided
entirely because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of this
imposition by providing for zero rating of certain transactions (R.A.
No. 7716, 3, amending 102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, 4 amending
103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In
this case, it is just an enema, a first-aid measure to resuscitate an
economy in distress. The Court is neither blind nor is it turning a
deaf ear on the plight of the masses. But it does not have the
panacea for the malady that the law seeks to remedy. As in other
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cases, the Court cannot strike down a law as unconstitutional
simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong
there is a remedy, and that the judiciary should stand ready to
afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions. . .
.
Let us likewise disabuse our minds from the notion that the
judiciary is the repository of remedies for all political or social ills;
We should not forget that the Constitution has judiciously allocated
the powers of government to three distinct and separate
compartments; and that judicial interpretation has tended to the
preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not
the guardian of the others and that, for official wrong-doing, each
may be brought to account, either by impeachment, trial or by the
ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it
still holds true now. All things considered, there is no raison d'tre
for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the
petitions in G.R. Nos. 168056, 168207, 168461, 168463, and
168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement
and implementation of R.A. No. 9337, the temporary restraining
order issued by the Court on July 1, 2005 is LIFTED upon finality
of herein decision.
SO ORDERED.
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G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS,
INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE
HON. ACTING SECRETARY OF FINANCE JUANITA D.
AMATONG, and THE HON. COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner
Chamber of Real Estate and Builders Associations, Inc. is
questioning the constitutionality of Section 27 (E) of Republic Act
(RA) 84242 and the revenue regulations (RRs) issued by the Bureau
of Internal Revenue (BIR) to implement said provision and those
involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in
the Philippines. It impleaded former Executive Secretary Alberto
Romulo, then acting Secretary of Finance Juanita D. Amatong and
then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.
Petitioner assails the validity of the imposition of minimum
corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as
ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner argues that
the MCIT violates the due process clause because it levies income
tax even if there is no realized gain.
AL Ilagan-Malipol. AB. MD
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by
RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii)
of RR 7-2003, all of which prescribe the rules and procedures for
the collection of CWT on the sale of real properties categorized as
ordinary assets. Petitioner contends that these revenue regulations
are contrary to law for two reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets and
second, respondent Secretary of Finance has no authority to collect
CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the
subject revenue regulations violate the due process clause because,
like the MCIT, the government collects income tax even when the
net income has not yet been determined. They contravene the
equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises,
more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the
present case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from
sales of real properties classified as ordinary assets under
RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year
of operation, is assessed an MCIT of 2% of its gross income when
such MCIT is greater than the normal corporate income tax
imposed under Section 27(A).4 If the regular income tax is higher
than the MCIT, the corporation does not pay the MCIT. Any excess
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TAXATION LAW i
of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the
gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under
this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its
business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this
Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of
the [MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The
Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because of
force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, the necessary
rules and regulations that shall define the terms and
conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the
[MCIT] provided under Subsection (E) hereof, the term
gross income shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of
goods sold" shall include all business expenses directly
AL Ilagan-Malipol. AB. MD
incurred to produce the merchandise to bring them to their
present location and use.
For trading or merchandising concern, "cost of goods sold" shall
include the invoice cost of the goods sold, plus import duties,
freight in transporting the goods to the place where the goods are
actually sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and
sold" shall include all costs of production of finished goods, such as
raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring
the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross
income" means gross receipts less sales returns, allowances,
discounts and cost of services. "Cost of services" shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries
and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly
utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in
the case of banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary),
on the recommendation of the Commissioner of Internal Revenue
(CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the
gross income as of the end of the taxable year (whether calendar
or fiscal year, depending on the accounting period employed) is
hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in
which such corporation commenced its business operations. The
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TAXATION LAW i

MCIT shall be imposed whenever such corporation has zero or the seller/transferor is habitually engaged in the real estate
negative taxable income or whenever the amount of minimum business in accordance with the following schedule
corporate income tax is greater than the normal income tax due
from such corporation.
Those which are exempt from a Exempt
For purposes of these Regulations, the term, "normal income tax" withholding tax at source as
means the income tax rates prescribed under Sec. 27(A) and Sec. prescribed in Sec. 2.57.5 of
28(A)(1) of the Code xxx at 32% effective January 1, 2000 and these regulations.
thereafter.
With a selling price of five 1.5%
xxx xxx xxx hundred thousand pesos
(P500,000.00) or less.
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT]
over the normal income tax as computed under Sec. 27(A) of the With a selling price of more 3.0%
Code shall be carried forward on an annual basis and credited than five hundred thousand
against the normal income tax for the three (3) immediately pesos (P500,000.00) but not
succeeding taxable years. more than two million pesos
(P2,000,000.00).
xxx xxx xxx
With selling price of more than 5.0%
Meanwhile, on April 17, 1998, respondent Secretary, upon two million pesos
recommendation of respondent CIR, promulgated RR 2-98 (P2,000,000.00)
implementing certain provisions of RA 8424 involving the
withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real xxx xxx xxx
property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business were Gross selling price shall mean the consideration stated in the sales
subjected to CWT: document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
Sec. 2.57.2. Income payment subject to [CWT] and rates exchange, the fair market value of the property received in
prescribed thereon: exchange, as determined in the Income Tax Regulations shall be
used.
xxx xxx xxx
Where the consideration or part thereof is payable on installment,
(J) Gross selling price or total amount of consideration or its no withholding tax is required to be made on the periodic
equivalent paid to the seller/owner for the sale, exchange or installment payments where the buyer is an individual not engaged
transfer of. Real property, other than capital assets, sold by an in trade or business. In such a case, the applicable rate of tax
individual, corporation, estate, trust, trust fund or pension fund and
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TAXATION LAW i
based on the entire consideration shall be withheld on the last
installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld by
the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A [CWT]
based on the gross selling price/total amount of consideration or
the fair market value determined in accordance with Section 6(E) of
the Code, whichever is higher, paid to the seller/owner for the sale,
transfer or exchange of real property, other than capital asset, shall
be imposed upon the withholding agent,/buyer, in accordance with
the following schedule:
Where the seller/transferor is exempt from [CWT] in Exempt
accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where
the seller/transferor is habitually engaged in the
real estate business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(P500,000.00) or less.
With a selling price of more than Five Hundred 3.0%
Thousand Pesos (P500,000.00) but not more than
Two Million Pesos (P2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(P2,000,000.00).
AL Ilagan-Malipol. AB. MD
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is,
payments in the year of sale do not exceed 25% of the selling
price), the tax shall be deducted and withheld by the buyer on
every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a
"deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross selling price or fair
market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be
issued to the buyer unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424
provides that any sale, barter or exchange subject to the CWT will
not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the
taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of
conveyances of land or land and building/improvement thereon
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TAXATION LAW i
arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of
Deeds unless the [CIR] or his duly authorized representative has
certified that such transfers and conveyances have been reported
and the expanded withholding tax, inclusive of the documentary
stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing
for the guidelines in determining whether a particular real property
is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of
real property. - Gains/Income derived from sale, exchange, or
other disposition of real properties shall, unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending
on whether the subject properties are classified as capital assets or
ordinary assets;
a. In the case of individual citizen (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under
Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross
selling price or current fair market value as determined in
accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on
net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
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xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as
capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the
Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT] under Sec. 27(E)
of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question
unless the following requisites are satisfied: (1) there must be an
actual case calling for the exercise of judicial review; (2) the
question before the court must be ripe for adjudication; (3) the
person challenging the validity of the act must have standing to do
so; (4) the question of constitutionality must have been raised at
the earliest opportunity and (5) the issue of constitutionality must
be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this
case. According to them, there is no actual case calling for the
exercise of judicial power and it is not yet ripe for adjudication
because
[petitioner] did not allege that CREBA, as a corporate entity, or any
of its members, has been assessed by the BIR for the payment of
[MCIT] or [CWT] on sales of real property. Neither did petitioner
allege that its members have shut down their businesses as a result
of the payment of the MCIT or CWT. Petitioner has raised concerns
in mere abstract and hypothetical form without any actual, specific
44
TAXATION LAW i
and concrete instances cited that the assailed law and revenue
regulations have actually and adversely affected it. Lacking
empirical data on which to base any conclusion, any discussion on
the constitutionality of the MCIT or CWT on sales of real property is
essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory
opinion that does not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or
an assertion of opposite legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or abstract
difference or dispute.11 On the other hand, a question is considered
ripe for adjudication when the act being challenged has a direct
adverse effect on the individual challenging it.12
Contrary to respondents assertion, we do not have to wait until
petitioners members have shut down their operations as a result of
the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers Multi-Purpose
Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a
singular violation of the Constitution and/or the law is enough to
awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no
better time than the present to settle such question once and for
all.
Respondents next argue that petitioner has no legal standing to
sue:
AL Ilagan-Malipol. AB. MD
Petitioner is an association of some of the real estate developers
and builders in the Philippines. Petitioners did not allege that [it]
itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of
[the assailed provisions].15
Legal standing or locus standi is a partys personal and substantial
interest in a case such that it has sustained or will sustain direct
injury as a result of the governmental act being challenged.16 In
Holy Spirit Homeowners Association, Inc. v. Defensor,17 we held
that the association had legal standing because its members stood
to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the
enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified beneficiaries.
Thus, petitioner association may assail those provisions in the IRR
which it believes to be unfavorable to the rights of its members.
xxx Certainly, petitioner and its members have sustained direct
injury arising from the enforcement of the IRR in that they have
been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a
suit which does not satisfy the requirements of an actual case,
ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only
petitioners but practically all domestic corporate taxpayers in our
country. The transcendental importance of the issues raised and
their overreaching significance to society make it proper for us to
take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by
RA 8424 to the Philippine taxation system. It came about as a
45
TAXATION LAW i
result of the perceived inadequacy of the self-assessment system in
capturing the true income of corporations.21 It was devised as a
relatively simple and effective revenue-raising instrument
compared to the normal income tax which is more difficult to
control and enforce. It is a means to ensure that everyone will
make some minimum contribution to the support of the public
sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice
of certain corporations of reporting constantly a loss in their
operations to avoid the payment of taxes, and thus avoid sharing in
the cost of government. In this regard, the Tax Reform Act
introduces for the first time a new concept called the [MCIT] so as
to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. This will go a long
way in ensuring that corporations will pay their just share in
supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their
privilege to do business to the government. They also benefit from
the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to
the public expenses.
Congress intended to put a stop to the practice of corporations
which, while having large turn-overs, report minimal or negative
net income resulting in minimal or zero income taxes year in and
year out, through under-declaration of income or over-deduction of
expenses otherwise called tax shelters.23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to
remedy, that is why they have proposed the [MCIT]. Because from
experience too, you have corporations which have been losing year
in and year out and paid no tax. So, if the corporation has been
losing for the past five years to ten years, then that corporation has
no business to be in business. It is dead. Why continue if you are
AL Ilagan-Malipol. AB. MD
losing year in and year out? So, we have this provision to avoid this
type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax
avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the
following safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of
the need to recoup initial major capital expenditures, the imposition
of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation
commenced its operations.25 This grace period allows a new
business to stabilize first and make its ventures viable before it is
subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the
MCIT paid over the normal income tax which shall be credited
against the normal income tax for the three immediately
succeeding years.27
Third, since certain businesses may be incurring genuine repeated
losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own
system of minimum corporate income taxation. Our lawmakers
46
TAXATION LAW i
noted that most developing countries, particularly Latin American
and Asian countries, have the same form of safeguards as we do.
As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have
of course quite a bit of room for underdeclaration of gross receipts
have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum
of income tax of half a percent (0.5%) of gross assessable income.
In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis
for that minimum income tax.
The other thing youll notice is the preponderance of Latin American
countries that employed this method. Okay, those are additional
Latin American countries.29
At present, the United States of America, Mexico, Argentina,
Tunisia, Panama and Hungary have their own versions of the
MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross
income, were not taken into account.31 Thus, pegging the tax base
of the MCIT to a corporations gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is
not "realized gain."32
We disagree.
AL Ilagan-Malipol. AB. MD
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. The exercise of taxing
power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest
and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that
is purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a
specific rate for a particular public purpose on persons or things
within its jurisdiction. In other words, the legislature wields the
power to define what tax shall be imposed, why it should be
imposed, how much tax shall be imposed, against whom (or what)
it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its
range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it.37 Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat
"[no] person shall be deprived of life, liberty or property without
due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that
the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure39 when it amounts to a
confiscation of property.40 But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional
(for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a
factual foundation to such an unconstitutional taint.42 This merely
adheres to the authoritative doctrine that, where the due process
clause is invoked, considering that it is not a fixed rule but rather a
47
TAXATION LAW i
broad standard, there is a need for proof of such persuasive
character.43
Petitioner is correct in saying that income is distinct from capital. 44
Income means all the wealth which flows into the taxpayer other
than a mere return on capital. Capital is a fund or property existing
at one distinct point in time while income denotes a flow of wealth
during a definite period of time.45 Income is gain derived and
severed from capital.46 For income to be taxable, the following
requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes
capital because capital is not income. In other words, it is income,
not capital, which is subject to income tax. However, the MCIT is
not a tax on capital.
The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its goods,
i.e., the cost of goods48 and other direct expenses from gross sales.
Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses
as the base the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time
reducing the applicable tax rate.49
AL Ilagan-Malipol. AB. MD
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions. Tax
thereon is generally held to be within the power of a state to
impose; or constitutional, unless it interferes with interstate
commerce or violates the requirement as to uniformity of
taxation.50
The United States has a similar alternative minimum tax (AMT)
system which is generally characterized by a lower tax rate but a
broader tax base.51 Since our income tax laws are of American
origin, interpretations by American courts of our parallel tax laws
have persuasive effect on the interpretation of these laws.52
Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are
comparable. On the question of the AMTs constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin
v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy
general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no
taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the
constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes
was a legitimate governmental end to which the AMT bore a
reasonable relation.55
American courts have also emphasized that Congress has the
power to condition, limit or deny deductions from gross income in
order to arrive at the net that it chooses to tax.56 This is because
deductions are a matter of legislative grace.57
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TAXATION LAW i
Absent any other valid objection, the assignment of gross income,
instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical
data to show that the implementation of the MCIT resulted in the
confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its
allegation that the MCIT is arbitrary and confiscatory. The Court
cannot strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its nature,
it adversely affects property rights.59 The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without
due process of law because the MCIT is being imposed and
collected even when there is actually a loss, or a zero or negative
taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed
whenever such corporation has zero or negative taxable income
or whenever the amount of [MCIT] is greater than the normal
income tax due from such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines
the coverage of Section 27(E). This means that even if a
corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an
MCIT of 2% of its gross income. This is consistent with the law
AL Ilagan-Malipol. AB. MD
which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT is
to be paid only if it is greater than the normal net income.
Obviously, it may well be the case that the MCIT would be less than
the net income of the corporation which posts a zero or negative
taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes
(including income taxes) are collected.61 Under Section 57 of RA
8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain
incomes; (b) withholding of creditable tax at source and (c) tax-
free covenant bonds. Petitioner is concerned with the second
category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary
assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and
ordinary assets under RA 8424, contends that Sections 2.57.2(J)
and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-
2003 were promulgated "with grave abuse of discretion amounting
to lack of jurisdiction" and "patently in contravention of law"62
because they ignore such distinctions. Petitioners conclusion is
based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real
estate as basis for determining the income tax for the sale of real
estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which
calls for the payment of the net income at the end of the taxable
period.63
Petitioner theorizes that since RA 8424 treats capital assets and
ordinary assets differently, respondents cannot disregard the
distinctions set by the legislators as regards the tax base, modes of
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collection and payment of taxes on income from the sale of capital
and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection
of CWT on Sales of Real Property Considered as Ordinary
Assets
The Secretary of Finance is granted, under Section 244 of RA 8424,
the authority to promulgate the necessary rules and regulations for
the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations
must not override, but must remain consistent and in harmony
with, the law they seek to apply and implement.64 It is well-settled
that an administrative agency cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at
source is a procedure of collecting income tax which is sanctioned
by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; second, to ensure
the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding
returns and third, to improve the governments cash flow.67 This
results in administrative savings, prompt and efficient collection of
taxes, prevention of delinquencies and reduction of governmental
effort to collect taxes through more complicated means and
remedies.68
Respondent Secretary has the authority to require the withholding
of a tax on items of income payable to any person, national or
juridical, residing in the Philippines. Such authority is derived from
Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source.
xxx xxx xxx
AL Ilagan-Malipol. AB. MD
(B) Withholding of Creditable Tax at Source. The [Secretary] may,
upon the recommendation of the [CIR], require the withholding of a
tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the
taxable year.
The questioned provisions of RR 2-98, as amended, are well within
the authority given by Section 57(B) to the Secretary, i.e., the
graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the
taxable year.
Effect of RRs on the Tax Base for the Income Tax of
Individuals or Corporations Engaged in the Real Estate
Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted
the tax base of a real estate business income tax from net income
to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to extinguish its possible tax obligation. 69 They
are installments on the annual tax which may be due at the end of
the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entitys net
income imposed under Section 24 (resident individuals) or Section
27 (domestic corporations) in relation to Section 31 of RA 8424, i.e.
gross income less allowable deductions. The CWT is to be deducted
from the net income tax payable by the taxpayer at the end of the
taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003
50
TAXATION LAW i
reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition
of real property. - Gains/Income derived from sale, exchange, or
other disposition of real properties shall unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending
on whether the subject properties are classified as capital assets or
ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under
Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of the
Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of
the Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as
capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of
the Code. In lieu of the ordinary income tax, however, domestic
AL Ilagan-Malipol. AB. MD
corporations may become subject to the [MCIT] under Sec. 27(E)
of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is greater than the
tax withheld, then the taxpayer shall pay the difference. If, on the
other hand, the tax due is less than the tax withheld, the taxpayer
will be entitled to a refund or tax credit. Undoubtedly, the taxpayer
is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding
taxes is evidently for purposes of practicality and convenience.
Obviously, the withholding agent/buyer who is obligated to withhold
the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and privity are
limited only to the particular transaction in which he is a party. In
such a case, his basis can only be the GSP or FMV as these are the
only factors reasonably known or knowable by him in connection
with the performance of his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and
Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or
FMV of the real property categorized as ordinary assets. On the
other hand, Section 27(D)(5) of RA 8424 imposes a final tax and
flat rate of 6% on the gain presumed to be realized from the sale of
a capital asset based on its GSP or FMV. This final tax is also
withheld at source.72
The differences between the two forms of withholding tax, i.e.,
creditable and final, show that ordinary assets are not treated in
the same manner as capital assets. Final withholding tax (FWT) and
CWT are distinguished as follows:
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the manner and time of filing of the return, payment and

FWT CWT assessment of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically
mean that it is treated exactly the same way as capital gains. As
a) The amount of income a) Taxes withheld on certain income
aforementioned, the mechanics of the FWT are distinct from those
tax withheld by the payments are intended to equal or at of the CWT. The withholding agent/buyers act of collecting the tax
withholding agent is least approximate the tax due of the at the time of the transaction by withholding the tax due from the
constituted as a full and payee on said income.
income payable is the essence of the withholding tax method of tax
final payment of the income
collection.
tax due from the payee on
the said income.
No Rule that Only Passive

Incomes Can Be Subject to CWT

b)The liability for payment
of the tax rests primarily on
the payor as a withholding
agent.
b) Payee of income is required to
report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.
Petitioner submits that only passive income can be subjected to
withholding tax, whether final or creditable. According to petitioner,
the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive
income being subjected to FWT. It follows that Section 57(B) on
CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

c) The payee is not required c) The income recipient is still
to file an income tax return required to file an income tax return, (A) Withholding of Final Tax on Certain Incomes. Subject
for the particular income.73 as prescribed in Sec. 51 and Sec. 52 to rules and regulations, the [Secretary] may promulgate,
of the NIRC, as amended.74 upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2),
As previously stated, FWT is imposed on the sale of capital assets. 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
On the other hand, CWT is imposed on the sale of ordinary assets. 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
The inherent and substantial differences between FWT and CWT 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
disprove petitioners contention that ordinary assets are being 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
lumped together with, and treated similarly as, capital assets in 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
contravention of the pertinent provisions of RA 8424. 28(B)(5)(c); 33; and 282 of this Code on specified
items of income shall be withheld by payor-corporation
Petitioner insists that the levy, collection and payment of CWT at and/or person and paid in the same manner and subject to
the time of transaction are contrary to the provisions of RA 8424 on the same conditions as provided in Section 58 of this Code.
AL Ilagan-Malipol. AB. MD 52
TAXATION LAW i
(B) Withholding of Creditable Tax at Source. The
[Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for
by law, at the rate of not less than one percent (1%) but not
more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for
the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on
certain kinds of income and enumerates these as passive income.
The BIR defines passive income by stating what it is not:
if the income is generated in the active pursuit and performance
of the corporations primary purposes, the same is not passive
income76
It is income generated by the taxpayers assets. These assets can
be in the form of real properties that return rental income, shares
of stock in a corporation that earn dividends or interest income
received from savings.
On the other hand, Section 57(B) provides that the Secretary can
require a CWT on "income payable to natural or juridical persons,
residing in the Philippines." There is no requirement that this
income be passive income. If that were the intent of Congress, it
could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to
FWT while Section 57(B) pertains to CWT. The former covers the
kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since
the law itself makes distinctions, it is wrong to regard 57(A) and
57(B) in the same way.
AL Ilagan-Malipol. AB. MD
To repeat, the assailed provisions of RR 2-98, as amended, do not
modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency
may adopt any reasonable method to carry out its functions. 77
Similarly, considering that the law uses the general term "income,"
the Secretary and CIR may specify the kinds of income the rules
will apply to based on what is feasible. In addition, administrative
rules and regulations ordinarily deserve to be given weight and
respect by the courts78 in view of the rule-making authority given
to those who formulate them and their specific expertise in their
respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real
estate classified as ordinary assets deprives its members of their
property without due process of law because, in their line of
business, gain is never assured by mere receipt of the selling price.
As a result, the government is collecting tax from net income not
yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due
from the seller of the property at the end of the taxable year. The
seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no
confiscation of property repugnant to the constitutional guarantee
of due process. More importantly, the due process requirement
applies to the power to tax.79 The CWT does not impose new taxes
nor does it increase taxes.80 It relates entirely to the method and
time of payment.
Petitioner protests that the refund remedy does not make the CWT
less burdensome because taxpayers have to wait years and may
even resort to litigation before they are granted a refund.81 This
argument is misleading. The practical problems encountered in
53
TAXATION LAW i
claiming a tax refund do not affect the constitutionality and validity
of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have
otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save
the entity from having to obtain loans entailing considerable
interest expense. Petitioner also lists the expenses and pitfalls of
the trade which add to the burden of the realty industry: huge
investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-
front" regulatory fees from at least 20 government agencies.82
Petitioners lamentations will not support its attack on the
constitutionality of the CWT. Petitioners complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on
the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment basis.83
Petitioners desire to utilize for its operational and capital expenses
money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be
demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the
equal protection clause because the CWT is being levied only on
real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their
sales, even if their manner of doing business is not much different
from that of a real estate enterprise. Like a manufacturing concern,
a real estate business is involved in a continuous process of
production and it incurs costs and expenditures on a regular basis.
The only difference is that "goods" produced by the real estate
business are house and lot units.84
AL Ilagan-Malipol. AB. MD
Again, we disagree.
The equal protection clause under the Constitution means that "no
person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."85 Stated differently, all
persons belonging to the same class shall be taxed alike. It follows
that the guaranty of the equal protection of the laws is not violated
by legislation based on a reasonable classification. Classification, to
be valid, must (1) rest on substantial distinctions; (2) be germane
to the purpose of the law; (3) not be limited to existing conditions
only and (4) apply equally to all members of the same class.86
The taxing power has the authority to make reasonable
classifications for purposes of taxation.87 Inequalities which result
from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.88 The real estate
industry is, by itself, a class and can be validly treated differently
from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly
as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real
property is bigger and its frequency of transaction limited, making
it less cumbersome for the parties to comply with the withholding
tax scheme.
On the other hand, each manufacturing enterprise may have tens
of thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold
the taxes on each of their transactions with their tens or hundreds
of suppliers may result in an inefficient and unmanageable system
of taxation and may well defeat the purpose of the withholding tax
system.
54
TAXATION LAW i

Petitioner counters that there are other businesses wherein Conclusion

expensive items are also sold infrequently, e.g. heavy equipment,
jewelry, furniture, appliance and other capital goods yet these are
not similarly subjected to the CWT.89 As already discussed, the
Secretary may adopt any reasonable method to carry out its
functions.90 Under Section 57(B), it may choose what to subject to
CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that
petitioners argument is not accurate. The sales of manufacturers
who have clients within the top 5,000 corporations, as specified by
the BIR, are also subject to CWT for their transactions with said
5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58
of RA 8424
The renowned genius Albert Einstein was once quoted as saying
"[the] hardest thing in the world to understand is the income
tax."92 When a party questions the constitutionality of an income
tax measure, it has to contend not only with Einsteins observation
but also with the vast and well-established jurisprudence in support
of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that
the imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides

that the Registry of Deeds should not effect the regisration of any
document transferring real property unless a certification is issued
by the CIR that the withholding tax has been paid. Petitioner
proffers hardly any reason to strike down this rule except to rely on
its contention that the CWT is unconstitutional. We have ruled that
it is not. Furthermore, this provision uses almost exactly the same
wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any

document transferring real property shall be effected by the
Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been
reported, and the capital gains or [CWT], if any, has been
paid: xxxx any violation of this provision by the Register of Deeds
shall be subject to the penalties imposed under Section 269 of this
Code. (Emphasis supplied)

AL Ilagan-Malipol. AB. MD 55
TAXATION LAW i
G.R. No. 159796 July 17, 2007
ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and
ENVIRONMENTALIST CONSUMERS NETWORK, INC. (ECN),
Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY
COMMISSION (ERC), NATIONAL POWER CORPORATION
(NPC), POWER SECTOR ASSETS AND LIABILITIES
MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER
UTILITIES GROUP (SPUG), and PANAY ELECTRIC COMPANY
INC. (PECO), Respondents.
DECISION
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and
Environmentalist Consumers Network, Inc. (ECN) (petitioners),
come before this Court in this original action praying that Section
34 of Republic Act (RA) 9136, otherwise known as the "Electric
Power Industry Reform Act of 2001" (EPIRA), imposing the
Universal Charge,1 and Rule 18 of the Rules and Regulations (IRR)2
which seeks to implement the said imposition, be declared
unconstitutional. Petitioners also pray that the Universal Charge
imposed upon the consumers be refunded and that a preliminary
injunction and/or temporary restraining order (TRO) be issued
directing the respondents to refrain from implementing, charging,
and collecting the said charge.3 The assailed provision of law reads:
SECTION 34. Universal Charge. Within one (1) year from the
effectivity of this Act, a universal charge to be determined, fixed
and approved by the ERC, shall be imposed on all electricity end-
users for the following purposes:
(a) Payment for the stranded debts4 in excess of the amount
assumed by the National Government and stranded contract
costs of NPC5 and as well as qualified stranded contract costs
AL Ilagan-Malipol. AB. MD
of distribution utilities resulting from the restructuring of the
industry;
(b) Missionary electrification;6
(c) The equalization of the taxes and royalties applied to
indigenous or renewable sources of energy vis--vis
imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one
centavo per kilowatt-hour (P0.0025/kWh), which shall accrue
to an environmental fund to be used solely for watershed
rehabilitation and management. Said fund shall be managed
by NPC under existing arrangements; and
(e) A charge to account for all forms of cross-subsidies for a
period not exceeding three (3) years.
The universal charge shall be a non-bypassable charge which shall
be passed on and collected from all end-users on a monthly basis
by the distribution utilities. Collections by the distribution utilities
and the TRANSCO in any given month shall be remitted to the
PSALM Corp. on or before the fifteenth (15th) of the succeeding
month, net of any amount due to the distribution utility. Any end-
user or self-generating entity not connected to a distribution utility
shall remit its corresponding universal charge directly to the
TRANSCO. The PSALM Corp., as administrator of the fund, shall
create a Special Trust Fund which shall be disbursed only for the
purposes specified herein in an open and transparent manner. All
amount collected for the universal charge shall be distributed to the
respective beneficiaries within a reasonable period to be provided
by the ERC.
The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it
took effect.7
56
TAXATION LAW i
On April 5, 2002, respondent National Power Corporation-Strategic
Power Utilities Group8 (NPC-SPUG) filed with respondent Energy
Regulatory Commission (ERC) a petition for the availment from the
Universal Charge of its share for Missionary Electrification, docketed
as ERC Case No. 2002-165.9
On May 7, 2002, NPC filed another petition with ERC, docketed as
ERC Case No. 2002-194, praying that the proposed share from the
Universal Charge for the Environmental charge of P0.0025 per
kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved
for withdrawal from the Special Trust Fund (STF) managed by
respondent Power Sector Assets and
Liabilities Management Group (PSALM)10 for the rehabilitation and
management of watershed areas.11
On December 20, 2002, the ERC issued an Order12 in ERC Case No.
2002-165 provisionally approving the computed amount of
P0.0168/kWh as the share of the NPC-SPUG from the Universal
Charge for Missionary Electrification and authorizing the National
Transmission Corporation (TRANSCO) and Distribution Utilities to
collect the same from its end-users on a monthly basis.
On June 26, 2003, the ERC rendered its Decision13 (for ERC Case
No. 2002-165) modifying its Order of December 20, 2002, thus:
WHEREFORE, the foregoing premises considered, the provisional
authority granted to petitioner National Power Corporation-
Strategic Power Utilities Group (NPC-SPUG) in the Order dated
December 20, 2002 is hereby modified to the effect that an
additional amount of P0.0205 per kilowatt-hour should be added to
the P0.0168 per kilowatt-hour provisionally authorized by the
Commission in the said Order. Accordingly, a total amount of
P0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from
the Special Trust Fund managed by PSALM as its share from the
Universal Charge for Missionary Electrification (UC-ME) effective on
the following billing cycles:
AL Ilagan-Malipol. AB. MD
(a) June 26-July 25, 2003 for National Transmission
Corporation (TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-
ME in the amount of P0.0373 per kilowatt-hour and remit the same
to PSALM on or before the 15th day of the succeeding month.
In the meantime, NPC-SPUG is directed to submit, not later than
April 30, 2004, a detailed report to include Audited Financial
Statements and physical status (percentage of completion) of the
projects using the prescribed format.1avvphi1
Let copies of this Order be furnished petitioner NPC-SPUG and all
distribution utilities (Dus).
SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration
asking the ERC, among others,14 to set aside the above-mentioned
Decision, which the ERC granted in its Order dated October 7,
2003, disposing:
WHEREFORE, the foregoing premises considered, the "Motion for
Reconsideration" filed by petitioner National Power Corporation-
Small Power Utilities Group (NPC-SPUG) is hereby GRANTED.
Accordingly, the Decision dated June 26, 2003 is hereby modified
accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report
on the following:
1. Projects for CY 2002 undertaken;
2. Location
57
TAXATION LAW i
3. Actual amount utilized to complete the project;
4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.
SO ORDERED.15
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194,
authorizing the NPC to draw up to P70,000,000.00 from PSALM for
its 2003 Watershed Rehabilitation Budget subject to the availability
of funds for the Environmental Fund component of the Universal
Charge.16
On the basis of the said ERC decisions, respondent Panay Electric
Company, Inc. (PECO) charged petitioner Romeo P. Gerochi and all
other end-users with the Universal Charge as reflected in their
respective electric bills starting from the month of July 2003.17
Hence, this original action.
Petitioners submit that the assailed provision of law and its IRR
which sought to implement the same are unconstitutional on the
following grounds:
1) The universal charge provided for under Sec. 34 of the
EPIRA and sought to be implemented under Sec. 2, Rule 18
of the IRR of the said law is a tax which is to be collected
from all electric end-users and self-generating entities. The
power to tax is strictly a legislative function and as such, the
delegation of said power to any executive or administrative
agency like the ERC is unconstitutional, giving the same
unlimited authority. The assailed provision clearly provides
that the Universal Charge is to be determined, fixed and
approved by the ERC, hence leaving to the latter complete
discretionary legislative authority.
AL Ilagan-Malipol. AB. MD
2) The ERC is also empowered to approve and determine
where the funds collected should be used.
3) The imposition of the Universal Charge on all end-users is
oppressive and confiscatory and amounts to taxation without
representation as the consumers were not given a chance to
be heard and represented.18
Petitioners contend that the Universal Charge has the
characteristics of a tax and is collected to fund the operations of the
NPC. They argue that the cases19 invoked by the respondents
clearly show the regulatory purpose of the charges imposed
therein, which is not so in the case at bench. In said cases, the
respective funds20 were created in order to balance and stabilize
the prices of oil and sugar, and to act as buffer to counteract the
changes and adjustments in prices, peso devaluation, and other
variables which cannot be adequately and timely monitored by the
legislature. Thus, there was a need to delegate powers to
administrative bodies.21 Petitioners posit that the Universal Charge
is imposed not for a similar purpose.
On the other hand, respondent PSALM through the Office of the
Government Corporate Counsel (OGCC) contends that unlike a tax
which is imposed to provide income for public purposes, such as
support of the government, administration of the law, or payment
of public expenses, the assailed Universal Charge is levied for a
specific regulatory purpose, which is to ensure the viability of the
country's electric power industry. Thus, it is exacted by the State in
the exercise of its inherent police power. On this premise, PSALM
submits that there is no undue delegation of legislative power to
the ERC since the latter merely exercises a limited authority or
discretion as to the execution and implementation of the provisions
of the EPIRA.22
Respondents Department of Energy (DOE), ERC, and NPC, through
the Office of the Solicitor General (OSG), share the same view that
the Universal Charge is not a tax because it is levied for a specific
regulatory purpose, which is to ensure the viability of the country's
58
TAXATION LAW i
electric power industry, and is, therefore, an exaction in the
exercise of the State's police power. Respondents further contend
that said Universal Charge does not possess the essential
characteristics of a tax, that its imposition would redound to the
benefit of the electric power industry and not to the public, and that
its rate is uniformly levied on electricity end-users, unlike a tax
which is imposed based on the individual taxpayer's ability to pay.
Moreover, respondents deny that there is undue delegation of
legislative power to the ERC since the EPIRA sets forth sufficient
determinable standards which would guide the ERC in the exercise
of the powers granted to it. Lastly, respondents argue that the
imposition of the Universal Charge is not oppressive and
confiscatory since it is an exercise of the police power of the State
and it complies with the requirements of due process.23
On its part, respondent PECO argues that it is duty-bound to collect
and remit the amount pertaining to the Missionary Electrification
and Environmental Fund components of the Universal Charge,
pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case
Nos. 2002-194 and 2002-165. Otherwise, PECO could be held liable
under Sec. 4624 of the EPIRA, which imposes fines and penalties for
any violation of its provisions or its IRR.25
The Issues
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed under Sec.
34 of the EPIRA is a tax; and
2) Whether or not there is undue delegation of legislative
power to tax on the part of the ERC.26
Before we discuss the issues, the Court shall first deal with an
obvious procedural lapse.
Petitioners filed before us an original action particularly
denominated as a Complaint assailing the constitutionality of Sec.
AL Ilagan-Malipol. AB. MD
34 of the EPIRA imposing the Universal Charge and Rule 18 of the
EPIRA's IRR. No doubt, petitioners have locus standi. They impugn
the constitutionality of Sec. 34 of the EPIRA because they sustained
a direct injury as a result of the imposition of the Universal Charge
as reflected in their electric bills.
However, petitioners violated the doctrine of hierarchy of courts
when they filed this "Complaint" directly with us. Furthermore, the
Complaint is bereft of any allegation of grave abuse of discretion on
the part of the ERC or any of the public respondents, in order for
the Court to consider it as a petition for certiorari or prohibition.
Article VIII, Section 5(1) and (2) of the 1987 Constitution27
categorically provides that:
SECTION 5. The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting
ambassadors, other public ministers and consuls, and over
petitions for certiorari, prohibition, mandamus, quo
warranto, and habeas corpus.
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.
But this Court's jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, and habeas corpus, while concurrent
with that of the regional trial courts and the Court of Appeals, does
not give litigants unrestrained freedom of choice of forum from
which to seek such relief.28 It has long been established that this
Court will not entertain direct resort to it unless the redress desired
cannot be obtained in the appropriate courts, or where exceptional
59
TAXATION LAW i
and compelling circumstances justify availment of a remedy within
and call for the exercise of our primary jurisdiction.29 This
circumstance alone warrants the outright dismissal of the present
action.
This procedural infirmity notwithstanding, we opt to resolve the
constitutional issue raised herein. We are aware that if the
constitutionality of Sec. 34 of the EPIRA is not resolved now, the
issue will certainly resurface in the near future, resulting in a repeat
of this litigation, and probably involving the same parties. In the
public interest and to avoid unnecessary delay, this Court renders
its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the States
power of taxation from the police power.
The power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency that is to pay
it.30 It is based on the principle that taxes are the lifeblood of the
government, and their prompt and certain availability is an
imperious need.31 Thus, the theory behind the exercise of the
power to tax emanates from necessity; without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-
being of the people.32
On the other hand, police power is the power of the state to
promote public welfare by restraining and regulating the use of
liberty and property.33 It is the most pervasive, the least limitable,
and the most demanding of the three fundamental powers of the
State. The justification is found in the Latin maxims salus populi est
suprema lex (the welfare of the people is the supreme law) and sic
utere tuo ut alienum non laedas (so use your property as not to
AL Ilagan-Malipol. AB. MD
injure the property of others). As an inherent attribute of
sovereignty which virtually extends to all public needs, police power
grants a wide panoply of instruments through which the State, as
parens patriae, gives effect to a host of its regulatory powers.34 We
have held that the power to "regulate" means the power to protect,
foster, promote, preserve, and control, with due regard for the
interests, first and foremost, of the public, then of the utility and of
its patrons.35
The conservative and pivotal distinction between these two powers
rests in the purpose for which the charge is made. If generation of
revenue is the primary purpose and regulation is merely incidental,
the imposition is a tax; but if regulation is the primary purpose, the
fact that revenue is incidentally raised does not make the
imposition a tax.36
In exacting the assailed Universal Charge through Sec. 34 of the
EPIRA, the State's police power, particularly its regulatory
dimension, is invoked. Such can be deduced from Sec. 34 which
enumerates the purposes for which the Universal Charge is
imposed37 and which can be amply discerned as regulatory in
character. The EPIRA resonates such regulatory purposes, thus:
SECTION 2. Declaration of Policy. It is hereby declared the policy
of the State:
(a) To ensure and accelerate the total electrification of the
country;
(b) To ensure the quality, reliability, security and
affordability of the supply of electric power;
(c) To ensure transparent and reasonable prices of electricity
in a regime of free and fair competition and full public
accountability to achieve greater operational and economic
efficiency and enhance the competitiveness of Philippine
products in the global market;
60
TAXATION LAW i
(d) To enhance the inflow of private capital and broaden the
ownership base of the power generation, transmission and
distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public
and private sector entities in the process of restructuring the
electric power industry;
(f) To protect the public interest as it is affected by the rates
and services of electric utilities and other providers of
electric power;
(g) To assure socially and environmentally compatible
energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and
renewable energy resources in power generation in order to
reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization of
the assets and liabilities of the National Power Corporation
(NPC);
(j) To establish a strong and purely independent regulatory
body and system to ensure consumer protection and
enhance the competitive operation of the electricity market;
and
(k) To encourage the efficient use of energy and other
modalities of demand side management.
From the aforementioned purposes, it can be gleaned that the
assailed Universal Charge is not a tax, but an exaction in the
exercise of the State's police power. Public welfare is surely
promoted.
Moreover, it is a well-established doctrine that the taxing power
may be used as an implement of police power.38 In Valmonte v.
AL Ilagan-Malipol. AB. MD
Energy Regulatory Board, et al.39 and in Gaston v. Republic Planters
Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF)
and the Sugar Stabilization Fund (SSF) were exactions made in the
exercise of the police power. The doctrine was reiterated in Osmea
v. Orbos41 with respect to the OPSF. Thus, we disagree with
petitioners that the instant case is different from the
aforementioned cases. With the Universal Charge, a Special Trust
Fund (STF) is also created under the administration of PSALM.42
The STF has some notable characteristics similar to the OPSF and
the SSF, viz.:
1) In the implementation of stranded cost recovery, the ERC
shall conduct a review to determine whether there is under-
recovery or over recovery and adjust (true-up) the level of
the stranded cost recovery charge. In case of an over-
recovery, the ERC shall ensure that any excess amount shall
be remitted to the STF. A separate account shall be created
for these amounts which shall be held in trust for any future
claims of distribution utilities for stranded cost recovery. At
the end of the stranded cost recovery period, any remaining
amount in this account shall be used to reduce the electricity
rates to the end-users.43
2) With respect to the assailed Universal Charge, if the total
amount collected for the same is greater than the actual
availments against it, the PSALM shall retain the balance
within the STF to pay for periods where a shortfall occurs.44
3) Upon expiration of the term of PSALM, the administration
of the STF shall be transferred to the DOF or any of the DOF
attached agencies as designated by the DOF Secretary.45
The OSG is in point when it asseverates:
Evidently, the establishment and maintenance of the Special Trust
Fund, under the last paragraph of Section 34, R.A. No. 9136, is well
within the pervasive and non-waivable power and responsibility of
the government to secure the physical and economic survival and
61
TAXATION LAW i
well-being of the community, that comprehensive sovereign
authority we designate as the police power of the State.46
This feature of the Universal Charge further boosts the position that
the same is an exaction imposed primarily in pursuit of the State's
police objectives. The STF reasonably serves and assures the
attainment and perpetuity of the purposes for which the Universal
Charge is imposed, i.e., to ensure the viability of the country's
electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the three
branches of government has exclusive cognizance of and is
supreme in matters falling within its own constitutionally allocated
sphere. A logical corollary to the doctrine of separation of powers is
the principle of non-delegation of powers, as expressed in the Latin
maxim potestas delegata non delegari potest (what has been
delegated cannot be delegated). This is based on the ethical
principle that such delegated power constitutes not only a right but
a duty to be performed by the delegate through the instrumentality
of his own judgment and not through the intervening mind of
another. 47
In the face of the increasing complexity of modern life, delegation
of legislative power to various specialized administrative agencies is
allowed as an exception to this principle.48 Given the volume and
variety of interactions in today's society, it is doubtful if the
legislature can promulgate laws that will deal adequately with and
respond promptly to the minutiae of everyday life. Hence, the need
to delegate to administrative bodies - the principal agencies tasked
to execute laws in their specialized fields - the authority to
promulgate rules and regulations to implement a given statute and
effectuate its policies. All that is required for the valid exercise of
this power of subordinate legislation is that the regulation be
germane to the objects and purposes of the law and that the
regulation be not in contradiction to, but in conformity with, the
standards prescribed by the law. These requirements are
AL Ilagan-Malipol. AB. MD
denominated as the completeness test and the sufficient standard
test.
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. The
second test mandates adequate guidelines or limitations in the law
to determine the boundaries of the delegate's authority and prevent
the delegation from running riot.49
The Court finds that the EPIRA, read and appreciated in its entirety,
in relation to Sec. 34 thereof, is complete in all its essential terms
and conditions, and that it contains sufficient standards.
Although Sec. 34 of the EPIRA merely provides that "within one (1)
year from the effectivity thereof, a Universal Charge to be
determined, fixed and approved by the ERC, shall be imposed on all
electricity end-users," and therefore, does not state the specific
amount to be paid as Universal Charge, the amount nevertheless is
made certain by the legislative parameters provided in the law
itself. For one, Sec. 43(b)(ii) of the EPIRA provides:
SECTION 43. Functions of the ERC. The ERC shall promote
competition, encourage market development, ensure customer
choice and penalize abuse of market power in the restructured
electricity industry. In appropriate cases, the ERC is authorized to
issue cease and desist order after due notice and hearing. Towards
this end, it shall be responsible for the following key functions in
the restructured industry:
xxxx
(b) Within six (6) months from the effectivity of this Act,
promulgate and enforce, in accordance with law, a National Grid
Code and a Distribution Code which shall include, but not limited to
the following:
xxxx
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TAXATION LAW i
(ii) Financial capability standards for the generating companies, the
TRANSCO, distribution utilities and suppliers: Provided, That in the
formulation of the financial capability standards, the nature and
function of the entity shall be considered: Provided, further, That
such standards are set to ensure that the electric power industry
participants meet the minimum financial standards to protect the
public interest. Determine, fix, and approve, after due notice and
public hearings the universal charge, to be imposed on all electricity
end-users pursuant to Section 34 hereof;
Moreover, contrary to the petitioners contention, the ERC does not
enjoy a wide latitude of discretion in the determination of the
Universal Charge. Sec. 51(d) and (e) of the EPIRA50 clearly
provides:
SECTION 51. Powers. The PSALM Corp. shall, in the performance
of its functions and for the attainment of its objective, have the
following powers:
xxxx
(d) To calculate the amount of the stranded debts and
stranded contract costs of NPC which shall form the basis
for ERC in the determination of the universal charge;
(e) To liquidate the NPC stranded contract costs, utilizing the
proceeds from sales and other property contributed to it,
including the proceeds from the universal charge.
Thus, the law is complete and passes the first test for valid
delegation of legislative power.
As to the second test, this Court had, in the past, accepted as
sufficient standards the following: "interest of law and order;"51
"adequate and efficient instruction;"52 "public interest;"53 "justice
and equity;"54 "public convenience and welfare;"55 "simplicity,
economy and efficiency;"56 "standardization and regulation of
medical education;"57 and "fair and equitable employment
AL Ilagan-Malipol. AB. MD
practices."58 Provisions of the EPIRA such as, among others, "to
ensure the total electrification of the country and the quality,
reliability, security and affordability of the supply of electric
power"59 and "watershed rehabilitation and management"60 meet
the requirements for valid delegation, as they provide the
limitations on the ERCs power to formulate the IRR. These are
sufficient standards.
It may be noted that this is not the first time that the ERC's
conferred powers were challenged. In Freedom from Debt Coalition
v. Energy Regulatory Commission,61 the Court had occasion to say:
In determining the extent of powers possessed by the ERC, the
provisions of the EPIRA must not be read in separate parts. Rather,
the law must be read in its entirety, because a statute is passed as
a whole, and is animated by one general purpose and intent. Its
meaning cannot to be extracted from any single part thereof but
from a general consideration of the statute as a whole. Considering
the intent of Congress in enacting the EPIRA and reading the
statute in its entirety, it is plain to see that the law has expanded
the jurisdiction of the regulatory body, the ERC in this case, to
enable the latter to implement the reforms sought to be
accomplished by the EPIRA. When the legislators decided to
broaden the jurisdiction of the ERC, they did not intend to abolish
or reduce the powers already conferred upon ERC's predecessors.
To sustain the view that the ERC possesses only the powers and
functions listed under Section 43 of the EPIRA is to frustrate the
objectives of the law.
In his Concurring and Dissenting Opinion62 in the same case, then
Associate Justice, now Chief Justice, Reynato S. Puno described the
immensity of police power in relation to the delegation of powers to
the ERC and its regulatory functions over electric power as a vital
public utility, to wit:
Over the years, however, the range of police power was no longer
limited to the preservation of public health, safety and morals,
which used to be the primary social interests in earlier times. Police
63
TAXATION LAW i
power now requires the State to "assume an affirmative duty to
eliminate the excesses and injustices that are the concomitants of
an unrestrained industrial economy." Police power is now exerted
"to further the public welfare a concept as vast as the good of
society itself." Hence, "police power is but another name for the
governmental authority to further the welfare of society that is the
basic end of all government." When police power is delegated to
administrative bodies with regulatory functions, its exercise should
be given a wide latitude. Police power takes on an even broader
dimension in developing countries such as ours, where the State
must take a more active role in balancing the many conflicting
interests in society. The Questioned Order was issued by the ERC,
acting as an agent of the State in the exercise of police power. We
should have exceptionally good grounds to curtail its exercise. This
approach is more compelling in the field of rate-regulation of
electric power rates. Electric power generation and distribution is a
traditional instrument of economic growth that affects not only a
few but the entire nation. It is an important factor in encouraging
investment and promoting business. The engines of progress may
come to a screeching halt if the delivery of electric power is
impaired. Billions of pesos would be lost as a result of power
outages or unreliable electric power services. The State thru the
ERC should be able to exercise its police power with great
flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers
for Reforms v. Energy Regulatory Commission63 where the Court
held that the ERC, as regulator, should have sufficient power to
respond in real time to changes wrought by multifarious factors
affecting public utilities.
From the foregoing disquisitions, we therefore hold that there is no
undue delegation of legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the contention in
the Complaint that the imposition of the Universal Charge on all
end-users is oppressive and confiscatory, and amounts to taxation
without representation. Hence, such contention is deemed waived
AL Ilagan-Malipol. AB. MD
or abandoned per Resolution64 of August 3, 2004.65 Moreover, the
determination of whether or not a tax is excessive, oppressive or
confiscatory is an issue which essentially involves questions of fact,
and thus, this Court is precluded from reviewing the same.66
As a penultimate statement, it may be well to recall what this Court
said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in
recent years is the EPIRA. It established a new policy, legal
structure and regulatory framework for the electric power industry.
The new thrust is to tap private capital for the expansion and
improvement of the industry as the large government debt and the
highly capital-intensive character of the industry itself have long
been acknowledged as the critical constraints to the program. To
attract private investment, largely foreign, the jaded structure of
the industry had to be addressed. While the generation and
transmission sectors were centralized and monopolistic, the
distribution side was fragmented with over 130 utilities, mostly
small and uneconomic. The pervasive flaws have caused a low
utilization of existing generation capacity; extremely high and
uncompetitive power rates; poor quality of service to consumers;
dismal to forgettable performance of the government power sector;
high system losses; and an inability to develop a clear strategy for
overcoming these shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the
industry, including the privatization of the assets of the National
Power Corporation (NPC), the transition to a competitive structure,
and the delineation of the roles of various government agencies
and the private entities. The law ordains the division of the industry
into four (4) distinct sectors, namely: generation, transmission,
distribution and supply.
Corollarily, the NPC generating plants have to privatized and its
transmission business spun off and privatized thereafter.67
64
TAXATION LAW i

Finally, every law has in its favor the presumption of

constitutionality, and to justify its nullification, there must be a
clear and unequivocal breach of the Constitution and not one that is
doubtful, speculative, or argumentative.68 Indubitably, petitioners
failed to overcome this presumption in favor of the EPIRA. We find
no clear violation of the Constitution which would warrant a
pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR
are unconstitutional and void.

WHEREFORE, the instant case is hereby DISMISSED for lack of

merit.

SO ORDERED.

AL Ilagan-Malipol. AB. MD 65
TAXATION LAW i
G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON,
OSCAR VILLANUEVA, JOSE ABELLO, REMO RAMOS,
CAROLINA LOPEZ, JESUS ISASI, MANUEL LACSON, JAVIER
LACSON, TITO TAGARAO, EDUARDO SUATENGCO, AUGUSTO
LLAMAS, RODOLFO SIASON, PACIFICO MAGHARI, JR., JOSE
JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR
COMMISSION, and SUGAR REGULATORY ADMINISTRATION,
respondents, ANGEL H. SEVERINO, JR., GLICERIO
JAVELLANA, GLORIA P. DE LA PAZ, JOEY P. DE LA PAZ, ET
AL., and NATIONAL FEDERATION OF SUGARCANE PLANTERS,
intervenors.
MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers,
who have come to this Court in their individual capacities and in
representation of other sugar producers, planters and millers, said
to be so numerous that it is impracticable to bring them all before
the Court although the subject matter of the present controversy is
of common interest to all sugar producers, whether parties in this
action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short)
was formerly the government office tasked with the function of
regulating and supervising the sugar industry until it was
superseded by its co-respondent Sugar Regulatory Administration
(SRA, for brevity) under Executive Order No. 18 on May 28, 1986.
Although said Executive Order abolished the PHILSUCOM, its
existence as a juridical entity was mandated to continue for three
(3) more years "for the purpose of prosecuting and defending suits
by or against it and enables it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets."
AL Ilagan-Malipol. AB. MD
Respondent Republic Planters Bank (briefly, the Bank) is a
commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting
and milling their sugarcane in different mill districts of Negros
Occidental, were allowed to intervene by the Court, since they have
common cause with petitioners and respondents having interposed
no objection to their intervention. Subsequently, on January
14,1988, the National Federation of Sugar Planters (NFSP) also
moved to intervene, which the Court allowed on February 16,1988.
Petitioners and Intervenors have come to this Court praying for a
Writ of mandamus commanding respondents:
TO IMPLEMENT AND ACCOMPLISH THE
PRIVATIZATION OF REPUBLIC PLANTERS BANK BY
THE TRANSFER AND DISTRIBUTION OF THE SHARES
OF STOCK IN THE SAID BANK; NOW HELD BY AND
STILL CARRIED IN THE NAME OF THE PHILIPPINE
SUGAR COMMISSION, TO THE SUGAR PRODUCERS,
PLANTERS AND MILLERS, WHO ARE THE TRUE
BENEFICIAL OWNERS OF THE 761,416 COMMON
SHARES VALUED AT P36,548.000.00, AND
53,005,045 PREFERRED SHARES (A, B & C) WITH A
TOTAL PAR VALUE OF P254,424,224.72, OR A TOTAL
INVESTMENT OF P290,972,224.72, THE SAID
INVESTMENT HAVING BEEN FUNDED BY THE
DEDUCTION OF Pl.00 PER PICUL FROM SUGAR
PROCEEDS OF THE SUGAR PRODUCERS
COMMENCING THE YEAR 1978-79 UNTIL THE
PRESENT AS STABILIZATION FUND PURSUANT TO
P.D. # 388.
Respondent Bank does not take issue with either petitioners or its
correspondents as it has no beneficial or equitable interest that
may be affected by the ruling in this Petition, but welcomes the
filing of the Petition since it will settle finally the issue of legal
ownership of the questioned shares of stock.
66
TAXATION LAW i
Respondents PHILSUCOM and SRA, for their part, squarely traverse
the petition arguing that no trust results from Section 7 of P.D. No.
388; that the stabilization fees collected are considered government
funds under the Government Auditing Code; that the transfer of
shares of stock from PHILSUCOM to the sugar producers would be
irregular, if not illegal; and that this suit is barred by laches.
The Solicitor General aptly summarizes the basic issues thus: (1)
whether the stabilization fees collected from sugar planters and
millers pursuant to Section 7 of P.D. No. 388 are funds in trust for
them, or public funds; and (2) whether shares of stock in
respondent Bank paid for with said stabilization fees belong to the
PHILSUCOM or to the different sugar planters and millers from
whom the fees were collected or levied.
P. D. No. 388, promulgated on February 2,1974, which created the
PHILSUCOM, provided for the collection of a Stabilization Fund as
follows:
SEC. 7. Capitalization, Special Fund of the
Commission, Development and Stabilization Fund.
There is hereby established a fund for the commission
for the purpose of financing the growth and
development of the sugar industry and all its
components, stabilization of the domestic market
including the foreign market to be administered in
trust by the Commission and deposited in the
Philippine National Bank derived in the manner herein
below cited from the following sources:
a. Stabilization fund shall be collected as provided for
in the various provisions of this Decree.
b. Stabilization fees shall be collected from planters
and millers in the amount of Two (P2.00) Pesos for
every picul produced and milled for a period of five
years from the approval of this Decree and One
AL Ilagan-Malipol. AB. MD
(Pl.00) Peso for every picul produced and milled every
year thereafter.
Provided: That fifty (P0.50) centavos per picul of the
amount levied on planters, millers and traders under
Section 4(c) of this Decree will be used for the
payment of salaries and wages of personnel, fringe
benefits and allowances of officers and employees for
the purpose of accomplishing and employees for the
purpose of accomplishing the efficient performance of
the duties of the Commission.
Provided, further: That said amount shall constitute a
lien on the sugar quedan and/or warehouse receipts
and shall be paid immediately by the planters and mill
companies, sugar centrals and refineries to the
Commission. (paragraphing and bold supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees
collected "shall be administered in trust by the Commission."
However, while the element of an intent to create a trust is
present, a resulting trust in favor of the sugar producers, millers
and planters cannot be said to have ensued because the
presumptive intention of the parties is not reasonably ascertainable
from the language of the statute itself.
The doctrine of resulting trusts is founded on the
presumed intention of the parties; and as a general
rule, it arises where, and only where such may be
reasonably presumed to be the intention of the
parties, as determined from the facts and
circumstances existing at the time of the transaction
out of which it is sought to be established (89 C.J.S.
947).
No implied trust in favor of the sugar producers either can be
deduced from the imposition of the levy. "The essential Idea of an
implied trust involves a certain antagonism between the cestui que
67
TAXATION LAW i
trust and the trustee even when the trust has not arisen out of
fraud nor out of any transaction of a fraudulent or immoral
character (65 CJ 222). It is not clearly shown from the statute itself
that the PHILSUCOM imposed on itself the obligation of holding the
stabilization fund for the benefit of the sugar producers. It must be
categorically demonstrated that the very administrative agency
which is the source of such regulation would place a burden on
itself (Batchelder v. Central Bank of the Philippines, L-25071, July
29,1972,46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640
[1954]).
Neither can petitioners place reliance on the history of respondents
Bank. They recite that at the beginning, the Bank was owned by
the Roman-Rojas Group. Because it underwent difficulties early in
the year 1978, Mr. Roberto S. Benedicto, then Chairman of the
PHILSUCOM, submitted a proposal to the Central Bank for the
rehabilitation of the Bank. The Central Bank acted favorably on the
proposal at the meeting of the Monetary Board on March 31, 1978
subject to the infusion of fresh capital by the Benedicto Group.
Petitioners maintain that this infusion of fresh capital was
accomplished, not by any capital investment by Mr. Benedicto, but
by PHILSUCOM, which set aside the proceeds of the P1.00 per picul
stabilization fund to pay for its subscription in shares of stock of
respondent Bank. It is petitioners' submission that all shares were
placed in PHILSUCOM's name only out of convenience and necessity
and that they are the true and beneficial owners thereof.
In point of fact, we cannot see our way clear to upholding
petitioners' position that the investment of the proceeds from the
stabilization fund in subscriptions to the capital stock of the Bank
were being made for and on their behalf. That could have been
clarified by the Trust Agreement, dated May 28, 1986, entered into
between PHILSUCOM, as "Trustor" acting through Mr. Fred J.
Elizalde as Officer-in-Charge, and respondent RPB- Trust
Department' as "Trustee," acknowledging that PHILSUCOM holds
said shares for and in behalf of the sugar producers," the latter
"being the true and beneficial owners thereof." The Agreement,
however, did not get off the ground because it failed to receive the
AL Ilagan-Malipol. AB. MD
approval of the PHILSUCOM Board of Commissioners as required in
the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the
Agreement because of the adverse opinion of the SRA, Resident
Auditor, dated June 25,1986, which was aimed by the Chairman of
the Commission on Audit, on January 26,1987.
On February 19, 1987, the SRA, resolved to revoke the Trust
Agreement "in the light of the ruling of the Commission on Audit
that the aforementioned Agreement is of doubtful validity."
From the legal standpoint, we find basis for the opinion of the
Commission on Audit reading:
That the government, PHILSUCOM or its successor-in-
interest, Sugar Regulatory Administration, in
particular, owns and stocks. While it is true that the
collected stabilization fees were set aside by
PHILSUCOM to pay its subscription to RPB, it did not
collect said fees for the account of the sugar
producers. That stabilization fees are charges/levies
on sugar produced and milled which accrued to
PHILSUCOM under PD 338, as amended. ...
The stabilization fees collected are in the nature of a tax, which is
within the power of the State to impose for the promotion of the
sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute
sugar liens (Sec. 7[b], P.D. No. 388). The collections made accrue
to a "Special Fund," a "Development and Stabilization Fund,"
almost Identical to the "Sugar Adjustment and Stabilization Fund"
created under Section 6 of Commonwealth Act 567. 1 The tax
collected is not in a pure exercise of the taxing power. It is levied
with a regulatory purpose, to provide means for the stabilization of
the sugar industry. The levy is primarily in the exercise of the police
power of the State (Lutz vs. Araneta, supra.).
68
TAXATION LAW i

The protection of a large industry constituting one of
the great sources of the state's wealth and therefore
directly or indirectly affecting the welfare of so great a
portion of the population of the State is affected to
such an extent by public interests as to be within the
police power of the sovereign. (Johnson vs. State ex
rel. Marey, 128 So. 857, cited in Lutz vs. Araneta,
supra).
The stabilization fees in question are levied by the State upon sugar
millers, planters and producers for a special purpose that of
"financing the growth and development of the sugar industry and
all its components, stabilization of the domestic market including
the foreign market the fact that the State has taken possession of
moneys pursuant to law is sufficient to constitute them state funds,
even though they are held for a special purpose (Lawrence vs.
American Surety Co., 263 Mich 586, 249 ALR 535, cited in 42 Am.
Jur. Sec. 2, p. 718). Having been levied for a special purpose, the
revenues collected are to be treated as a special fund, to be, in the
language of the statute, "administered in trust' for the purpose
intended. Once the purpose has been fulfilled or abandoned, the
balance, if any, is to be transferred to the general funds of the
Government. That is the essence of the trust intended (See 1987
Constitution, Article VI, Sec. 29(3), lifted from the 1935
Constitution, Article VI, Sec. 23(l]). 2
The character of the Stabilization Fund as a special fund is
emphasized by the fact that the funds are deposited in the
Philippine National Bank and not in the Philippine Treasury, moneys
from which may be paid out only in pursuance of an appropriation
made by law (1987) Constitution, Article VI, Sec. 29[1],1973
Constitution, Article VIII, Sec. 18[l]).
from them since it is also they who are to be benefited from the
expenditure of the funds derived from it. The investment in shares
of respondent Bank is not alien to the purpose intended because of
the Bank's character as a commodity bank for sugar conceived for
the industry's growth and development. Furthermore, of note is the
fact that one-half, (1/2) or PO.50 per picul, of the amount levied
under P.D. No. 388 is to be utilized for the "payment of salaries and
wages of personnel, fringe benefits and allowances of officers and
employees of PHILSUCOM" thereby immediately negating the claim
that the entire amount levied is in trust for sugar, producers,
planters and millers.
To rule in petitioners' favor would contravene the general principle
that revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the entire sugar
industry, "and all its components, stabilization of the domestic
market," including the foreign market the industry being of vital
importance to the country's economy and to national interest.
WHEREFORE, the Writ of mandamus is denied and the Petition
hereby dismissed. No costs.
This Decision is immediately executory.
SO ORDERED

That the fees were collected from sugar producers, planters and
millers, and that the funds were channeled to the purchase of
shares of stock in respondent Bank do not convert the funds into a
trust fired for their benefit nor make them the beneficial owners of
the shares so purchased. It is but rational that the fees be collected
AL Ilagan-Malipol. AB. MD 69
TAXATION LAW i
G.R. No. 106611 July 21, 1994
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION
and COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Palaez, Adriano & Gregorio for private respondent.
REGALADO, J.:
The judicial proceedings over the present controversy commenced
with CTA Case No. 4099, wherein the Court of Tax Appeals ordered
herein petitioner Commissioner of Internal Revenue to grant a
refund to herein private respondent Citytrust Banking Corporation
(Citytrust) in the amount of P13,314,506.14, representing its
overpaid income taxes for 1984 and 1985, but denied its claim for
the alleged refundable amount reflected in its 1983 income tax
return on the ground of prescription. 1 That judgment of the tax
court was affirmed by respondent Court of Appeals in its judgment
in CA-G.R. SP
No. 26839. 2
The case was then elevated to us in the present
petition for review on certiorari wherein the latter judgment is
impugned and sought to be nullified and/or set aside.
It appears that in a letter dated August 26, 1986, herein private
respondent corporation filed a claim for refund with the Bureau of
Internal Revenue (BIR) in the amount of P19,971,745.00
representing the alleged aggregate of the excess of its carried-over
total quarterly payments over the actual income tax due, plus
carried-over withholding tax payments on government securities
and rental income, as computed in its final income tax return for
the calendar year ending December 31, 1985. 3
AL Ilagan-Malipol. AB. MD
Two days later, or on August 28, 1986, in order to interrupt the
running of the prescriptive period, Citytrust filed a petition with the
Court of Tax Appeals, docketed therein as CTA Case No. 4099,
claiming the refund of its income tax overpayments for the years
1983, 1984 and 1985 in the total amount of P19,971,745.00. 4
In the answer filed by the Office of the Solicitor General, for and in
behalf of therein respondent commissioner, it was asserted that the
mere averment that Citytrust incurred a net loss in 1985 does not
ipso facto merit a refund; that the amounts of P6,611,223.00,
P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983
income tax overpayment, taxes withheld on proceeds of
government securities investments, as well as on rental income,
respectively, are not properly documented; that assuming
arguendo that petitioner is entitled to refund, the right to claim the
same has prescribed
with respect to income tax payments prior to August 28, 1984,
pursuant to Sections 292 and 295 of the National Internal Revenue
Code of 1977, as amended, since the petition was filed only on
August 28, 1986. 5
On February 20, 1991, the case was submitted for decision based
solely on the pleadings and evidence submitted by herein private
respondent Citytrust. Herein petitioner could not present any
evidence by reason of the repeated failure of the Tax Credit/Refund
Division of the BIR to transmit the records of the case, as well as
the investigation report thereon, to the Solicitor General. 6
However, on June 24, 1991, herein petitioner filed with the tax
court a manifestation and motion praying for the suspension of the
proceedings in the said case on the ground that the claim of
Citytrust for tax refund in the amount of P19,971,745.00 was
already being processed by the Tax Credit/Refund Division of the
BIR, and that said bureau was only awaiting the submission by
Citytrust of the required confirmation receipts which would show
whether or not the aforestated amount was actually paid and
remitted to the BIR. 7
70
TAXATION LAW i

Citytrust filed an opposition thereto, contending that since the Less: FCDU payable 150,252.00
Court of Tax Appeals already acquired jurisdiction over the case, it
could no longer be divested of the same; and, further, that the Amount refundable for 1984 P (13,296,663.67)
proceedings therein could not be suspended by the mere fact that
the claim for refund was being administratively processed, 1985 Income tax due (loss) P 0
especially where the case had already been submitted for decision. Less: W/T on rentals 36,716.47*
It also argued that the BIR had already conducted an audit, citing
therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in the case, which Tax Overpayment (36,716.47)*
clearly showed that there was an overpayment of income taxes and Less: FCDU payable 18,874.00
for which a tax credit or refund was due to Citytrust. The Foregoing
exhibits are allegedly conclusive proof of and an admission by Amount Refundable for 1985 P (17,842.47)
herein petitioner that there had been an overpayment of income
taxes. 8 * Note:

The tax court denied the motion to suspend proceedings on the These credits are smaller than the
ground that the case had already been submitted for decision since claimed amount because only the above
February 20, 1991. 9 figures are well supported by the various
exhibits presented during the hearing.
Thereafter, said court rendered its decision in the case, the decretal
portion of which declares: No pronouncement as to costs.

WHEREFORE, in view of the foregoing, petitioner is SO ORDERED. 10

entitled to a refund but only for the overpaid taxes
incurred in 1984 and 1985. The refundable amount as The order for refund was based on the following findings of the
shown in its 1983 income tax return is hereby denied Court of Tax Appeals: (1) the fact of withholding has been
on the ground of prescription. Respondent is hereby established by the statements and certificates of withholding taxes
ordered to grant a refund to petitioner Citytrust accomplished by herein private respondent's withholding agents,
Banking Corp. in the amount of P13,314,506.14 the authenticity of which were neither disputed nor controverted by
representing the overpaid income taxes for 1984 and herein petitioner; (2) no evidence was presented which could
1985, recomputed as follows: effectively dispute the correctness of the income tax return filed by
herein respondent corporation and other material facts stated
1984 Income tax due P 4,715,533.00 therein; (3) no deficiency assessment was issued by herein
Less: 1984 Quarterly payments P 16,214,599.00* petitioner; and (4) there was an audit report submitted by the BIR
1984 Tax Credits Assessment Branch, recommending the refund of overpaid taxes for
W/T on int. on gov't. sec. 1,921,245.37* the years concerned (Exhibits Y to Y-3), which enjoys the
W/T on rental inc. 26,604.30* 18,162,448.67 presumption of regularity in the performance of official duty. 11

Tax Overpayment (13,446,915.67)
AL Ilagan-Malipol. AB. MD 71
TAXATION LAW i
A motion for the reconsideration of said decision was initially filed
by the Solicitor General on the sole ground that the statements and
certificates of taxes allegedly withheld are not conclusive evidence
of actual payment and remittance of the taxes withheld to the BIR.
12 A supplemental motion for reconsideration was thereafter filed,
wherein it was contended for the first time that herein private
respondent had outstanding unpaid deficiency income taxes.
Petitioner alleged that through an inter-office memorandum of the
Tax Credit/Refund Division, dated August 8, 1991, he came to
know only lately that Citytrust had outstanding tax liabilities for
1984 in the amount of P56,588,740.91 representing deficiency
income and business taxes covered by Demand/Assessment Notice
No. FAS-1-84-003291-003296. 13
Oppositions to both the basic and supplemental motions for
reconsideration were filed by private respondent Citytrust. 14
Thereafter, the Court of Tax Appeals issued a resolution denying
both motions for the reason that Section 52 (b) of the Tax Code, as
implemented by Revenue Regulation
6-85, only requires that the claim for tax credit or refund must
show that the income received was declared as part of the gross
income, and that the fact of withholding was duly established.
Moreover, with regard to the argument raised in the supplemental
motion for reconsideration anent the deficiency tax assessment
against herein petitioner, the tax court ruled that since that matter
was not raised in the pleadings, the same cannot be considered,
invoking therefor the salutary purpose of the omnibus motion rule
which is to obviate multiplicity of motions and to discourage
dilatory pleadings. 15
As indicated at the outset, a petition for review was filed by herein
petitioner with respondent Court of Appeals which in due course
promulgated its decision affirming the judgment of the Court of Tax
Appeals. Petitioner eventually elevated the case to this Court,
maintaining that said respondent court erred in affirming the grant
of the claim for refund of Citytrust, considering that, firstly, said
private respondent failed to prove and substantiate its claim for
such refund; and, secondly, the bureau's findings of deficiency
AL Ilagan-Malipol. AB. MD
income and business tax liabilities against private respondent for
the year 1984 bars such payment. 16
After a careful review of the records, we find that under the
peculiar circumstances of this case, the ends of substantial justice
and public interest would be better subserved by the remand of this
case to the Court of Tax Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by
petitioner Commissioner of Internal Revenue, was denied its day in
court by reason of the mistakes and/or negligence of its officials
and employees. It can readily be gleaned from the records that
when it was herein petitioner's turn to present evidence, several
postponements were sought by its counsel, the Solicitor General,
due to the unavailability of the necessary records which were not
transmitted by the Refund Audit Division of the BIR to said counsel,
as well as the investigation report made by the Banks/Financing
and Insurance Division of the said bureau/ despite repeated
requests. 17 It was under such a predicament and in deference to
the tax court that ultimately, said records being still unavailable,
herein petitioner's counsel was constrained to submit the case for
decision on February 20, 1991 without presenting any evidence.
For that matter, the BIR officials and/or employees concerned also
failed to heed the order of the Court of Tax Appeals to remand the
records to it pursuant to Section 2, Rule 7 of the Rules of the Court
of Tax Appeals which provides that the Commissioner of Internal
Revenue and the Commissioner of Customs shall certify and
forward to the Court of Tax Appeals, within ten days after filing his
answer, all the records of the case in his possession, with the pages
duly numbered, and if the records are in separate folders, then the
folders shall also be numbered.
The aforestated impass came about due to the fact that, despite
the filing of the aforementioned initiatory petition in CTA Case No.
4099 with the Court of Tax Appeals, the Tax Refund Division of the
BIR still continued to act administratively on the claim for refund
72
TAXATION LAW i
previously filed therein, instead of forwarding the records of the
case to the Court of Tax Appeals as ordered. 18
It is a long and firmly settled rule of law that the Government is not
bound by the errors committed by its agents. 19 In the performance
of its governmental functions, the State cannot be estopped by the
neglect of its agent and officers. Although the Government may
generally be estopped through the affirmative acts of public officers
acting within their authority, their neglect or omission of public
duties as exemplified in this case will not and should not produce
that effect.
Nowhere is the aforestated rule more true than in the field of
taxation. 20 It is axiomatic that the Government cannot and must
not be estopped particularly in matters involving taxes. Taxes are
the lifeblood of the nation through which the government agencies
continue to operate and with which the State effects its functions
for the welfare of its constituents. 21 The errors of certain
administrative officers should never be allowed to jeopardize the
Government's financial position, 22 especially in the case at bar
where the amount involves millions of pesos the collection whereof,
if justified, stands to be prejudiced just because of bureaucratic
lethargy.
Further, it is also worth nothing that the Court of Tax Appeals erred
in denying petitioner's supplemental motion for reconsideration
alleging bringing to said court's attention the existence of the
deficiency income and business tax assessment against Citytrust.
The fact of such deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank to claim
for a tax refund for the same year. To award such refund despite
the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be
entitled to refund and at the same time be liable for a tax
deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax
return is valid, that is, the facts stated therein are true and correct.
AL Ilagan-Malipol. AB. MD
The deficiency assessment, although not yet final, created a doubt
as to and constitutes a challenge against the truth and accuracy of
the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the
refund.
Section 82, Chapter IX of the National Internal Revenue Code of
1977, which was the applicable law when the claim of Citytrust was
filed, provides that "(w)hen an assessment is made in case of any
list, statement, or return, which in the opinion of the Commissioner
of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that
the said list, statement, or return was not false nor fraudulent and
did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be
made in good faith regarding annual depreciation of oil or gas wells
and mines."
Moreover, to grant the refund without determination of the proper
assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should
subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes
which recourse must be filed within the prescriptive period of ten
years after discovery of the falsity, fraud or omission in the false or
fraudulent return involved. 23 This would necessarily require and
entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds,
and impede or delay the collection of much-needed revenue for
governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or
expenses, it is both logically necessary and legally appropriate that
the issue of the deficiency tax assessment against Citytrust be
resolved jointly with its claim for tax refund, to determine once and
for all in a single proceeding the true and correct amount of tax due
or refundable.
73
TAXATION LAW i

In fact, as the Court of Tax Appeals itself has heretofore conceded, SO ORDERED.
24 it would be only just and fair that the taxpayer and the

Government alike be given equal opportunities to avail of remedies

under the law to defeat each other's claim and to determine all
matters of dispute between them in one single case. It is important
to note that in determining whether or not petitioner is entitled to
the refund of the amount paid, it would necessary to determine
how much the Government is entitled to collect as taxes. This
would necessarily include the determination of the correct liability
of the taxpayer and, certainly, a determination of this case would
constitute res judicata on both parties as to all the matters subject
thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what
caused the Government to lose its case in the tax court may
hopefully be ascribed merely to the ennui or ineptitude of
officialdom, and not to syndicated intent or corruption. The
evidential cul-de-sac in which the Solicitor General found himself
once again gives substance to the public perception and suspicion
that it is another proverbial tip in the iceberg of venality in a
government bureau which is pejoratively rated over the years.
What is so distressing, aside from the financial losses to the
Government, is the erosion of trust in a vital institution wherein the
reputations of so many honest and dedicated workers are
besmirched by the acts or omissions of a few. Hence, the liberal
view we have here taken pro hac vice, which may give some
degree of assurance that this Court will unhesitatingly react to any
bane in the government service, with a replication of such response
being likewise expected by the people from the executive
authorities.

WHEREFORE, the judgment of respondent Court of Appeals in CA-

G.R. SP No. 26839 is hereby SET ASIDE and the case at bar is
REMANDED to the Court of Tax Appeals for further proceedings and
appropriate action, more particularly, the reception of evidence for
petitioner and the corresponding disposition of CTA Case No. 4099
not otherwise inconsistent with our adjudgment herein.

AL Ilagan-Malipol. AB. MD 74
TAXATION LAW i
G.R. No. 117359 July 23, 1998
DAVAO GULF LUMBER CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.
PANGANIBAN, J.:
Because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally
in favor of the government. Otherwise stated, any exemption from
the payment of a tax must be clearly stated in the language of the
law; it cannot be merely implied therefrom.
Statement of the Case
This principium is applied by the Court in resolving this petition for
review under Rule 45 of the Rules of Court, assailing the Decision 1
of Respondent Court of Appeals 2 in CA-GR SP No. 34581 dated
September 26, 1994, which affirmed the June 21, 1994 Decision 3
of the Court of Tax Appeals 4 in CTA Case No. 3574. The dispositive
portion of the CTA Decision affirmed by Respondent Court reads:
WHEREFORE, judgment is hereby rendered ordering
the respondent to refund to the petitioner the amount
of P2,923.15 representing the partial refund of
specific taxes paid on manufactured oils and fuels. 5
The Antecedent Facts
The facts are undisputed. 6 Petitioner is a licensed forest
concessionaire possessing a Timber License Agreement granted by
the Ministry of Natural Resources (now Department of Environment
and Natural Resources). From July 1, 1980 to January 31, 1982
petitioner purchased, from various oil companies, refined and
AL Ilagan-Malipol. AB. MD
manufactured mineral oils as well as motor and diesel fuels, which
it used exclusively for the exploitation and operation of its forest
concession. Said oil companies paid the specific taxes imposed,
under Sections 153 and 156 7 of the 1977 National Internal
Revenue Code (NIRC), on the sale of said products. Being included
in the purchase price of the oil products, the specific taxes paid by
the oil companies were eventually passed on to the user, the
petitioner in this case.
On December 13, 1982, petitioner filed before Respondent
Commissioner of Internal Revenue (CIR) a claim for refund in the
amount of P120,825.11, representing 25% of the specific taxes
actually paid on the above-mentioned fuels and oils that were used
by petitioner in its operations as forest concessionaire. The claim
was based on Insular Lumber Co. vs. Court of Tax Appeals 8 and
Section 5 of RA 1435 which reads:
Sec. 5. The proceeds of the additional tax on
manufactured oils shall accrue to the road and bridge
funds of the political subdivision for whose benefit the
tax is collected: Provided, however, That whenever
any oils mentioned above are used by miners or
forest concessionaires in their operations, twenty-five
per centum of the specific tax paid thereon shall be
refunded by the Collector of Internal Revenue upon
submission of proof of actual use of oils and under
similar conditions enumerated in subparagraphs one
and two of section one hereof, amending section one
hundred forty-two of the Internal Revenue Code:
Provided, further, That no new road shall be
constructed unless the routes or location thereof shall
have been approved by the Commissioner of Public
Highways after a determination that such road can be
made part of an integral and articulated route in the
Philippine Highway System, as required in section
twenty-six of the Philippine Highway Act of 1953.
75
TAXATION LAW i
It is an unquestioned fact that petitioner complied with the
procedure for refund, including the submission of proof of the
actual use of the aforementioned oils in its forest concession as
required by the above-quoted law. Petitioner, in support of its claim
for refund, submitted to the CIR the affidavits of its general
manager, the president of the Philippine Wood Products
Association, and three disinterested persons, all attesting that the
said manufactured diesel and fuel oils were actually used in the
exploitation and operation of its forest concession.
On January 20, 1983, petitioner filed at the CTA a petition for
review docketed as CTA Case No. 3574. On June 21, 1994, the CTA
rendered its decision finding petitioner entitled to a partial refund of
specific taxes the latter had paid in the reduced amount of
P2,923.15. The CTA ruled that the claim on purchases of lubricating
oil (from July 1, 1980 to January 19, 1981) and on manufactured
oils other than lubricating oils (from July 1, 1980 to January 4,
1981) had prescribed. Disallowed on the ground that they were not
included in the original claim filed before the CIR were the claims
for refund on purchases of manufactured oils from January 1, 1980
to June 30, 1980 and from February 1, 1982 to June 30, 1982. In
regard to the other purchases, the CTA granted the claim, but it
computed the refund based on rates deemed paid under RA 1435,
and not on the higher rates actualhy paid by petitioner under the
NIRC.
Insisting that the basis for computing the refund should be the
increased rates prescribed by Sections 153 and 156 of the NIRC,
petitioner elevated the matter to the Court of Appeals. As noted
earlier, the Court of Appeals affirmed the CTA Decision. Hence, this
petition for review. 9
Public Respondent's Ruling
In its petition before the Court of Appeals, petitioner raised the
following arguments:
AL Ilagan-Malipol. AB. MD
I. The respondent Court of Tax Appeals failed to apply
the Supreme Court's Decision in Insular Lumber Co.
v. Court of Tax Appeals which granted the claim for
partial refund of specific taxes paid by the claimant,
without qualification or limitation.
II. The respondent Court of Tax Appeals ignored the
increase in rates imposed by succeeding amendatory
laws,under which the petitioner paid the specific taxes
on manufactured and diesel fuels.
III. In its decision, the respondent Court of Tax
Appeals ruled contrary to established tenets of law
when it lent itself to interpreting Section 5 of R.A.
1435, when the construction of said law is not
necessary.
IV. Sections 1 and 2 of R.A. 1435 are not the
operative provisions to be applied but rather, Sections
153 and 156 of the National Internal Revenue Code,
as amended.
V. To rule that the basis for computation of the
refunded taxes should be Sections 1 and 2 of R.A.
1435 rather than Section 153 and 156 of the National
Internal Revenue Code is unfair, erroneous, arbitrary,
inequitable and oppressive. 10
The Court of Appeals held that the claim for refund should indeed
be computed on the basis of the amounts deemed paid under
Sections 1 and 2 of RA 1435. In so ruling, it cited our
pronouncement in Commissioner of Internal Revenue v. Rio Tuba
Nickel Mining Corporation 11 and subsequent Resolution dated June
15, 1992 clarifying the said Decision. Respondent Court further
ruled that the claims for refund which prescribed and those which
were not filed at the administrative level must be excluded.
The Issue
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TAXATION LAW i
In its Memorandum, petitioner raises one critical issue:
Whether or not petitioner is entitled under Republic
Act No. 1435 to the refund of 25% of the amount of
specific taxes it actually paid on various refined and
manufactured mineral oils and other oil products
taxed under Sec. 153 and Sec. 156 of the 1977 (Sec.
142 and Sec. 145 of the 1939) National Internal
Revenue Code. 12
In the main, the question before us pertains only to the
computation of the tax refund. Petitioner argues that the refund
should be based on the increased rates of specific taxes which it
actually paid, as prescribed in Sections 153 and 156 of the NIRC.
Public respondent, on the other hand, contends that it should be
based on specific taxes deemed paid under Sections 1 and 2 of RA
1435.
The Court's Ruling
The petition is not meritorious.
Petitioner Entitled to Refund
Under Sec. 5 of RA 1435
At the outset, it must be stressed that petitioner is entitled to a
partial refund under Section 5 of RA 1435, which was enacted to
provide means for increasing the Highway Special Fund.
The rationale for this grant of partial refund of specific taxes paid
on purchases of manufactured diesel and fuel oils rests on the
character of the Highway Special Fund. The specific taxes collected
on gasoline and fuel accrue to the Fund, which is to be used for the
construction and maintenance of the highway system. But because
the gasoline and fuel purchased by mining and lumber
concessionaires are used within their own compounds and roads,
and their vehicles seldom use the national highways, they do not
AL Ilagan-Malipol. AB. MD
directly benefit from the Fund and its use. Hence, the tax refund
gives the mining and the logging companies a measure of relief in
light of their peculiar situation. 13 When the Highway Special Fund
was abolished in 1985, the reason for the refund likewise ceased to
exist. 14 Since petitioner purchased the subject manufactured diesel
and fuel oils from July 1, 1980 to January 31, 1982 and submitted
the required proof that these were actually used in operating its
forest concession, it is entitled to claim the refund under Section 5
of RA 1435.
Tax Refund Strictly Constrtued
Against the Grantee
Petitioner submits that it is entitled to the refund of 25 percent of
the specific taxes it had actually paid for the petroleum products
used in its operations. In other words, it claims a refund based on
the increased rates under Sections 153 and 156 of the NIRC. 15
Petitioner argues that the statutory grant of the refund privilege,
specifically the phrase "twenty-five per centum of the specific tax
paid thereon shall be refunded by the Collector of Internal
Revenue," is "clear and unambiguous" enough to require
construction or qualification thereof. 16 In addition, it cites our
pronouncement in Insular Lumber vs. Court of Tax Appeals: 17
. . . Sec. 5 [of RA 1435] makes reference to
subparagraphs 1 and 2 of Section 1 only for the
purpose of prescribing the procedure for refund. This
express reference cannot be expanded in scope to
include the limitation of the period of refund. If the
limitation of the period of refund of specific taxes paid
on oils used in aviation and agriculture is intended to
cover similar taxes paid on oil used by miners and
forest concessionaires, there would have been no
need of dealing with oil used by miners and forest
concessions separately and Section 5 would very well
have been included in Section 1 of Republic Act No.
77
TAXATION LAW i
1435, notwithstanding the different rate of
exemption.
Petitioner then reasons that "the express mention of Section 1 of
RA 1435 in Section 5 cannot be expanded to include a limitation on
the tax rates to be applied . . . [otherwise,] Section 5 should very
well have been included in Section 1 . . . ." 18
The Court is nor persuaded. The relevant statutory provisions do
not clearly support petitioner's claim for refund. RA 1435 provides:
Sec. 1 Section one hundred and forty-two of the
National Internal Revenue Code, as amended, is
further amended to read as follows:
Sec. 142. Specific tax on manufactured oils and other
fuels. On refined and manufactured mineral oils
and motor fuels, there shall be collected the following
taxes:
(a) Kerosene or petroleum, per liter of volume
capacity, two and one-half centavos;
(b) Lubricating oils, per liter of volume capacity,
seven centavos;
(c) Naptha, gasoline, and all other similar products of
distillation, per liter of volume capacity, eight
centavos; and
(d) On denatured alcohol to be used for motive
power, per liter of volume capacity, one centavo:
Provided, That if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been
paid, only the alcohol content shall be subject to the
tax herein prescribed. For the purpose of this
subsection, the removal of denatured alcohol of not
less than one hundred eighty degrees proof (ninety
AL Ilagan-Malipol. AB. MD
per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the
contrary.
Whenever any of the oils mentioned above are, during
the five years from June eighteen, nineteen hundred
and fifty two, used in agriculture and aviation, fifty
per centum of the specific tax paid thereon shall be
refunded by the Collector of Internal Revenue upon
the submission of the following:
(1) A sworn affidavit of the producer and two
disinterested persons proving that the said oils were
actually used in agriculture, or in lieu thereof.
(2) Should the producer belong to any producers'
association or federation, duly registered with the
Securities and Exchange Commission, the affidavit of
the president of the association or federation,
attesting to the fact that the oils were actually used in
agriculture.
(3) In the case of aviation oils, a sworn certificate
satisfactory to the Collector proving that the said oils
were actually used in aviation: Provided, That no such
refunds shall be granted in respect to the oils used in
aviation by citizens and corporations of foreign
countries which do not grant equivalent refunds or
exemptions in respect to similar oils used in aviation
by citizens and corporations of the Philippines.
Sec. 2 Section one hundred and forty-five of the
National Internal Revenue Code, as amended, is
further amended to read as follows:
Sec. 145. Specific Tax on Diesel fuel oil. On fuel oil,
commercially known as diesel fuel oil, and on all
similar fuel oils, having more or less the same
78
TAXATION LAW i
generating power, there shall be collected, per metric
ton, one peso.
xxx xxx xxx
Sec. 5. The proceeds of the additional tax on
manufactured oils shall accrue to the road and bridge
funds of the political subdivision for whose benefit the
tax is collected: Provided, however, That whenever
any oils mentioned above are used by miners or
forest concessionaires in their operations, twenty-five
per centum of the specific tax paid thereon shall be
refunded by the Collector of Internal Revenue upon
submission of proof of actual use of oils and under
similar conditions enumerated in subparagraphs one
and two of section one hereof, amending section one
hundred forty-two of the Internal Revenue Code:
Provided, further, That no new road shall be
constructed unless the route or location thereof shall
have been approved by the Commissioner of Public
Highways after a determination that such road can be
made part of an integral and articulated route in the
Philippine Highway System, as required in section
twenty-six of the Philippine Highway Act of 1953.
Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the
first two provisions, renumbering them and prescribing higher
rates. Accordingly, petitioner paid specific taxes on petroleum
products purchased from July 1, 1980 to January 31, 1982 under
the following statutory provisions.
From February 8, 1980 to March 20, 1981, Sections 153 and 156
provided as follows:
Sec. 153. Specific tax on manufactured oils and other
fuels. On refined and manufactured mineral oils
and motor fuels, there shall be collected the following
AL Ilagan-Malipol. AB. MD
taxes which shall attach to the articles hereunder
enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, seven
centavos;
(b) Lubricating oils, per liter of volume capacity,
eighty centavos;
(c) Naphtha, gasoline and all other similar products of
distillation, per liter of volume capacity, ninety-one
centavos: Provided, That on premium and aviation
gasoline, the tax shall be one peso per liter of volume
capacity;
(d) On denatured alcohol to be used for motive
power, per liter of volume capacity, one centavo:
Provided, That unless otherwise provided for by
special laws, if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been
paid, only the alcohol content shall be subject to the
tax herein prescribed. For the purposes of this
subsection, the removal of denatured alcohol of not
less than one hundred eighty degrees proof (ninety
per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the
contrary;
(e) Processed gas, per liter of volume capacity, three
centavos;
(f) Thinners and solvents, per liter of volume capacity,
fifty-seven centavos;
(g) Liquefied petroleum gas, per kilogram, fourteen
centavos: Provided, That liquefied petroleum gas used
for motive power shall be taxed at the equivalent rate
as the specific tax on diesel fuel oil;
79
TAXATION LAW i
(h) Asphalts, per kilogram, eight centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty
centavos;
(j) Aviation turbo jet fuel, per liter of volume capacity,
fifty-five centavos. (As amended by Sec. 1, P.D. No.
1672.)
xxx xxx xxx
Sec. 156. Specific tax on diesel fuel oil. On fuel oil,
commercially known as diesel fuel oil, and on all
similar fuel oils, having more or less the same
generating power, per liter of volume capacity,
seventeen and one-half centavos, which tax shall
attach to this fuel oil as soon as it is in existence as
such.
Then on March 21, 1981, these provisions were amended by EO
672 to read:
Sec. 153. Specific tax on manufactured oils and other
fuels. On refined and manufactured mineral oils
and motor fuels, there shall be collected the following
taxes which shall attach to the articles hereunder
enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, nine
centavos;
(b) Lubricating oils, per liter of volume capacity,
eighty centavos;
(c) Naphtha, gasoline and all other similar products of
distillation, per liter of volume capacity, one peso and
six centavos: Provided, That on premium and aviation
gasoline, the tax shall be one peso and ten centavos
AL Ilagan-Malipol. AB. MD
and one peso, respectively, per liter of volume
capacity;
(d) On denatured alcohol to be used for motive
power, per liter of volume capacity, one centavo;
Provided, That unless otherwise provided for by
special laws, if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been
paid, only the alcohol content shall be subject to the
tax herein prescribed. For the purpose of this
subsection, the removal of denatured alcohol of not
less than one hundred eighty degrees proof (ninety
per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the
contrary;
(e) Processed gas, per liter of volume capacity, three
centavos;
(f) Thinners and solvents, per liter of volume capacity,
sixty-one centavos;
(g) Liquefied petroleum gas, per kilogram, twenty-one
centavos: Provided, That, liquified petroleum gas used
for motive power shall be taxed at the equivalent rate
as the specific tax on diesel fuel oil;
(h) Asphalts, per kilogram, twelve centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty
centavos;
(j) Aviation turbo-jet fuel, per liter of volume capacity,
sixty-four centavos.
xxx xxx xxx
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TAXATION LAW i
Sec. 156. Specific tax on diesel fuel oil. On fuel oil,
commercially known as diesel fuel oil, and all similar
fuel oils, having more or less the same generating
power, per liter of volume capacity, twenty-five and
one-half centavos, which tax shall attach to this fuel
oil as soon as it is in existence as such.
A tax cannot be imposed unless it is supported by the clear and
express language of a statute; 19 on the other hand, once the tax is
unquestionably imposed, "[a] claim of exemption from tax
payments must be clearly shown and based on language in the law
too plain to be mistaken." 20 Since the partial refund authorized
under Section 5, RA 1435, is in the nature of a tax exemption, 21 it
must be construed strictissimi Juris against the grantee. Hence,
petitioner's claim of refund on the basis of the specific taxes it
actually paid must expressly be granted in a statute stated in a
language too clear to be mistaken.
We have carefully scrutinized RA 1435 and the subsequent
pertinent statutes and found no expression of a legislative will
authorizing a refund based on the higher rates claimed by
petitioner. The mere fact that the privilege of refund was included
in Section 5, and not in Section 1, is insufficient to support
petitioner's claim. When the law itself does not explicitly provide
that a refund under RA 1435 may be based on higher rates which
were nonexistent at the time of its enactment, this Coure cannot
presume otherwise. A legislative lacuna cannot be filled by judicial
fiat. 22
The issue is not really novel. In Commissioner of Internal Revenue
vs. Court of Appeals and Atlas Consolidated Mining and
Development
Corporation 23 (the second Atlas case), the CIR contended that the
refund should be based on Sections 1 and 2 of RA 1435, not
Sections 153 and 156 of the NIRC of 1977. In categorically ruling
that Private Respondent Atlas Consolidated Mining and
Development Corporation was entitled to a refund based on
Sections 1 and 2 of RA 1435, the Court, through Mr. Justice Hilario
AL Ilagan-Malipol. AB. MD
G. Davide, Jr., reiterated our pronouncement in Commissioner of
Internal Revenue vs. Rio Tuba Nickel and Mining Corporation:
Our Resolution of 25 March 1992 modifying our 30
September 1991 Decision in the Rio Tuba case sets
forth the controlling doctrine. In that Resolution, we
stated:
Since the private respondent's claim for refund covers
specific taxes paid from 1980 to July 1983 then we
find that the private respondent is entitled to a
refund. It should be made clear, however, that Rio
Tuba is not entitled to the whole amount it claims as
refund.
The specific taxes on oils which Rio Tuba paid for the
aforesaid period were no longer based on the rates
specified by Sections 1 and 2 of R.A. No. 1435 but on
the increased rates mandated under Sections 153 and
156 of the National Internal Revenue Code of 1977.
We note however, that the latter law does not
specifically provide for a refund to these mining and
lumber companies of specific taxes paid on
manufactured and diesel fuel oils.
In Insular Lumber Co. v. Court of Tax Appeals, (104
SCRA 710 [1981]), the Court held that the authorized
partial refund under Section 5 of R.A. No. 1435
partakes of the nature of a tax exemption and
therefore cannot be allowed unless granted in the
most explicit and categorical language. Since the
grant of refund privileges must be strictly construed
against the taxpayer, the basis for the refund shall be
the amounts deemed paid under Sections 1 and 2 of
R.A. No. 1435.
ACCORDINGLY, the decision in G.R. Nos. 83583-84 is
hereby MODIFIED. The private respondent's CLAIM for
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TAXATION LAW i
REFUND is GRANTED, computed on the basis of the
amounts deemed paid under Sections 1 and 2 of R.A.
No. 1435, without interest. 24
We rule, therefore, that since Atlas's claims for refund
cover specific taxes paid before 1985, it should be
granted the refund based on the rates specified by
Sections 1 and 2 of R.A. No. 1435 and not on the
increased rates under Sections 153 and 156 of the
Tax Code of 1977, provided the claims are not yet
barred by prescription. (Emphasis supplied.)
Insular Lumber Co. and First Atlas Case
Not Inconsistent With Rio Tuba
and Second Atlas Case
Petitioner argues that the applicable jurisprudence in this case
should be Commissioner of Internal Revenue vs. Atlas Consolidated
and Mining Corp. (the first Atlas case), an unsigned resolution, and
Insular Lumber Co. vs. Court of Tax Appeals, an en banc decision.
25 Petitioner also asks the Court to take a "second look" at Rio Tuba
and the second Atlas case, both decided by Divisions, in view of
Insular which was decided en banc. Petitioner posits that "[I]n view
of the similarity of the situation of herein petitioner with Insular
Lumber Company (claimant in Insular Lumber) and Rio Tuba Nickel
Mining Corporation (claimant in Rio Tuba), a dilemma has been
created as to whether or not Insular Lumber, which has been
decided by the Honorable Court en banc, or Rio Tuba, which was
decided only [by] the Third Division of the Honorable Court, should
apply." 26
We find no conflict between these two pairs of cases. Neither
Insular Lumber Co. nor the first Atlas case ruled on the issue of
whether the refund privilege under Section 5 should be computed
based on the specific tax deemed paid under Sections 1 and 2 of RA
AL Ilagan-Malipol. AB. MD
1435, regardless of what was actually paid under the increased
rates. Rio Tuba and the second Atlas case did.
Insular Lumber Co. decided a claim for refund on specific tax paid
on petroleum products purchased in the year 1963, when the
increased rates under the NIRC of 1977 were nor yet in effect.
Thus, the issue now before us did not exist at the time, since the
applicable rates were still those prescribed under Sections 1 and 2
of RA 1435.
On the other hand, the issue raised in the first Atlas case was
whether the claimant was entitled to the refund under Section 5,
notwithstanding its failure to pay any additional tax under a
municipal or city ordinance. Although Atlas purchased petroleum
products in the years, 1976 to 1978 when the rates had already
been changed, the Court did not decide or make any
pronouncement on the issue in that case.
Clearly, it is impossible for these two decisions to clash with our
pronouncement in Rio Tuba and second Atlas case, in which we
ruled that the refund granted be computed on the basis of the
amounts deemed paid under Sections 1 and 2 of RA 1435. In this
light, we find no basis for petitioner's invocation of the
constitutional proscription that "no doctrine or principle of law laid
down by the Court in a decision rendered en banc or in division
may be modified or reversed except by the Court sitting en banc. 27
Finally, petitioner asserts that "equity and justice demand that the
computation of the tax refunds be based on actual amounts paid
under Sections 153 and 156 of the NIRC." 28 We disagree.
According to an eminent authority on taxation, "there is no tax
exemption solely on the, ground of equity." 29
WHEREFORE, the petition is hereby DENIED and the assailed
Decision of the Court of Appeals is AFFIRMED. SO ORDERED.
82
TAXATION LAW i
G.R. No. 112024 January 28, 1999
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondent.
QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of
Appeals dated September 22, 1993 affirming the Decision 2 and a
Resolution 3 of the Court Of Tax Appeals which denied the claims of
the petitioner for tax refund and tax credits, and disposing as
follows:
IN VIEW OF ALL, THE FOREGOING, the instant
petition for review, is DENIED due course. The
Decision of the Court of Tax Appeals dated May 20,
1993 and its resolution dated July 20, 1993, are
hereby AFFIRMED in toto.
SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits
of overpaid income tax for 1985 in the amount of
P5,299,749.95 is hereby denied for having been filed
beyond the reglementary period. The 1986 claim for
refund amounting to P234,077.69 is likewise denied
since petitioner has opted and in all likelihood
automatically credited the same to the succeeding
year. The petition for review is dismissed for lack of
merit.
SO ORDERED. 5
AL Ilagan-Malipol. AB. MD
The facts on record show the antecedent circumstances pertinent to
this case.
Petitioner, Philippine Bank of Communications (PBCom), a
commercial banking corporation duly organized under Philippine
laws, filed its quarterly income tax returns for the first and second
quarters of 1985, reported profits, and paid the total income tax of
P5,016,954.00. The taxes due were settled by applying PBCom's
tax credit memos and accordingly, the Bureau of Internal Revenue
(BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed
its Annual Income Tax Returns for the year-ended December 31,
1986, the petitioner likewise reported a net loss of P14,129,602.00,
and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from
leased properties. The lessees withheld and remitted to the BIR
withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of P5,016,954.00
representing the overpayment of taxes in the first and second
quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of
creditable taxes withheld by their lessees from property rentals in
1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of
Internal Revenue, petitioner instituted a Petition for Review on
November 18, 1988 before the Court of Tax Appeals (CTA). The
petition was docketed as CTA Case No. 4309 entitled: "Philippine
Bank of Communications vs. Commissioner of Internal Revenue."
83
TAXATION LAW i
The losses petitioner incurred as per the summary of petitioner's
claims for refund and tax credit for 1985 and 1986, filed before the
Court of Tax Appeals, are as follows:
1985 1986
September 22, 1993, the Court of Appeals affirmed in toto the
Net Income (Loss) (P25,317,288.00)
(P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985
tax claim as P5,299,749.95. A forty five
centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on
the outset, denied the request of petitioner for a tax refund or
credit in the sum amount of P5,299,749.95, on the ground that it
was filed beyond the two-year reglementary period provided for by
law. The petitioner's claim for refund in 1986 amounting to
P234,077.69 was likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment in the
succeeding year.
AL Ilagan-Malipol. AB. MD
On June 22, 1993, petitioner filed a Motion for Reconsideration of
the CTA's decision but the same was denied due course for lack of
merit. 6
Thereafter, PBCom filed a petition for review of said decision and
resolution of the CTA with the Court of Appeals. However on
CTA's resolution dated July 20, 1993. Hence this petition now
before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom which
relied in good faith on the formal
assurances of BIR in RMC No. 7-85 and
did not immediately file with the CTA a
petition for review asking for the
refund/tax credit of its 1985-86 excess
quarterly income tax payments can
be prejudiced by the subsequent BIR
rejection, applied retroactivity, of its
assurances in RMC No. 7-85 that the
prescriptive period for the refund/tax
credit of excess quarterly income tax
payments is not two years but ten (10).
7
II. Whether the Court of Appeals
seriously erred in affirming the CTA
decision which denied PBCom's claim for
the refund of P234,077.69 income tax
overpaid in 1986 on the mere
speculation, without proof, that there
were taxes due in 1987 and that PBCom
availed of tax-crediting that year. 8
Simply stated, the main question is: Whether or not the Court of
Appeals erred in denying the plea for tax refund or tax credits on
84
TAXATION LAW i

the ground of prescription, despite petitioner's reliance on RMC No. Appeals within the two-year period from the date of
7-85, changing the prescriptive period of two years to ten years? payment, in accordance with sections 292 and 295 of
the National Internal Revenue Code. It is obvious that
Petitioner argues that its claims for refund and tax credits are not the filing of the case in court is to preserve the
yet barred by prescription relying on the applicability of Revenue judicial right of the corporation to claim the refund or
Memorandum Circular No. 7-85 issued on April 1, 1985. The tax credit.
circular states that overpaid income taxes are not covered by the
two-year prescriptive period under the tax Code and that taxpayers It should he noted, however, that this is not a case of
may claim refund or tax credits for the excess quarterly income tax erroneously or illegally paid tax under the provisions
with the BIR within ten (10) years under Article 1144 of the Civil of Sections 292 and 295 of the Tax Code.
Code. The pertinent portions of the circular reads:
In the above provision of the Regulations the
REVENUE MEMORANDUM CIRCULAR NO. 7-85 corporation may request for the refund of the
overpaid income tax or claim for automatic tax credit.
SUBJECT: PROCESSING OF To insure prompt action on corporate annual income
REFUND OR TAX CREDIT tax returns showing refundable amounts arising from
OF EXCESS CORPORATE overpaid quarterly income taxes, this Office has
INCOME TAX RESULTING promulgated Revenue Memorandum Order No. 32-76
FROM THE FILING OF THE dated June 11, 1976, containing the procedure in
FINAL ADJUSTMENT processing said returns. Under these procedures, the
RETURN. returns are merely pre-audited which consist mainly
of checking mathematical accuracy of the figures of
TO: All Internal Revenue Officers and Others the return. After which, the refund or tax credit is
Concerned. granted, and, this procedure was adopted to facilitate
immediate action on cases like this.
Sec. 85 And 86 Of the National Internal Revenue Code
provide: In this regard, therefore, there is no need to file
petitions for review in the Court of Tax Appeals in
xxx xxx xxx order to preserve the right to claim refund or tax
credit the two year period. As already stated, actions
The foregoing provisions are implemented by Section hereon by the Bureau are immediate after only a
7 of Revenue Regulations Nos. 10-77 which provide; cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the Bureau of
Internal Revenue excess income tax paid under the
xxx xxx xxx
provisions of Section 86 of the Tax Code within 10
years from the date of payment considering that it is
It has been observed, however, that because of the
an obligation created by law (Article 1144 of the Civil
excess tax payments, corporations file claims for Code). 9 (Emphasis supplied.)
recovery of overpaid income tax with the Court of Tax
AL Ilagan-Malipol. AB. MD 85
TAXATION LAW i

Petitioner argues that the government is barred from asserting a
position contrary to its declared circular if it would result to
injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs.
Court of Tax Appeals 10 petitioner claims that rulings or circulars
promulgated by the Commissioner of Internal Revenue have no
retroactive effect if it would be prejudicial to taxpayers, In ABS-
CBN case, the Court held that the government is precluded from
adopting a position inconsistent with one previously taken where
injustice would result therefrom or where there has been a
misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue
Code explicitly provides for this rules as follows:
Sec. 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;
c). where the taxpayer
acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor
General, argues that the two-year prescriptive period for filing tax
cases in court concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted Income Tax
Return, which is generally done on April 15 following the close of
the calendar year. As precedents, respondent Commissioner cited
cases which adhered to this principle, to wit ACCRA Investments
Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner
also states that since the Final Adjusted Income Tax Return of the
petitioner for the taxable year 1985 was supposed to be filed on
April 15, 1986, the latter had only until April 15, 1988 to seek relief
from the court. Further, respondent Commissioner stresses that
when the petitioner filed the case before the CTA on November 18,
1988, the same was filed beyond the time fixed by law, and such
failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on
the matter, we find that, contrary to the petitioner's contention, the
relaxation of revenue regulations by RMC 7-85 is not warranted as
it disregards the two-year prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation."
The primary purpose is to generate funds for the State to finance
the needs of the citizenry and to advance the common weal. 13 Due
process of law under the Constitution does not require judicial
proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the
means to carry on its operations and it is of utmost importance that
the modes adopted to enforce the collection of taxes levied should
be summary and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit should
be exercised within the time fixed by law because the BIR being an

AL Ilagan-Malipol. AB. MD 86
TAXATION LAW i
administrative body enforced to collect taxes, its functions should
not be unduly delayed or hampered by incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977
(now Sec. 229, NIRC of 1997) provides for the prescriptive period
for filing a court proceeding for the recovery of tax erroneously or
illegally collected, viz.:
Sec. 230. 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
excessive 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 proceedings shall begun
after the expiration of two years from the date of
payment of the tax or penalty regardless of any
supervening cause that may arise after payment;
Provided however, That the Commissioner may, even
without a written claim therefor, refund or credit any
tax, where on the face of the return upon which
payment was made, such payment appears clearly to
have been erroneously paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or
credit with the Commissioner of Internal Revenue, within two (2)
years after payment of tax, before any suit in CTA is commenced.
The two-year prescriptive period provided, should be computed
from the time of filing the Adjustment Return and final payment of
the tax for the year.
AL Ilagan-Malipol. AB. MD
In Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co., 15 this Court explained the application of Sec. 230 of
1977 NIRC, as follows:
Clearly, the prescriptive period of two years should
commence to run only from the time that the refund
is ascertained, which can only be determined after a
final adjustment return is accomplished. In the
present case, this date is April 16, 1984, and two
years from this date would be April 16, 1986. . . . As
we have earlier said in the TMX Sales case, Sections
68. 16 69, 17 and 70 18 on Quarterly Corporate Income
Tax Payment and Section 321 should be considered in
conjunction with it 19
When the Acting Commissioner of Internal Revenue issued RMC 7-
85, changing the prescriptive period of two years to ten years on
claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather
it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time
to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. 20
Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with the
law they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and
regulations issued by administrative officials to implement a law
cannot go beyond the terms and provisions of the latter.
87
TAXATION LAW i
Appellant contends that Section 2 of FAO No. 37-1 is
void because it is not only inconsistent with but is
contrary to the provisions and spirit of Act. No 4003
as amended, because whereas the prohibition
prescribed in said Fisheries Act was for any single
period of time not exceeding five years duration, FAO
No 37-1 fixed no period, that is to say, it establishes
an absolute ban for all time. This discrepancy between
Act No. 4003 and FAO No. 37-1 was probably due to
an oversight on the part of Secretary of Agriculture
and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason
that the regulation or rule issued to implement a law
cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the
technical men in the offices of Department Heads who
draft rules and regulation is called to the importance
and necessity of closely following the terms and
provisions of the law which they intended to
implement, this to avoid any possible
misunderstanding or confusion as in the present case.
23
Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. 24 As
pointed out by the respondent courts, the nullification of RMC No.
7-85 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230
of 1977 NIRC. for being contrary to the express provision of a
statute. Hence, his interpretation could not be given weight for to
do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of
Internal Revenue, after promulgating RMC No. 7-85,
is estopped by the principle of non-retroactively of
BIR rulings. Again We do not agree. The
Memorandum Circular, stating that a taxpayer may
recover the excess income tax paid within 10 years
AL Ilagan-Malipol. AB. MD
from date of payment because this is an obligation
created by law, was issued by the Acting
Commissioner of Internal Revenue. On the other
hand, the decision, stating that the taxpayer should
still file a claim for a refund or tax credit and
corresponding petition fro review within the
two-year prescription period, and that the lengthening
of the period of limitation on refund from two to ten
years would be adverse to public policy and run
counter to the positive mandate of Sec. 230, NIRC, -
was the ruling and judicial interpretation of the Court
of Tax Appeals. Estoppel has no application in the
case at bar because it was not the Commissioner of
Internal Revenue who denied petitioner's claim of
refund or tax credit. Rather, it was the Court of Tax
Appeals who denied (albeit correctly) the claim and in
effect, ruled that the RMC No. 7-85 issued by the
Commissioner of Internal Revenue is an
administrative interpretation which is out of harmony
with or contrary to the express provision of a statute
(specifically Sec. 230, NIRC), hence, cannot be given
weight for to do so would in effect amend the statute.
25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a
taxpayer with shield against judicial action. For there are no vested
rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same.
27 Moreover, the non-retroactivity of rulings by the Commissioner
of Internal Revenue is not applicable in this case because the nullity
of RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as
repeatedly held by this Court, a claim for refund is in the nature of
88
TAXATION LAW i

a claim for exemption and should be construed in strictissimi juris
against the taxpayer. 28
On the second issue, the petitioner alleges that the Court of
Appeals seriously erred in affirming CTA's decision denying its claim
for refund of P234,077.69 (tax overpaid in 1986), based on mere
speculation, without proof, that PBCom availed of the automatic tax
credit in 1987.
That the petitioner opted for an automatic tax credit in accordance
with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final
Adjusted Income Tax Return, is a finding of fact which we must
respect. Moreover, the 1987 annual corporate tax return of the
petitioner was not offered as evidence to contovert said fact. Thus,
we are bound by the findings of fact by respondent courts, there
being no showing of gross error or abuse on their part to disturb
our reliance thereon. 31

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC)
provides that any excess of the total quarterly payments over the
actual income tax computed in the adjustment or final corporate
income tax return, shall either (a) be refunded to the corporation,
or (b) may be credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year.
WHEREFORE, the, petition is hereby DENIED, The decision of the
Court of Appeals appealed from is AFFIRMED, with COSTS against
the petitioner.1wphi1.nt
SO ORDERED.

The corporation must signify in its annual corporate adjustment

return (by marking the option box provided in the BIR form) its
intention, whether to request for a refund or claim for an automatic
tax credit for the succeeding taxable year. To ease the
administration of tax collection, these remedies are in the
alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-

paid in 1986 the Court of Tax Appeals, after
examining the adjusted final corporate annual income
tax return for taxable year 1986, found out that
petitioner opted to apply for automatic tax credit. This
was the basis used (vis-avis the fact that the 1987
annual corporate tax return was not offered by the
petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the
automatic tax credit to the succeeding year, hence it
can no longer ask for refund, as to [sic] the two
remedies of refund and tax credit are alternative. 30

AL Ilagan-Malipol. AB. MD 89
TAXATION LAW i

G.R. No. 134062 April 17, 2007 Deficiency percentage tax P93,723,372.40

COMMISSIONER OF INTERNAL REVENUE, Petitioner, Add: 25% surcharge 23,430,843.10

vs. 15,000.00
BANK OF THE PHILIPPINE ISLANDS, Respondent. Compromise penalty

DECISION P117,169,215.50
TOTAL AMOUNT DUE AND COLLECTIBLE
.5
CORONA, J.:
Both notices of assessment contained the following note:
This is a petition for review on certiorari1 of a decision2 of the Court
of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 Please be informed that your [percentage and documentary stamp
which reversed and set aside the decision3 and resolution4 of the taxes have] been assessed as shown above. Said assessment has
Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, been based on return (filed by you) (as verified) (made by
1996, respectively, in CTA Case No. 4715. this Office) (pending investigation) (after investigation). You
are requested to pay the above amount to this Office or to our
In two notices dated October 28, 1988, petitioner Commissioner of Collection Agent in the Office of the City or Deputy Provincial
Internal Revenue (CIR) assessed respondent Bank of the Philippine Treasurer of xxx6
Islands (BPIs) deficiency percentage and documentary stamp
taxes for the year 1986 in the total amount of P129,488,656.63: In a letter dated December 10, 1988, BPI, through counsel, replied
as follows:
1986 Deficiency Percentage Tax
1. Your "deficiency assessments" are no assessments at all.
P 7, The taxpayer is not informed, even in the vaguest terms,
Deficiency percentage tax why it is being assessed a deficiency. The very purpose of a
270,892.88
deficiency assessment is to inform taxpayer why he has
Add: 25% surcharge 1,817,723.22 incurred a deficiency so that he can make an intelligent
20% interest from 1-21-87 to 10-28-88 3,215,825.03 decision on whether to pay or to protest the assessment.
This is all the more so when the assessment involves
15,000.00 astronomical amounts, as in this case.
Compromise penalty
We therefore request that the examiner concerned be
P12,319,441.1
TOTAL AMOUNT DUE AND COLLECTIBLE required to state, even in the briefest form, why he believes
3
the taxpayer has a deficiency documentary and percentage
taxes, and as to the percentage tax, it is important that the
1986 Deficiency Documentary Stamp Tax taxpayer be informed also as to what particular percentage
tax the assessment refers to.

AL Ilagan-Malipol. AB. MD 90
TAXATION LAW i
2. As to the alleged deficiency documentary stamp tax, you
are aware of the compromise forged between your office and
the Bankers Association of the Philippines [BAP] on this issue
and of BPIs submission of its computations under this
compromise. There is therefore no basis whatsoever for this
assessment, assuming it is on the subject of the BAP
compromise. On the other hand, if it relates to documentary
stamp tax on some other issue, we should like to be
informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are
completely at a loss on how such assessment may be
protested since your letter does not even tell the taxpayer
what particular percentage tax is involved and how your
examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we
shall inform you of the taxpayers decision on whether to pay
or protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8,
1991 stating that:
although in all respects, your letter failed to qualify as a protest
under Revenue Regulations No. 12-85 and therefore not deserving
of any rejoinder by this office as no valid issue was raised against
the validity of our assessment still we obliged to explain the basis
of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on the matter.8
On July 6, 1991, BPI requested a reconsideration of the
assessments stated in the CIRs May 8, 1991 letter.9 This was
denied in a letter dated December 12, 1991, received by BPI on
January 21, 1992.10
AL Ilagan-Malipol. AB. MD
On February 18, 1992, BPI filed a petition for review in the CTA.11
In a decision dated November 16, 1995, the CTA dismissed the
case for lack of jurisdiction since the subject assessments had
become final and unappealable. The CTA ruled that BPI failed to
protest on time under Section 270 of the National Internal Revenue
Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA
1125.12 It denied reconsideration in a resolution dated May 27,
1996.13
On appeal, the CA reversed the tax courts decision and resolution
and remanded the case to the CTA14 for a decision on the merits.15
It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal
and factual bases therefor. It declared that the proper assessments
were those contained in the May 8, 1991 letter which provided the
reasons for the claimed deficiencies.16 Thus, it held that BPI filed
the petition for review in the CTA on time.17 The CIR elevated the
case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for
deficiency percentage and documentary stamp taxes for
1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the
NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] or his
duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his
findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the [CIR] shall issue an
assessment based on his findings.
91
TAXATION LAW i
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28,
1988 notices19 were valid assessments. If they were not, as held by
the CA, then the correct assessments were in the May 8, 1991
letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991
letter, seasonably asked for a reconsideration of the findings which
the CIR denied in his December 12, 1991 letter, received by BPI on
January 21, 1992. Consequently, the petition for review filed by BPI
in the CTA on February 18, 1992 would be well within the 30-day
period provided by law.20
The CIR argues that the CA erred in holding that the October 28,
1988 notices were invalid assessments. He asserts that he used
BIR Form No. 17.08 (as revised in November 1964) which was
designed for the precise purpose of notifying taxpayers of the
assessed amounts due and demanding payment thereof.21 He
contends that there was no law or jurisprudence then that required
notices to state the reasons for assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and
law upon which the assessments were based be provided to the
taxpayer. It insists that the NIRC, as worded now (referring to
Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment shall
be void."
According to BPI, this is declaratory of what sound tax procedure is
and a confirmation of what due process requires even under the
former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC
provides:
AL Ilagan-Malipol. AB. MD
Sec. 228. Protesting of Assessment. When the [CIR] or his
duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not
be required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the
assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and
facts on which the assessments of the deficiency taxes were made.
He merely notified BPI of his findings, consisting only of the
computation of the tax liabilities and a demand for payment thereof
within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the
provisions of the former Section 270 prior to its amendment by RA
8424 (also known as the Tax Reform Act of 1997).23 In CIR v.
Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law
and the facts on which the assessment of estate taxes had been
made. She was merely notified of the findings by the CIR, who had
simply relied upon the provisions of former Section 229 prior to its
amendment by [RA] 8424, otherwise known as the Tax Reform Act
of 1997.
First, RA 8424 has already amended the provision of Section 229
on protesting an assessment. The old requirement of merely
notifying the taxpayer of the CIR's findings was changed in
1998 to informing the taxpayer of not only the law, but also of the
facts on which an assessment would be made; otherwise, the
assessment itself would be invalid.
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TAXATION LAW i
It was on February 12, 1998, that a preliminary assessment notice
was issued against the estate. On April 22, 1998, the final estate
tax assessment notice, as well as demand letter, was also issued.
During those dates, RA 8424 was already in effect. The notice
required under the old law was no longer sufficient under
the new law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the
former Section 270, the only requirement was for the CIR to
"notify" or inform the taxpayer of his "findings." Nothing in the old
law required a written statement to the taxpayer of the law and
facts on which the assessments were based. The Court cannot read
into the law what obviously was not intended by Congress. That
would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the
assessments contain a computation of tax liabilities, the amount
the taxpayer was to pay and a demand for payment within a
prescribed period.26 Everything considered, there was no doubt the
October 28, 1988 notices sufficiently met the requirements of a
valid assessment under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment shall
be void
was not in the old Section 270 but was only later on inserted in the
renumbered Section 228 in 1997. Evidently, the legislature saw the
need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed
that, prior to the introduction of the amendment, the statute had
an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the
renumbered Section 228 was not an affirmation of what the law
required under the former Section 270. The amendment introduced
AL Ilagan-Malipol. AB. MD
by RA 8424 was an innovation and could not be reasonably inferred
from the old law.29 Clearly, the legislature intended to insert a new
provision regarding the form and substance of assessments issued
by the CIR.30
In ruling that the October 28, 1988 notices were not valid
assessments, the CA explained:
xxx. Elementary concerns of due process of law should have
prompted the [CIR] to inform [BPI] of the legal and factual basis of
the formers decision to charge the latter for deficiency
documentary stamp and gross receipts taxes.31
In other words, the CAs theory was that BPI was deprived of due
process when the CIR failed to inform it in writing of the factual and
legal bases of the assessments even if these were not called for
under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic
constitutional requirement that "no person shall be deprived of his
property without due process of law."32 We note, however, what
the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not
only was [BPI] given the opportunity to discuss with the [CIR]
when the latter issued the former a Pre-Assessment Notice (which
[BPI] ignored) but that the examiners themselves went to [BPI]
and "we talk to them and we try to [thresh] out the issues, present
evidences as to what they need." Now, how can [BPI] and/or its
counsel honestly tell this Court that they did not know anything
about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew
beforehand the assessments[,] contrary to the allegations of its
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TAXATION LAW i
counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager
of the Accounting Department of [BPI]. He testified to the fact that
he prepared worksheets which contain his analysis regarding the
findings of the [CIRs] examiner, Mr. San Pedro and that the same
worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI]
was indeed aware of the nature and basis of the assessments, and
was given all the opportunity to contest the same but ignored it
despite the notice conspicuously written on the assessments which
states that "this ASSESSMENT becomes final and unappealable if
not protested within 30 days after receipt." Counsel resorted to
dilatory tactics and dangerously played with time. Unfortunately,
such strategy proved fatal to the cause of his client.33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of
its function is dedicated exclusively to the consideration of tax
problems, has necessarily developed an expertise on the subject,
and its conclusions will not be overturned unless there has been an
abuse or improvident exercise of authority. Such findings can only
be disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part
of the [CTA].34
Under the former Section 270, there were two instances when an
assessment became final and unappealable: (1) when it was not
protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days
from receipt of the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
AL Ilagan-Malipol. AB. MD
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation in such form and
manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise,
the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual,
association or corporation adversely affected by the decision on the
protest may appeal to the [CTA] within thirty (30) days from
receipt of the said decision; otherwise, the decision shall become
final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid
assessments, BPI should have protested the same within 30 days
from receipt thereof. The December 10, 1988 reply it sent to the
CIR did not qualify as a protest since the letter itself stated that
"[a]s soon as this is explained and clarified in a proper letter of
assessment, we shall inform you of the taxpayers decision on
whether to pay or protest the assessment."36 Hence, by its
own declaration, BPI did not regard this letter as a protest against
the assessments. As a matter of fact, BPI never deemed this a
protest since it did not even consider the October 28, 1988 notices
as valid or proper assessments.
The inevitable conclusion is that BPIs failure to protest the
assessments within the 30-day period provided in the former
Section 270 meant that they became final and unappealable. Thus,
the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI
was, from then on, barred from disputing the correctness of the
assessments or invoking any defense that would reopen the
question of its liability on the merits.37 Not only that. There arose a
presumption of correctness when BPI failed to protest the
assessments:
Tax assessments by tax examiners are presumed correct and made
in good faith. The taxpayer has the duty to prove otherwise. In the
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TAXATION LAW i
absence of proof of any irregularities in the performance of duties,
an assessment duly made by a Bureau of Internal Revenue
examiner and approved by his superior officers will not be
disturbed. All presumptions are in favor of the correctness of tax
assessments.38
Even if we considered the December 10, 1988 letter as a protest,
BPI must nevertheless be deemed to have failed to appeal the CIRs
final decision regarding the disputed assessments within the 30-day
period provided by law. The CIR, in his May 8, 1991 response,
stated that it was his "final decision on the matter." BPI therefore
had 30 days from the time it received the decision on June 27,
1991 to appeal but it did not. Instead it filed a request for
reconsideration and lodged its appeal in the CTA only on February
18, 1992, way beyond the reglementary period. BPI must now
suffer the repercussions of its omission. We have already declared
that:
the [CIR] should always indicate to the taxpayer in clear and
unequivocal language whenever his action on an assessment
questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of [RA
1125], as amended. On the basis of his statement indubitably
showing that the Commissioner's communicated action is his
final decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the
taxpayer would be able to determine when his right to
appeal to the tax court accrues.
The rule of conduct would also obviate all desire and
opportunity on the part of the taxpayer to continually delay
the finality of the assessment and, consequently, the
collection of the amount demanded as taxes by repeated
requests for recomputation and reconsideration. On the part
of the [CIR], this would encourage his office to conduct a careful
and thorough study of every questioned assessment and render a
correct and definite decision thereon in the first instance. This
AL Ilagan-Malipol. AB. MD
would also deter the [CIR] from unfairly making the taxpayer grope
in the dark and speculate as to which action constitutes the
decision appealable to the tax court. Of greater import, this rule of
conduct would meet a pressing need for fair play, regularity, and
orderliness in administrative action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve
BPI of its liability under the subject tax assessments.
We realize that these assessments (which have been pending for
almost 20 years) involve a considerable amount of money. Be that
as it may, we cannot legally presume the existence of something
which was never there. The state will be deprived of the taxes
validly due it and the public will suffer if taxpayers will not be held
liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty, the exercise of taxing power derives its source from
the very existence of the state whose social contract with its
citizens obliges it to promote public interest and common good. The
theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of
promoting the general welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998
decision of the Court of Appeals in CA-G.R. SP No. 41025 is
REVERSED and SET ASIDE.
SO ORDERED.
95
TAXATION LAW i
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance On the other hand, such
collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is
therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be
achieved.
The main issue in this case is whether or not the Collector of
Internal Revenue correctly disallowed the P75,000.00 deduction
claimed by private respondent Algue as legitimate business
expenses in its income tax returns. The corollary issue is whether
or not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in accordance
with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private
respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as
delinquency income taxes for the years 1958 and 1959. 1 On
January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day
in the office of the petitioner. 2 On March 12, 1965, a warrant of
distraint and levy was presented to the private respondent, through
its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on
the ground of the pending protest. 3 A search of the protest in the
AL Ilagan-Malipol. AB. MD
dockets of the case proved fruitless. Atty. Guevara produced his file
copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara
was finally informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served. 5 Sixteen days later,
on April 23, 1965, Algue filed a petition for review of the decision of
the Commissioner of Internal Revenue with the Court of Tax
Appeals. 6
The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within
thirty days after receipt of the decision or ruling challenged. 7 It is
true that as a rule the warrant of distraint and levy is "proof of the
finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof
and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of
this accepted doctrine.
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter of
protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only after Atty.
Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period,
the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by
private respondent was not pro forma and was based on strong
legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which
started on the date the assessment was received, viz., January 14,
1965. The period started running again only on April 7, 1965, when
the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on
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TAXATION LAW i
it. Hence, when the appeal was filed on April 23, 1965, only 20
days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00
was properly disallowed because it was not an ordinary reasonable
or necessary business expense. The Court of Tax Appeals had seen
it differently. Agreeing with Algue, it held that the said amount had
been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These
were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.
Parenthetically, it may be observed that the petitioner had
Originally claimed these promotional fees to be personal holding
company income 12 but later conformed to the decision of the
respondent court rejecting this assertion. 13 In fact, as the said
court found, the amount was earned through the joint efforts of the
persons among whom it was distributed It has been established
that the Philippine Sugar Estate Development Company had earlier
appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto
Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and
Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14
Ultimately, after its incorporation largely through the promotion of
the said persons, this new corporation purchased the PSEDC
properties. 15 For this sale, Algue received as agent a commission of
P126,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective
shares of the fees in their income tax returns and paid the
corresponding taxes thereon. 17 The Court of Tax Appeals also
AL Ilagan-Malipol. AB. MD
found, after examining the evidence, that no distribution of
dividends was involved. 18
The petitioner claims that these payments are fictitious because
most of the payees are members of the same family in control of
Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is
not enough substantiation of such payments. In short, the
petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the
accountant, Cecilia V. de Jesus, testified that the payments were
not made in one lump sum but periodically and in different amounts
as each payee's need arose. 19 It should be remembered that this
was a family corporation where strict business procedures were not
applied and immediate issuance of receipts was not required. Even
so, at the end of the year, when the books were to be closed, each
payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. 20 Admittedly, everything
seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the
family corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission paid by
the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21 After deducting the said fees,
Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation
of the Vegetable Oil Investment Corporation to the actual purchase
by it of the Sugar Estate properties. This finding of the respondent
court is in accord with the following provision of the Tax Code:
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TAXATION LAW i
SEC. 30. Deductions from gross income.--In
computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on any trade or business, including a
reasonable allowance for salaries or other
compensation for personal services actually rendered;
... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among
the ordinary and necessary expenses paid or incurred
in carrying on any trade or business may be included
a reasonable allowance for salaries or other
compensation for personal services actually rendered.
The test of deductibility in the case of compensation
payments is whether they are reasonable and are, in
fact, payments purely for service. This test and
deductibility in the case of compensation payments is
whether they are reasonable and are, in fact,
payments purely for service. This test and its practical
application may be further stated and illustrated as
follows:
Any amount paid in the form of compensation, but not
in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a
corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are
in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close
AL Ilagan-Malipol. AB. MD
relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are
not paid wholly for services rendered, but the
excessive payments are a distribution of earnings
upon the stock. . . . (Promulgated Feb. 11, 1931, 30
O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in
the regular employ of Algue nor were they its controlling
stockholders. 23
The Solicitor General is correct when he says that the burden is on
the taxpayer to prove the validity of the claimed deduction. In the
present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment
of the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was
no mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain
and the courts will then come to his succor. For all the awesome
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TAXATION LAW i

power of the tax collector, he may still be stopped in his tracks if

the taxpayer can demonstrate, as it has here, that the law has not
been observed.

We hold that the appeal of the private respondent from the decision
of the petitioner was filed on time with the respondent court in
accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under
the Internal Revenue Code and should therefore not have been
disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is

AFFIRMED in toto, without costs.

SO ORDERED.

AL Ilagan-Malipol. AB. MD 99
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AL Ilagan-Malipol. AB. MD 100

TAXATION LAW i
G.R. No. L-68252 May 26, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT
STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS,
respondents.
PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping
Co. Ltd., is entitled to a refund or tax credit for amounts
representing pre-payment of income and common carrier's taxes
under the National Internal Revenue Code, section 24 (b) (2), as
amended. 1
Private respondent is a foreign corporation represented in the
Philippines by Soriamont Steamship Agencies, Incorporated. It
owns and operates tramper vessel M/V Gardenia. In December
1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric
tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr.
Edilberto Lising, the operations supervisor of Soriamont Agency, 4
paid the required income and common carrier's taxes in the
respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED
TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS
(P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED
NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE
CENTAVOS (P107,142.75) based on the expected gross receipts of
the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo, the
vessel found no sugar for loading. On January 10, 1981, NASUTRA
and private respondent's agent mutually agreed to have the vessel
sail for Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as
erroneous since no receipt was realized from the charter
agreement, private respondent instituted a claim for tax credit or
refund of the sum ONE HUNDRED SEVEN THOUSAND ONE
AL Ilagan-Malipol. AB. MD
HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS
(P107,142.75) before petitioner Commissioner of Internal Revenue
on March 23, 1981. Petitioner failed to act promptly on the claim,
hence, on May 14, 1981, private respondent filed a petition for
review 6 before public respondent Court of Tax Appeals.
Petitioner contested the petition. As special and affirmative
defenses, it alleged the following: that taxes are presumed to have
been collected in accordance with law; that in an action for refund,
the burden of proof is upon the taxpayer to show that taxes are
erroneously or illegally collected, and the taxpayer's failure to
sustain said burden is fatal to the action for refund; and that claims
for refund are construed strictly against tax claimants. 7
After trial, respondent tax court decided in favor of the private
respondent. It held:
It has been shown in this case that 1) the petitioner
has complied with the mentioned statutory
requirement by having filed a written claim for refund
within the two-year period from date of payment; 2)
the respondent has not issued any deficiency
assessment nor disputed the correctness of the tax
returns and the corresponding amounts of prepaid
income and percentage taxes; and 3) the chartered
vessel sailed out of the Philippine port with absolutely
no cargo laden on board as cleared and certified by
the Customs authorities; nonetheless 4) respondent's
apparent bit of reluctance in validating the legal merit
of the claim, by and large, is tacked upon the
"examiner who is investigating petitioner's claim for
refund which is the subject matter of this case has not
yet submitted his report. Whether or not respondent
will present his evidence will depend on the said
report of the examiner." (Respondent's Manifestation
and Motion dated September 7, 1982). Be that as it
may the case was submitted for decision by
respondent on the basis of the pleadings and records
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TAXATION LAW i
and by petitioner on the evidence presented by
counsel sans the respective memorandum.
An examination of the records satisfies us that the
case presents no dispute as to relatively simple
material facts. The circumstances obtaining amply
justify petitioner's righteous indignation to a more
expeditious action. Respondent has offered no reason
nor made effort to submit any controverting
documents to bash that patina of legitimacy over the
claim. But as might well be, towards the end of some
two and a half years of seeming impotent anguish
over the pendency, the respondent Commissioner of
Internal Revenue would furnish the satisfaction of
ultimate solution by manifesting that "it is now his
turn to present evidence, however, the Appellate
Division of the BIR has already recommended the
approval of petitioner's claim for refund subject
matter of this petition. The examiner who examined
this case has also recommended the refund of
petitioner's claim. Without prejudice to withdrawing
this case after the final approval of petitioner's claim,
the Court ordered the resetting to September 7,
1983." (Minutes of June 9, 1983 Session of the Court)
We need not fashion any further issue into an
apparently settled legal situation as far be it from a
comedy of errors it would be too much of a stretch to
hold and deny the refund of the amount of prepaid
income and common carrier's taxes for which
petitioner could no longer be made accountable.
On August 3, 1984, respondent court denied petitioner's motion for
reconsideration, hence, this petition for review on certiorari.
Petitioner now contends: (1) private respondent has the burden of
proof to support its claim of refund; (2) it failed to prove that it did
not realize any receipt from its charter agreement; and (3) it
suppressed evidence when it did not present its charter agreement.
AL Ilagan-Malipol. AB. MD
We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b) (2)
of the National Internal Revenue Code which at that time provides
as follows:
A corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the
total net income derived in the preceding taxable year
from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of
two and one-half per cent (2 1/2%) on their gross
Philippine billings: "Gross Philippine Billings" include
gross revenue realized from uplifts anywhere in the
world by any international carrier doing business in
the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail,
provided the cargo or mail originates from the
Philippines. The gross revenue realized from the said
cargo or mail include the gross freight charge up to
final destination. Gross revenue from chartered flights
originating from the Philippines shall likewise form
part of "Gross Philippine Billings" regardless of the
place or payment of the passage documents . . . . .
Pursuant to this provision, a resident foreign corporation engaged
in the transport of cargo is liable for taxes depending on the
amount of income it derives from sources within the Philippines.
Thus, before such a tax liability can be enforced the taxpayer must
be shown to have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a
claim for exemption 8 and should be construed in strictissimi juris
against the taxpayer. 9 Likewise, there can be no disagreement with
petitioner's stance that private respondent has the burden of proof
to establish the factual basis of its claim for tax refund.
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TAXATION LAW i
The pivotal issue involves a question of fact whether or not the
private respondent was able to prove that it derived no receipts
from its charter agreement, and hence is entitled to a refund of the
taxes it pre-paid to the government.
The respondent court held that sufficient evidence has been
adduced by the private respondent proving that it derived no
receipt from its charter agreement with NASUTRA. This finding of
fact rests on a rational basis, and hence must be sustained.
Exhibits "E", "F," and "G" positively show that the tramper vessel
M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no
raw sugar to load and returned to Japan without any cargo laden on
board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued
by the District Collector of Customs, Port of Iloilo while Exhibit "F"
is the Certification by the Officer-in-Charge, Export Division of the
Bureau of Customs Iloilo. The correctness of the contents of these
documents regularly issued by officials of the Bureau of Customs
cannot be doubted as indeed, they have not been contested by the
petitioner. The records also reveal that in the course of the
proceedings in the court a quo, petitioner hedged and hawed when
its turn came to present evidence. At one point, its counsel
manifested that the BIR examiner and the appellate division of the
BIR have both recommended the approval of private respondent's
claim for refund. The same counsel even represented that the
government would withdraw its opposition to the petition after final
approval of private respondents' claim. The case dragged on but
petitioner never withdrew its opposition to the petition even if it did
not present evidence at all. The insincerity of petitioner's stance
drew the sharp rebuke of respondent court in its Decision and for
good reason. Taxpayers owe honesty to government just as
government owes fairness to taxpayers.
In its last effort to retain the money erroneously prepaid by the
private respondent, petitioner contends that private respondent
suppressed evidence when it did not present its charter agreement
with NASUTRA. The contention cannot succeed. It presupposes
without any basis that the charter agreement is prejudicial evidence
against the private respondent. 10 Allegedly, it will show that
AL Ilagan-Malipol. AB. MD
private respondent earned a charter fee with or without
transporting its supposed cargo from Iloilo to Japan. The allegation
simply remained an allegation and no court of justice will regard it
as truth. Moreover, the charter agreement could have been
presented by petitioner itself thru the proper use of a subpoena
duces tecum. It never did either because of neglect or because it
knew it would be of no help to bolster its position. 11 For whatever
reason, the petitioner cannot take to task the private respondent
for not presenting what it mistakenly calls "suppressed evidence."
We cannot but bewail the unyielding stance taken by the
government in refusing to refund the sum of ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE
CENTAVOS (P107,142.75) erroneously prepaid by private
respondent. The tax was paid way back in 1980 and despite the
clear showing that it was erroneously paid, the government
succeeded in delaying its refund for fifteen (15) years. After fifteen
(15) long years and the expenses of litigation, the money that will
be finally refunded to the private respondent is just worth a
damaged nickel. This is not, however, the kind of success the
government, especially the BIR, needs to increase its collection of
taxes. Fair deal is expected by our taxpayers from the BIR and the
duty demands that BIR should refund without any unreasonable
delay what it has erroneously collected. Our ruling in Roxas v.
Court of Tax Appeals 12 is apropos to recall:
The power of taxation is sometimes called also the
power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary
rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the
"hen that lays the golden egg." And, in order to
maintain the general public's trust and confidence in
the Government this power must be used justly and
not treacherously.
IN VIEW HEREOF, the assailed decision of respondent Court of Tax
Appeals, dated September 15, 1983, is AFFIRMED in toto. No costs.
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TAXATION LAW i
SO ORDERED.
G.R. No. 172598 December 21, 2007
PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45
assailing the April 28, 2006 Decision1 of the Court of Tax Appeals
(CTA) En Banc in CTA EB No. 64, which upheld respondents
assessment against petitioner for deficiency excise taxes for the
taxable years 1992 and 1994 to 1997. Said En Banc decision
reversed and set aside the August 2, 2004 Decision2 and January
20, 2005 Resolution3 of the CTA Division in CTA Case No. 6003
entitled Pilipinas Shell Petroleum Corporation v. Commissioner of
Internal Revenue, which ordered the withdrawal of the April 22,
1998 collection letter of respondent and enjoined him from
collecting said deficiency excise taxes.
The Facts
Petitioner Pilipinas Shell Petroleum Corporation (PSPC) is the
Philippine subsidiary of the international petroleum giant Shell, and
is engaged in the importation, refining and sale of petroleum
products in the country.
From 1988 to 1997, PSPC paid part of its excise tax liabilities with
Tax Credit Certificates (TCCs) which it acquired through the
Department of Finance (DOF) One Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center (Center) from other Board of
Investment (BOI)-registered companies. The Center is a composite
AL Ilagan-Malipol. AB. MD
body run by four government agencies, namely: the DOF, Bureau
of Internal Revenue (BIR), Bureau of Customs (BOC), and BOI.
Through the Center, PSPC acquired for value various Center-issued
TCCs which were correspondingly transferred to it by other BOI-
registered companies through Center-approved Deeds of
Assignments. Subsequently, when PSPC signified its intent to use
the TCCs to pay part of its excise tax liabilities, said payments were
duly approved by the Center through the issuance of Tax Debit
Memoranda (TDM), and the BIR likewise accepted as payments the
TCCs by issuing its own TDM covering said TCCs, and the
corresponding Authorities to Accept Payment for Excise Taxes
(ATAPETs).
However, on April 22, 1998, the BIR sent a collection letter 4 to
PSPC for alleged deficiency excise tax liabilities of PhP
1,705,028,008.06 for the taxable years 1992 and 1994 to 1997,
inclusive of delinquency surcharges and interest. As basis for the
collection letter, the BIR alleged that PSPC is not a qualified
transferee of the TCCs it acquired from other BOI-registered
companies. These alleged excise tax deficiencies covered by the
collection letter were already paid by PSPC with TCCs acquired
through, and issued and duly authorized by the Center, and duly
covered by TDMs of both the Center and BIR, with the latter also
issuing the corresponding ATAPETs.
PSPC protested the April 22, 1998 collection letter, but the protest
was denied by the BIR through the Regional Director of Revenue
Region No. 8. PSPC filed its motion for reconsideration. However,
due to respondents inaction on the motion, on February 2, 1999,
PSPC filed a petition for review before the CTA, docketed as CTA
Case No. 5728.
On July 23, 1999, the CTA rendered a Decision5 in CTA Case No.
5728 ruling, inter alia, that the use by PSPC of the TCCs was legal
and valid, and that respondents attempt to collect alleged
delinquent taxes and penalties from PSPC without an assessment
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TAXATION LAW i
constitutes denial of due process. The dispositive portion of the July
23, 1999 CTA Decision reads:
[T]he instant petition for review is GRANTED. The collection letter
issued by the Respondent dated April 22, 1998 is considered
withdrawn and he is ENJOINED from any attempts to collect from
petitioner the specific tax, surcharge and interest subject of this
petition.6
Respondent elevated the July 23, 1999 CTA Decision in CTA Case
No. 5728 to the Court of Appeals (CA) through a petition for
review7 docketed as CA-G.R. SP No. 55329. This case was
subsequently consolidated with the similarly situated case of Petron
Corporation under CA-G.R. SP No. 55330. To date, these
consolidated cases are still pending resolution before the CA.
Meanwhile, in late 1999, and despite the pendency of CA-G.R. SP
No. 55329, the Center sent several letters to PSPC dated August
31, 1999,8 September 1, 1999,9 and October 18, 1999.10 The first
required PSPC to submit copies of pertinent sales invoices and
delivery receipts covering sale transactions of PSPC products to the
TCC assignors/transferors purportedly in connection with an
ongoing post audit. The second letter similarly required submission
of the same documents covering PSPC Industrial Fuel Oil (IFO)
deliveries to Spintex International, Inc. The third letter is in reply to
the September 29, 1999 letter sent by PSPC requesting a list of the
serial numbers of the TCCs assigned or transferred to it by various
BOI-registered companies, either assignors or transferors.
In its letter dated October 29, 1999 and received by the Center on
November 3, 1999, PSPC emphasized that the required submission
of these documents had no legal basis, for the applicable rules and
regulations on the matter only require that both the assignor and
assignee of TCCs be BOI-registered entities.11 On November 3,
1999, the Center informed PSPC of the cancellation of the first
batch of TCCs transferred to PSPC and the TDM covering PSPCs
use of these TCCs as well as the corresponding TCC assignments.
PSPCs motion for reconsideration was not acted upon.
AL Ilagan-Malipol. AB. MD
On November 22, 1999, PSPC received the November 15, 1999
assessment letter12 from respondent for excise tax deficiencies,
surcharges, and interest based on the first batch of cancelled TCCs
and TDM covering PSPCs use of the TCCs. All these cancelled TDM
and TCCs were also part of the subject matter in CTA Case No.
5728, now pending before the CA in CA-G.R. SP No. 55329.
PSPC protested13 the assessment letter, but the protest was denied
by the BIR, constraining it to file another petition for review14
before the CTA, docketed as CTA Case No. 6003.
Parenthetically, on March 30, 2004, Republic Act No. (RA) 928215
was promulgated amending RA 1125,16 expanding the jurisdiction
of the CTA and enlarging its membership. It became effective on
April 23, 2004 after its due publication. Thus, CTA Case No. 6003
was heard and decided by a CTA Division.
The Ruling of the Court of Tax Appeals Division
(CTA Case No. 6003)
On August 2, 2004, the CTA Division rendered a Decision17 granting
the PSPCs petition for review. The dispositive portion reads:
[T]he instant petition is hereby GRANTED. Accordingly, the
assessment issued by the respondent dated November 15, 1999
against petitioner is hereby CANCELLED and SET ASIDE.18
In granting PSPCs petition for review, the CTA Division held that
respondent failed to prove with convincing evidence that the TCCs
transferred to PSPC were fraudulently issued as respondents
finding of alleged fraud was merely speculative. The CTA Division
found that neither the respondent nor the Center could state what
sales figures were used as basis for the TCCs to issue, as they
merely based their conclusions on the audited financial statements
of the transferors which did not clearly show the actual export sales
of transactions from which the TCCs were issued.
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TAXATION LAW i
In the same vein, the CTA Division held that the machinery and
equipment cannot be the basis in concluding that transferor could
not have produced the volume of products indicated in its BOI
registration. It further ruled that the Center erroneously based its
findings of fraud on two possibilities: either the transferor did not
declare its export sales or underdeclare them. Thus, no specific
fraudulent acts were identified or proven. The CTA Division
concluded that the TCCs transferred to PSPC were not fraudulently
issued.
On the issue of whether a TCC transferee should be a supplier of
either capital equipment, materials, or supplies, the CTA Division
ruled in the negative as the Memorandum of Agreement (MOA)19
between the DOF and BOI executed on August 29, 1989 specifying
such requirement was not incorporated in the Implementing Rules
and Regulations (IRR) of Executive Order No. (EO) 226.20 The CTA
Division found that only the October 5, 1982 MOA between the then
Ministry of Finance (MOF) and BOI was incorporated in the IRR of
EO 226. It held that while the August 29, 1989 MOA indeed
amended the October 5, 1982 MOA still it was not incorporated in
the IRR. Moreover, according to the CTA Division, even if the
August 29, 1989 MOA was elevated or incorporated in the IRR of
EO 226, still, it is ineffective and could not bind nor prejudice third
parties as it was never published.
Anent the affidavits of former Officers or General Managers of
transferors attesting that no IFO deliveries were made by PSPC, the
CTA Division ruled that such cannot be given probative value as the
affiants were not presented during trial of the case. However, the
CTA Division said that the November 15, 1999 assessment was not
precluded by the prior CTA Case No. 5728 as the latter concerned
the validity of the transfer of the TCCs, while CTA Case No. 6003
involved alleged fraudulent procurement and transfer of the TCCs.
Respondent forthwith filed his motion for reconsideration of the
above decision which was rejected on January 20, 2005. And,
pursuant to Section 1121 of RA 9282, respondent appealed the
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above decision through a petition for review22 before the CTA En
Banc.
The Ruling of the Court of Tax Appeals En Banc
(CTA EB No. 64)
The CTA En Banc, however, rendered the assailed April 28, 2006
Decision23 setting aside the August 2, 2004 Decision and the
January 20, 2005 Resolution of the CTA Division. The fallo reads:
WHEREFORE, premises considered, the Petition for Review is
hereby GRANTED. The assailed Decision and Resolution dated
August 2, 2004 and January 20, 2005, respectively, are hereby SET
ASIDE and a new one entered dismissing respondent Pilipinas Shell
Petroleum Corporations Petition for Review filed in C.T.A. Case No.
6003 for lack of merit. Accordingly, respondent is ORDERED TO PAY
the petitioner the amount of P570,577,401.61 as deficiency excise
tax for the taxable years 1992 and 1994 to 1997, inclusive of 25%
surcharge and 20% interest, computed as follows:
Basic Tax P285,766,987.00
Add:
Surcharge (25%) 71,441,746.75
Interest (20%) 213,368,667.86
Total Tax Due P570,577,401.61
In addition, respondent is hereby ORDERED TO PAY 20%
delinquency interest thereon per annum computed from December
4, 1999 until full payment thereof, pursuant to Sections 248 and
249 of the NIRC of 1997.
SO ORDERED.24
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TAXATION LAW i
The CTA En Banc resolved respondents appeal by holding that
PSPC was liable to pay the alleged excise tax deficiencies arising
from the cancellation of the TDM issued against its TCCs which
were used to pay some of its excise tax liabilities for the years 1992
and 1994 to 1997. It ratiocinated in this wise, to wit:
First, the finding of the DOF that the TCCs had no monetary value
was undisputed. Consequently, there was a non-payment of excise
taxes corresponding to the value of the TCCs used for payment.
Since it was PSPC which acquired the subject TCCs from a third
party and utilized the same to discharge its own obligations, then it
must bear the loss.
Second, the TCCs carry a suspensive condition, that is, their
issuance was subject to post audit in order to determine if the
holder is indeed qualified to use it. Thus, until final determination of
the holders right to the issuance of the TCCs, there is no obligation
on the part of the DOF or BIR to recognize the rights of the holder
or assignee. And, considering that the subject TCCs were canceled
after the DOFs finding of fraud in its issuance, the assignees must
bear the consequence of such cancellation.
Third, PSPC was not an innocent purchaser for value of the TCCs as
they contained liability clauses expressly stipulating that the
transferees are solidarily liable with the transferors for any
fraudulent act or violation of pertinent laws, rules, or regulations
relating to the transfer of the TCC.
Fourth, the BIR was not barred by estoppel as it is a settled rule
that in the performance of its governmental functions, the State
cannot be estopped by the neglect of its agents and officers.
Although the TCCs were confirmed to be valid in view of the TDM,
the subsequent finding on post audit by the Center declaring the
TCCs to be fraudulently issued is entitled to the presumption of
regularity. Thus, the cancellation of the TCCs was legal and valid.
Fifth, the BIRs assessment did not prescribe considering that no
payment took effect as the subject TCCs were canceled upon post
AL Ilagan-Malipol. AB. MD
audit. Consequently, the filing of the tax return sans payment due
to the cancellation of the TCCs resulted in the falsity and/or
omission in the filing of the tax return which put them in the ambit
of the applicability of the 10-year prescriptive period from the
discovery of falsity, fraud, or omission.
Finally, however, the CTA En Banc applied Aznar v. Court of Tax
Appeals,25 where this Court held that without proof that the
taxpayer participated in the fraud, the 50% fraud surcharge is not
imposed, but the 25% late payment and the 20% interest per
annum are applicable.
Thus, PSPC filed this petition with the following issues:
I
WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY
ERRED IN ORDERING PETITIONER PSPC TO PAY THE
AMOUNT OF TWO HUNDRED EIGHTY FIVE MILLION SEVEN
HUNDRED SIXTY SIX THOUSAND NINE HUNDRED EIGHTY
SEVEN PESOS (P285,766,987.00), AS ALLEGED DEFICIENCY
EXCISE TAXES, FOR THE TAXABLE YEARS, 1992 AND 1994
TO 1997.
II
WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY
ERRED IN ISSUING THE QUESTIONED DECISION DATED 28
APRIL 2006 UPHOLDING THE CANCELLATION OF THE TAX
CREDIT CERTIFICATES UTILIZED BY PETITIONER PSPC IN
PAYING ITS EXCISE TAX LIABILITIES.
III
WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY
ERRED IN IMPOSING SURCHARGES AND INTERESTS ON THE
ALLEGED DEFICIENCY EXCISE TAX OF PETITIONER PSPC.
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TAXATION LAW i
IV
WHETHER OR NOT THE ASSESSMENT DATED 15 NOVEMBER
1999 IS VOID CONSIDERING THAT IT FAILED TO COMPLY
WITH THE STATUTORY AS WELL AS REGULATORY
REQUIREMENTS IN THE ISSUANCE OF ASSESSMENTS.26
The Courts Ruling
The petition is meritorious.
First Issue: Assessment of excise tax deficiencies
PSPC contends that respondent had no basis in issuing the
November 15, 1999 assessment as PSPC had no pending unpaid
excise tax liabilities. PSPC argues that under the IRR of EO 226, it
is allowed to use TCCs transferred from other BOI-registered
entities. On one hand, relative to the validity of the transferred
TCCs, PSPC asserts that the TCCs are not subject to a suspensive
condition; that the post-audit of a transferred TCC refers only to
computational discrepancy; that the solidary liability of the
transferor and transferee refers to computational discrepancy
resulting from the transfer and not from the issuance of the TCC;
that a post-audit cannot affect the validity and effectivity of a TCC
after it has been utilized by the transferee; and that the BIR duly
acknowledged the use of the subject TCCs, accepting them as
payment for the excise tax liabilities of PSPC. On the other hand,
PSPC maintains that if there was indeed fraud in the issuance of the
subject TCCs, of which it had no knowledge nor participation, the
Centers remedy is to go after the transferor for the value of the
TCCs the Center may have erroneously issued.
PSPC likewise assails the BIR assessment on prescription for having
been issued beyond the three-year prescriptive period under Sec.
203 of the National Internal Revenue Code (NIRC); and neither can
the BIR use the 10-year prescriptive period under Sec. 222(a) of
the NIRC, as PSPC has neither failed to file a return nor filed a false
or fraudulent return with intent to evade taxes.
AL Ilagan-Malipol. AB. MD
Respondent, on the other hand, counters that petitioner is liable for
the tax liabilities adjudged by the CTA En Banc since PSPC, as
transferee of the subject TCCs, is bound by the liability clause
found at the dorsal side of the TCCs which subjects the
genuineness, validity, and value of the TCCs to the outcome of the
post-audit to be conducted by the Center. He relies on the CTA En
Bancs finding of the presence of a suspensive condition in the
issuance of the TCCs. Thus, according to him, with the finding by
the Center that the TCCs were fraudulently procured the
subsequent cancellation of the TCCs resulted in the non-payment
by PSPC of its excise tax liabilities equivalent to the value of the
canceled TCCs.
Respondent likewise posits that the Center erred in approving the
transfer and issuance of the TDM, and of the TDM and ATAPETs
issued by the BIR in accepting the utilization by PSPC of the subject
TCCs, as payments for excise taxes cannot prejudice the BIR from
assessing the tax deficiencies of PSPC resulting from the non-
payment of the deficiencies after due cancellation by the Center of
the subject TCCs and corresponding TDM.
Respondent concludes that due to the fraudulent procurement of
the subject TCCs, his right to assess has not yet prescribed. He
relies on the finding of the Center that the fraud was discovered
only after the post-audit was conducted; hence, Sec. 222(a) of the
NIRC applies, reckoned from October 24, 1999 or the date of the
post-audit report. In fine, he points that what is at issue is the
resulting non-payment of PSPCs excise tax liabilities from the
cancellation of subject TCCs and not the amount of deficiency taxes
due from PSPC, as what was properly assessed on November 15,
1999 was the amount of tax declared and found in PSPCs excise
tax returns covered by the subject TCCs.
We find for PSPC.
The CTA En Banc upheld respondents theory by holding that the
Center has the authority to do a post-audit on the TCCs it issued;
the TCCs are subject to the results of the post-audit since their
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TAXATION LAW i
issuance is subject to a suspensive condition; the transferees of the
TCCs are solidarily liable with the transferors on the result of the
post-audit; and the cancellation of the subject TCCs resulted in
PSPC having to bear the loss anchored on its solidary liability with
the transferor of the subject TCCs.
We can neither sustain respondents theory nor that of the CTA En
Banc.
First, in overturning the August 2, 2004 Decision of the CTA
Division, the CTA En Banc applied Article 1181 of the Civil Code in
this manner:
To completely understand the matter presented before Us, it is
worth emphasizing that the statement on the subject certificate
stating that it is issued subject to post-audit is in the nature of a
suspensive condition under Article 1181 of the Civil Code, which is
quoted hereunder for ready reference, to wit:
In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.
The above-quoted article speaks of obligations. These conditions
affect obligations in diametrically opposed ways. If the suspensive
condition happens, the obligation arises; in other words, if the
condition does not happen, the obligation does not come into
existence. On the other hand, the resolutory condition extinguishes
rights and obligations already existing; in other words, the
obligations and rights already exist, but under the threat of
extinction upon the happening of the resolutory condition. (8
Manresa 130-131, cited on page 140, Civil Code of the Philippines,
Tolentino, 1962 ed., Vol. IV).
In adopting the foregoing provision of law, this Court rules that the
issuance of the tax credit certificate is subject to the condition that
a post-audit will subsequently be conducted in order to determine if
the holder is indeed qualified for its issuance. As stated earlier, the
AL Ilagan-Malipol. AB. MD
holder takes the same subject to the outcome of the post-audit.
Thus, unless and until there is a final determination of the holders
right to the issuance of the certificate, there exists no obligation on
the part of the DOF or the BIR to recognize the rights of then
holder or transferee. x x x
xxxx
The validity and propriety of the TCC to effectively constitute
payment of taxes to the government are still subject to the
outcome of the post-audit. In other words, when the issuing
authority (DOF) finds, as in the case at bar, circumstances which
may warrant the cancellation of the certificate, the holder is
inevitably bound by the outcome by the virtue of the express
provisions of the TCCs.27
The CTA En Banc is incorrect.
Art.1181 tells us that the condition is suspensive when the
acquisition of rights or demandability of the obligation must await
the occurrence of the condition.28 However, Art. 1181 does not
apply to the present case since the parties did NOT agree to a
suspensive condition. Rather, specific laws, rules, and regulations
govern the subject TCCs, not the general provisions of the Civil
Code. Among the applicable laws that cover the TCCs are EO 226 or
the Omnibus Investments Code, Letter of Instructions No. 1355, EO
765, RP-US Military Agreement, Sec. 106(c) of the Tariff and
Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations
(RRs), and others. Nowhere in the aforementioned laws does the
post-audit become necessary for the validity or effectivity of the
TCCs. Nowhere in the aforementioned laws is it provided that a TCC
is issued subject to a suspensive condition.
The CTA En Bancs holding of the presence of a suspensive
condition is untenable as the subject TCCs duly issued by the
Center are immediately effective and valid. The suspensive
condition as ratiocinated by the CTA En Banc is one where the
transfer contract was duly effected on the day it was executed
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TAXATION LAW i
between the transferee and the transferor but the TCC cannot be
enforced until after the post-audit has been conducted. In short,
under the ruling of the CTA En Banc, even if the TCC has been
issued, the real and true application of the tax credit happens only
after the post-audit confirms the TCCs validity and not before the
confirmation; thus, the TCC can still be canceled even if it has
already been ostensibly applied to specific internal revenue tax
liabilities.
We are not convinced.
We cannot subscribe to the CTA En Bancs holding that the
suspensive condition suspends the effectivity of the TCCs as
payment until after the post-audit. This strains the very nature of a
TCC.
A tax credit is not specifically defined in our Tax Code,29 but Art. 21
of EO 226 defines a tax credit as "any of the credits against taxes
and/or duties equal to those actually paid or would have been paid
to evidence which a tax credit certificate shall be issued by the
Secretary of Finance or his representative, or the Board (of
Investments), if so delegated by the Secretary of Finance." Tax
credits were granted under EO 226 as incentives to encourage
investments in certain businesses. A tax credit generally refers to
an amount that may be "subtracted directly from ones total tax
liability."30 It is therefore an "allowance against the tax itself"31 or
"a deduction from what is owed"32 by a taxpayer to the
government. In RR 5-2000,33 a tax credit is defined as "the amount
due to a taxpayer resulting from an overpayment of a tax liability
or erroneous payment of a tax due."34
A TCC is
a certification, duly issued to the taxpayer named therein, by the
Commissioner or his duly authorized representative, reduced in a
BIR Accountable Form in accordance with the prescribed
formalities, acknowledging that the grantee-taxpayer named
therein is legally entitled a tax credit, the money value of which
AL Ilagan-Malipol. AB. MD
may be used in payment or in satisfaction of any of his internal
revenue tax liability (except those excluded), or may be converted
as a cash refund, or may otherwise be disposed of in the manner
and in accordance with the limitations, if any, as may be prescribed
by the provisions of these Regulations.35
From the above definitions, it is clear that a TCC is an undertaking
by the government through the BIR or DOF, acknowledging that a
taxpayer is entitled to a certain amount of tax credit from either an
overpayment of income taxes, a direct benefit granted by law or
other sources and instances granted by law such as on specific
unused input taxes and excise taxes on certain goods. As such, tax
credit is transferable in accordance with pertinent laws, rules, and
regulations.
Therefore, the TCCs are immediately valid and effective after their
issuance. As aptly pointed out in the dissent of Justice Lovell
Bautista in CTA EB No. 64, this is clear from the Guidelines and
Instructions found at the back of each TCC, which provide:
1. This Tax Credit Certificate (TCC) shall entitle the grantee to
apply the tax credit against taxes and duties until the
amount is fully utilized, in accordance with the pertinent tax and
customs laws, rules and regulations.
xxxx
4. To acknowledge application of payment, the One-Stop-
Shop Tax Credit Center shall issue the corresponding Tax
Debit Memo (TDM) to the grantee.
The authorized Revenue Officer/Customs Collector to which
payment/utilization was made shall accomplish the Application of
Tax Credit portion at the back of the certificate and affix his
signature on the column provided. (Emphasis supplied.)
The foregoing guidelines cannot be clearer on the validity and
effectivity of the TCC to pay or settle tax liabilities of the grantee or
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TAXATION LAW i
transferee, as they do not make the effectivity and validity of the
TCC dependent on the outcome of a post-audit. In fact, if we are to
sustain the appellate tax court, it would be absurd to make the
effectivity of the payment of a TCC dependent on a post-audit since
there is no contemplation of the situation wherein there is no post-
audit. Does the payment made become effective if no post-audit is
conducted? Or does the so-called suspensive condition still apply as
no law, rule, or regulation specifies a period when a post-audit
should or could be conducted with a prescriptive period? Clearly, a
tax payment through a TCC cannot be both effective when made
and dependent on a future event for its effectivity. Our system of
laws and procedures abhors ambiguity.
Moreover, if the TCCs are considered to be subject to post-audit as
a suspensive condition, the very purpose of the TCC would be
defeated as there would be no guarantee that the TCC would be
honored by the government as payment for taxes. No investor
would take the risk of utilizing TCCs if these were subject to a post-
audit that may invalidate them, without prescribed grounds or
limits as to the exercise of said post-audit.
The inescapable conclusion is that the TCCs are not subject to post-
audit as a suspensive condition, and are thus valid and effective
from their issuance. As such, in the present case, if the TCCs have
already been applied as partial payment for the tax liability of
PSPC, a post-audit of the TCCs cannot simply annul them and the
tax payment made through said TCCs. Payment has already been
made and is as valid and effective as the issued TCCs. The
subsequent post-audit cannot void the TCCs and allow the
respondent to declare that utilizing canceled TCCs results in
nonpayment on the part of PSPC. As will be discussed, respondent
and the Center expressly recognize the TCCs as valid payment of
PSPCs tax liability.
Second, the only conditions the TCCs are subjected to are those
found on its face. And these are:
AL Ilagan-Malipol. AB. MD
1. Post-audit and subsequent adjustment in the event of
computational discrepancy;
2. A reduction for any outstanding account/obligation of
herein claimant with the BIR and/or BOC; and
3. Revalidation with the Center in case the TCC is not utilized
or applied within one (1) year from date of issuance/date of
last utilization.
The above conditions clearly show that the post-audit contemplated
in the TCCs does not pertain to their genuineness or validity, but on
computational discrepancies that may have resulted from the
transfer and utilization of the TCC.
This is shown by a close reading of the first and second conditions
above; the third condition is self explanatory. Since a tax credit
partakes of what is owed by the State to a taxpayer, if the taxpayer
has an outstanding liability with the BIR or the BOC, the money
value of the tax credit covered by the TCC is primarily applied to
such internal revenue liabilities of the holder as provided under
condition number two. Elsewise put, the TCC issued to a claimant is
applied first and foremost to any outstanding liability the claimant
may have with the government. Thus, it may happen that upon
post-audit, a TCC of a taxpayer may be reduced for whatever
liability the taxpayer may have with the BIR which remains unpaid
due to inadvertence or computational errors, and such reduction
necessarily affects the balance of the monetary value of the tax
credit of the TCC.
For example, Company A has been granted a TCC in the amount of
PhP 500,000 through its export transactions, but it has an
outstanding excise tax liability of PhP 250,000 which due to
inadvertence was erroneously assessed and paid at PhP 225,000.
On post-audit, with the finding of a deficiency of PhP 25,000, the
utilization of the TCC is accordingly corrected and the tax credit
remaining in the TCC correspondingly reduced by PhP 25,000. This
is a concrete example of a computational discrepancy which comes
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to light after a post-audit is conducted on the utilization of the TCC.
The same holds true for a transferees use of the TCC in paying its
outstanding internal revenue tax liabilities.
Other examples of computational errors would include the
utilization of a single TCC to settle several internal revenue tax
liabilities of the taxpayer or transferee, where errors committed in
the reduction of the credit tax running balance are discovered in
the post-audit resulting in the adjustment of the TCC utilization and
remaining tax credit balance.
Third, the post-audit the Center conducted on the transferred TCCs,
delving into their issuance and validity on alleged violations by
PSPC of the August 29, 1989 MOA between the DOF and BOI, is
completely misplaced. As may be recalled, the Center required
PSPC to submit copies of pertinent sales invoices and delivery
receipts covering sale transactions of PSPC products to the TCC
assignors/transferors purportedly in connection with an ongoing
post audit. As correctly protested by PSPC but which was
completely ignored by the Center, PSPC is not required by law to be
a capital equipment provider or a supplier of raw material and/or
component supplier to the transferors. What the law requires is that
the transferee be a BOI-registered company similar to the BOI-
registered transferors.
The IRR of EO 226, which incorporated the October 5, 1982 MOA
between the MOF and BOI, pertinently provides for the guidelines
concerning the transferability of TCCs:
[T]he MOF and the BOI, through their respective representatives,
have agreed on the following guidelines to govern the
transferability of tax credit certificates:
1) All tax credit certificates issued to BOI-registered
enterprises under P.D. 1789 may be transferred under
conditions provided herein;
2) The transferee should be a BOI-registered firm;
AL Ilagan-Malipol. AB. MD
3) The transferee may apply such tax credit certificates for
payment of taxes, duties, charges or fees directly due to the
national government for as long as it enjoys incentives under
P.D. 1789. (Emphasis supplied.)
The above requirement has not been amended or repealed during
the unfolding of the instant controversy. Thus, it is clear from the
above proviso that it is only required that a TCC transferee be BOI-
registered. In requiring PSPC to submit sales documents for its
purported post-audit of the TCCs, the Center gravely abused its
discretion as these are not required of the transferee PSPC by law
and by the rules.
While the October 5, 1982 MOA appears to have been amended by
the August 29, 1989 MOA between the DOF and BOI, such may not
operate to prejudice transferees like PSPC. For one, the August 29,
1989 MOA remains only an internal agreement as it has neither
been elevated to the level of nor incorporated as an amendment in
the IRR of EO 226. As aptly put by the CTA Division:
If the 1989 MOA has validly amended the 1982 MOA, it would have
been incorporated either expressly or by reference in Rule VII of
the Implementing Rules and Regulations (IRRs) of E.O. 226. To
date, said Rule VII has not been repealed, amended or otherwise
modified. It is noteworthy that the 1999 edition of the official
publication by the BOI of E.O. 226 and its IRRs (Exhibit R) which is
the latest version, as amended, has not mentioned expressly or by
reference [sic] 1989 MOA. The MOA mentioned therein is still the
1982 MOA.
The 1982 MOA, although executed as a mere agreement between
the DOF and the BOI was elevated to the status of a rule and
regulation applicable to the general public by reason of its having
been expressly incorporated in Rule VII of the IRRs. On the other
hand, the 1989 MOA which purportedly amended the 1982 MOA,
remained a mere agreement between the DOF and the BOI
because, unlike the 1982 MOA, it was never incorporated either
expressly or by reference to any amendment or revision of the said
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IRRs. Thus, it cannot be the basis of any invalidation of the
transfers of TCCs to petitioner nor of any other sanction against
petitioner.36
For another, even if the August 29, 1989 MOA has indeed amended
the IRR, which it has not, still, it is ineffective and cannot prejudice
third parties for lack of publication as mandatorily required under
Chapter 2 of Book VII, EO 292, otherwise known as the
Administrative Code of 1987, which pertinently provides:
Section 3. Filing.(1) Every agency shall file with the University of
the Philippines Law Center three (3) certified copies of every rule
adopted by it. Rules in force on the date of effectivity of this Code
which are not filed within three (3) months from the date shall not
thereafter be the basis of any sanction against any party or person.
(2) The records officer of the agency, or his equivalent
functionary, shall carry out the requirements of this section
under pain of disciplinary action.
(3) A permanent register of all rules shall be kept by the
issuing agency and shall be open to public inspection.
Section 4. Effectivity.In addition to other rule-making
requirement provided by law not inconsistent with this Book, each
rule shall become effective fifteen (15) days from the date of filing
as above provided unless a different date is fixed by law, or
specified in the rule in cases of imminent danger to public health,
safety and welfare, the existence of which must be expressed in a
statement accompanying the rule. The agency shall take
appropriate measures to make emergency rules known to persons
who may be affected by them.
Section 5. x x x x
(2) Every rule establishing an offense or defining an act which
pursuant to law, is punishable as a crime or subject to a penalty
shall in all cases be published in full text.
AL Ilagan-Malipol. AB. MD
It is clear that the Center or DOF cannot compel PSPC to submit
sales documents for the purported post-audit, as PSPC has duly
complied with the requirements of the law and rules to be a
qualified transferee of the subject TCCs.
Fourth, we likewise fail to see the liability clause at the dorsal
portion of the TCCs to be a suspensive condition relative to the
result of the post-audit. Said liability clause indicates:
LIABILITY CLAUSE
Both the TRANSFEROR and the TRANSFEREE shall be jointly and
severally liable for any fraudulent act or violation of the pertinent
laws, rules and regulations relating to the transfer of this TAX
CREDIT CERTIFICATE. (Emphasis supplied.)
The above clause to our mind clearly provides only for the solidary
liability relative to the transfer of the TCCs from the original
grantee to a transferee. There is nothing in the above clause that
provides for the liability of the transferee in the event that the
validity of the TCC issued to the original grantee by the Center is
impugned or where the TCC is declared to have been fraudulently
procured by the said original grantee. Thus, the solidary liability, if
any, applies only to the sale of the TCC to the transferee by the
original grantee. Any fraud or breach of law or rule relating to the
issuance of the TCC by the Center to the transferor or the original
grantee is the latters responsibility and liability. The transferee in
good faith and for value may not be unjustly prejudiced by the
fraud committed by the claimant or transferor in the procurement
or issuance of the TCC from the Center. It is not only unjust but
well-nigh violative of the constitutional right not to be deprived of
ones property without due process of law. Thus, a re-assessment
of tax liabilities previously paid through TCCs by a transferee in
good faith and for value is utterly confiscatory, more so when
surcharges and interests are likewise assessed.
A transferee in good faith and for value of a TCC who has relied on
the Centers representation of the genuineness and validity of the
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TCC transferred to it may not be legally required to pay again the
tax covered by the TCC which has been belatedly declared null and
void, that is, after the TCCs have been fully utilized through
settlement of internal revenue tax liabilities. Conversely, when the
transferee is party to the fraud as when it did not obtain the TCC
for value or was a party to or has knowledge of its fraudulent
issuance, said transferee is liable for the taxes and for the fraud
committed as provided for by law.
In the instant case, a close review of the factual milieu and the
records reveals that PSPC is a transferee in good faith and for
value. No evidence was adduced that PSPC participated in any way
in the issuance of the subject TCCs to the corporations who in turn
conveyed the same to PSPC. It has likewise been shown that PSPC
was not involved in the processing for the approval of the transfers
of the subject TCCs from the various BOI-registered transferors.
Respondent, through the Center, made much of the alleged non-
payment through non-delivery by PSPC of the IFOs it purportedly
sold to the transferors covered by supply agreements which were
allegedly the basis of the Center for the approval of the transfers.
Respondent points to the requirement under the August 29, 1989
MOA between the DOF and BOI, specifying the requirement that
"[t]he transferee should be a BOI-registered firm which is a
domestic capital equipment supplier, or a raw material and/or
component supplier of the transferor."37
As discussed above, the above amendment to the October 5, 1982
MOA between BOI and MOF cannot prejudice any transferee, like
PSPC, as it was neither incorporated nor elevated to the IRR of EO
226, and for lack of due publication. The pro-forma supply
agreements allegedly executed by PSPC and the transferors
covering the sale of IFOs to the transferors have been specifically
denied by PSPC. Moreover, the above-quoted requirement is not
required under the IRR of EO 226. Therefore, it is incumbent for
respondent to present said supply agreements to prove
participation by PSPC in the approval of the transfers of the subject
TCCs. Respondent failed to do this.
AL Ilagan-Malipol. AB. MD
PSPC claims to be a transferee in good faith of the subject TCCs. It
believed that its tax obligations for 1992 and 1994 to 1997 had in
fact been paid when it applied the subject TCCs, considering that all
the necessary authorizations and approvals attendant to the
transfer and utilization of the TCCs were present. It is undisputed
that the transfers of the TCCs from the original holders to PSPC
were duly approved by the Center, which is composed of a number
of government agencies, including the BIR. Such approval was
annotated on the reverse side of the TCCs, and the Center even
issued TDM which is proof of its approval for PSPC to apply the
TCCs as payment for the tax liabilities. The BIR issued its own TDM,
also signifying approval of the TCCs as payment for PSPCs tax
liabilities. The BIR also issued ATAPETs covering the
aforementioned BIR-issued TDM, further proving its acceptance of
the TCCs as valid tax payments, which formed part of PSPCs total
tax payments along with checks duly acknowledged and received
by BIRs authorized agent banks.
Several approvals were secured by PSPC before it utilized the
transferred TCCs, and it relied on the verification of the various
government agencies concerned of the genuineness and
authenticity of the TCCs as well as the validity of their issuances.
Furthermore, the parties stipulated in open court that the BIR-
issued ATAPETs for the taxes covered by the subject TCCs confirm
the correctness of the amount of excise taxes paid by PSPC during
the tax years in question.
Thus, it is clear that PSPC is a transferee in good faith and for value
of the subject TCCs and may not be prejudiced with a re-
assessment of excise tax liabilities it has already settled when due
with the use of the subject TCCs. Logically, therefore, the excise
tax returns filed by PSPC duly covered by the TDM and ATAPETs
issued by the BIR confirming the full payment and satisfaction of
the excise tax liabilities of PSPC, have not been fraudulently filed.
Consequently, as PSPC is a transferee in good faith and for value,
Sec. 222(a) of the NIRC does not apply in the instant case as PSPC
has neither been shown nor proven to have committed any
fraudulent act in the transfer and utilization of the subject TCCs.
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With more reason, therefore, that the three-year prescriptive
period for assessment under Art. 203 of the NIRC has already set in
and bars respondent from assessing anew PSPC for the excise
taxes already paid in 1992 and 1994 to 1997. Besides, even if the
period for assessment has not prescribed, still, there is no valid
ground for the assessment as the excise tax liabilities of PSPC have
been duly settled and paid.
Fifth, PSPC cannot be blamed for relying on the Centers approval
for the transfers of the subject TCCs and the Centers acceptance of
the TCCs for the payment of its excise tax liabilities. Likewise, PSPC
cannot be faulted in relying on the BIRs acceptance of the subject
TCCs as payment for its excise tax liabilities. This reliance is
supported by the fact that the subject TCCs have passed through
stringent reviews starting from the claims of the transferors, their
issuance by the Center, the Centers approval for their transfer to
PSPC, the Centers acceptance of the TCCs to pay PSPCs excise tax
liabilities through the issuance of the Centers TDM, and finally the
acceptance by the BIR of the subject TCCs as payment through the
issuance of its own TDM and ATAPETs.
Therefore, PSPC cannot be prejudiced by the Centers turnaround in
assailing the validity of the subject TCCs which it issued in due
course.
Sixth, we are of the view that the subject TCCs cannot be canceled
by the Center as these had already been canceled after their
application to PSPCs excise tax liabilities. PSPC contends they are
already functus officio, not quite in the sense of being no longer
effective, but in the sense that they have been used up. When the
subject TCCs were accepted by the BIR through the latters
issuance of TDM and the ATAPETs, the subject TCCs were duly
canceled.
The tax credit of a taxpayer evidenced by a TCC is used up or, in
accounting parlance, debited when applied to the taxpayers
internal revenue tax liability, and the TCC canceled after the tax
credit it represented is fully debited or used up. A credit is a
AL Ilagan-Malipol. AB. MD
payable or a liability. A tax credit, therefore, is a liability of the
government evidenced by a TCC. Thus, the tax credit of a taxpayer
evidenced by a TCC is debited by the BIR through a TDM, not only
evidencing the payment of the tax by the taxpayer, but likewise
deducting or debiting the existing tax credit with the amount of the
tax paid.
For example, a transferee or the tax claimant has a TCC of PhP 1
million, which was used to pay income tax liability of PhP 500,000,
documentary stamp tax liability of PhP 100,000, and value-added
tax liability of PhP 350,000, for an aggregate internal revenue tax
liability of PhP 950,000. After the payments through the PhP 1
million TCC have been approved and accepted by the BIR through
the issuance of corresponding TDM, the TCC money value is
reduced to only PhP 50,000, that is, a credit balance of PhP 50,000.
In this sense, the tax credit of the TCC has been canceled or used
up in the amount of PhP 950,000. Now, let us say the transferee or
taxpayer has excise tax liability of PhP 250,000, s/he only has the
remaining PhP 50,000 tax credit in the TCC to pay part of said
excise tax. When the transferee or taxpayer applies such payment,
the TCC is canceled as the money value of the tax credit it
represented has been fully debited or used up. In short, there is no
more tax credit available for the taxpayer to settle his/her other tax
liabilities.
In the instant case, with due application, approval, and acceptance
of the payment by PSPC of the subject TCCs for its then
outstanding excise tax liabilities in 1992 and 1994 to 1997, the
subject TCCs have been canceled as the money value of the tax
credits these represented have been used up. Therefore, the DOF
through the Center may not now cancel the subject TCCs as these
have already been canceled and used up after their acceptance as
payment for PSPCs excise tax liabilities. What has been used up,
debited, and canceled cannot anymore be declared to be void,
ineffective, and canceled anew.
Besides, it is indubitable that with the issuance of the
corresponding TDM, not only is the TCC canceled when fully
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utilized, but the payment is also final subject only to a post-audit
on computational errors. Under RR 5-2000, a TDM is
a certification, duly issued by the Commissioner or his duly
authorized representative, reduced in a BIR Accountable Form in
accordance with the prescribed formalities, acknowledging that the
taxpayer named therein has duly paid his internal revenue tax
liability in the form of and through the use of a Tax Credit
Certificate, duly issued and existing in accordance with the
provisions of these Regulations. The Tax Debit Memo shall serve
as the official receipt from the BIR evidencing a taxpayers
payment or satisfaction of his tax obligation. The amount
shown therein shall be charged against and deducted from the
credit balance of the aforesaid Tax Credit Certificate.
Thus, with the due issuance of TDM by the Center and TDM by the
BIR, the payments made by PSPC with the use of the subject TCCs
have been effected and consummated as the TDMs serve as the
official receipts evidencing PSPCs payment or satisfaction of its tax
obligation. Moreover, the BIR not only issued the corresponding
TDM, but it also issued ATAPETs which doubly show the payment of
the subject excise taxes of PSPC.
Based on the above discussion, we hold that respondent
erroneously and without factual and legal basis levied the
assessment. Consequently, the CTA En Banc erred in sustaining
respondents assessment.
Second Issue: Cancellation of TCCs
PSPC argues that the CTA En Banc erred in upholding the
cancellation by the Center of the subject TCCs it used in paying
some of its excise tax liabilities as the subject TCCs were genuine
and authentic, having been subjected to thorough and stringent
procedures, and approvals by the Center. Moreover, PSPC posits
that both the CTAs Division and En Banc duly found that PSPC had
neither knowledge, involvement, nor participation in the alleged
fraudulent issuance of the subject TCCs, and, thus, as a transferee
AL Ilagan-Malipol. AB. MD
in good faith and for value, it cannot be held solidarily liable for any
fraud attendant to the issuance of the subject TCCs. PSPC further
asserts that the Center has no authority to cancel the subject TCCs
as such authority is lodged exclusively with the BOI. Lastly, PSPC
said that the Centers Excom Resolution No. 03-05-99 which the
Center relied upon as basis for the cancellation is defective,
ineffective, and cannot prejudice third parties for lack of
publication.
As we have explained above, the subject TCCs after being fully
utilized in the settlement of PSPCs excise tax liabilities have been
canceled, and thus cannot be canceled anymore. For being
immediately effective and valid when issued, the subject TCCs have
been duly utilized by transferee PSPC which is a transferee in good
faith and for value.
On the issue of the fraudulent procurement of the TCCs, it has been
asseverated that fraud was committed by the TCC claimants who
were the transferors of the subject TCCs. We see no need to rule on
this issue in view of our finding that the real issue in this petition
does not dwell on the validity of the TCCs procured by the
transferor from the Center but on whether fraud or breach of law
attended the transfer of said TCCs by the transferor to the
transferee.
The finding of the CTA En Banc that there was fraud in the
procurement of the subject TCCs is, therefore, irrelevant and
immaterial to the instant petition. Moreover, there are pending
criminal cases arising from the alleged fraud. We leave the matter
to the anti-graft court especially considering the failure of the
affiants to the affidavits to appear, making these hearsay evidence.
We note in passing that PSPC and its officers were not involved in
any fraudulent act that may have been undertaken by the
transferors of subject TCCs, supported by the finding of the
Ombudsman Special Prosecutor Leonardo P. Tamayo that Pacifico
R. Cruz, PSPC General Manager of the Treasury and Taxation
Department, who was earlier indicted as accused in OMB-0-99-
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2012 to 2034 for violation of Sec. 3(e) and (j) of RA 3019, as
amended, otherwise known as the "Anti-Graft and Corrupt Practices
Act," for allegedly conspiring with other accused in defrauding and
causing undue injury to the government,38 did not in any way
participate in alleged fraudulent activities relative to the transfer
and use of the subject TCCs.
In a Memorandum39 addressed to then Ombudsman Aniano A.
Desierto, the Special Prosecutor Leonardo P. Tamayo recommended
dropping Pacifico Cruz as accused in Criminal Case Nos. 25940-
25962 entitled People of the Philippines v. Antonio P. Belicena, et
al., pending before the Sandiganbayan Fifth Division for lack of
probable cause. Special
Prosecutor Tamayo found that Cruzs involvement in the transfers
of the subject TCCs came after the applications for the transfers
had been duly processed and approved; and that Cruz could not
have been part of the conspiracy as he cannot be presumed to have
knowledge of the irregularity, because the 1989 MOA, which
prescribed the additional requirement that the transferee of a TCC
should be a supplier of the transferor, was not yet published and
made known to private parties at the time the subject TCCs were
transferred to PSPC. The Memorandum of Special Prosecutor
Tamayo was duly approved by then Ombudsman Desierto.
Consequently, on May 31, 2000, the Sandiganbayan Fifth Division,
hearing Criminal Case Nos. 25940-25962, dropped Cruz as
accused.40
But even assuming that fraud attended the procurement of the
subject TCCs, it cannot prejudice PSPCs rights as earlier explained
since PSPC has not been shown or proven to have participated in
the perpetration of the fraudulent acts, nor is it shown that PSPC
committed fraud in the transfer and utilization of the subject TCCs.
On the issue of the authority to cancel duly issued TCCs, we agree
with respondent that the Center has concurrent authority with the
BIR and BOC to cancel the TCCs it issued. The Center was created
under Administrative Order No. (AO) 266 in relation to EO 226. A
AL Ilagan-Malipol. AB. MD
scrutiny of said executive issuances clearly shows that the Center
was granted the authority to issue TCCs pursuant to its mandate
under AO 266. Sec. 5 of AO 266 provides:
SECTION 5. Issuance of Tax Credit Certificates and/or Duty
Drawback.The Secretary of Finance shall designate his
representatives who shall, upon the recommendation of the
CENTER, issue tax credit certificates within thirty (30) working days
from acceptance of applications for the enjoyment thereof.
(Emphasis supplied.)
On the other hand, it is undisputed that the BIR under the NIRC
and related statutes has the authority to both issue and cancel
TCCs it has issued and even those issued by the Center, either
upon full utilization in the settlement of internal revenue tax
liabilities or upon conversion into a tax refund of unutilized TCCs in
specific cases under the conditions provided.41 AO 266 however is
silent on whether or not the Center has authority to cancel a TCC it
itself issued. Sec. 3 of AO 266 reveals:
SECTION 3. Powers, Duties and Functions.The Center shall have
the following powers, duties and functions:
a. To promulgate the necessary rules and regulations and/or
guidelines for the effective implementation of this
administrative order;
xxxx
g. To enforce compliance with tax credit/duty drawback
policy and procedural guidelines;
xxxx
l. To perform such other functions/duties as may be
necessary or incidental in the furtherance of the purpose for
which it has been established. (Emphasis supplied.)
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Sec. 3, letter l. of AO 266, in relation to letters a. and g., does give
ample authority to the Center to cancel the TCCs it issued.
Evidently, the Center cannot carry out its mandate if it cannot
cancel the TCCs it may have erroneously issued or those that were
fraudulently issued. It is axiomatic that when the law and its
implementing rules are silent on the matter of cancellation while
granting explicit authority to issue, an inherent and incidental
power resides on the issuing authority to cancel that which was
issued. A caveat however is required in that while the Center has
authority to do so, it must bear in mind the nature of the TCCs
immediate effectiveness and validity for which cancellation may
only be exercised before a transferred TCC has been fully utilized or
canceled by the BIR after due application of the available tax credit
to the internal revenue tax liabilities of an innocent transferee for
value, unless of course the claimant or transferee was involved in
the perpetration of the fraud in the TCCs issuance, transfer, or
utilization. The utilization of the TCC will not shield a guilty party
from the consequences of the fraud committed.
While we agree with respondent that the State in the performance
of governmental function is not estopped by the neglect or omission
of its agents, and nowhere is this truer than in the field of
taxation,42 yet this principle cannot be applied to work injustice
against an innocent party. In the case at bar, PSPCs rights as an
innocent transferee for value must be protected. Therefore, the
remedy for respondent is to go after the claimant companies who
allegedly perpetrated the fraud. This is now the subject of a
criminal prosecution before the Sandiganbayan docketed as
Criminal Case Nos. 25940-25962 for violation of RA 3019.
On the issue of the publication of the Centers Excom Resolution
No. 03-05-99 providing for the "Guidelines and Procedures for the
Cancellation, Recall and Recovery of Fraudulently Issued Tax Credit
Certificates," we find that the resolution is invalid and
unenforceable. It authorizes the cancellation of TCCs and TDM
which are found to have been granted without legal basis or based
on fraudulent documents. The cancellation of the TCCs and TDM is
covered by a penal provision of the assailed resolution. Such being
AL Ilagan-Malipol. AB. MD
the case, it should have been published and filed with the National
Administrative Register of the U.P. Law Center in accordance with
Secs. 3, 4, and 5, Chapter 2 of Book VII, EO 292 or the
Administrative Code of 1987.
We explained in People v. Que Po Lay43 that a rule which carries a
penal sanction will bind the public if the public is officially and
specifically informed of the contents and penalties prescribed for
the breach of the rule. Since Excom Resolution No. 03-05-99 was
neither registered with the U.P.
Law Center nor published, it is ineffective and unenforceable. Even
if the resolution need not be published, the punishment for any
alleged fraudulent act in the procurement of the TCCs must not be
visited on PSPC, an innocent transferee for value, which has not
been shown to have participated in the fraud. Respondent must go
after the perpetrators of the fraud.
Third Issue: Imposition of surcharges and interests
PSPC claims that having no deficiency excise tax liabilities, it may
not be liable for the late payment surcharges and annual interests.
This issue has been mooted by our disquisition above resolving the
first issue in that PSPC has duly settled its excise tax liabilities for
1992 and 1994 to 1997. Consequently, there is no basis for the
imposition of a late payment surcharges and for interests, and no
need for further discussion on the matter.
Fourth Issue: Non-compliance with statutory and
procedural due process
Finally, PSPC avers that its statutory and procedural right to due
process was violated by respondent in the issuance of the
assessment. PSPC claims respondent violated RR 12-99 since no
pre-assessment notice was issued to PSPC before the November
15, 1999 assessment. Moreover, PSPC argues that the November
15, 1999 assessment effectively deprived it of its statutory right to
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protest the pre-assessment within 30 days from receipt of the
disputed assessment letter.
While this has likewise been mooted by our discussion above, it
would not be amiss to state that PSPCs rights to substantive and
procedural due process have indeed been violated. The facts show
that PSPC was not accorded due process before the assessment
was levied on it. The Center required PSPC to submit certain sales
documents relative to supposed delivery of IFOs by PSPC to the
TCC transferors. PSPC contends that it could not submit these
documents as the transfer of the subject TCCs did not require that
it be a supplier of materials and/or component supplies to the
transferors in a letter dated October 29, 1999 which was received
by the Center on November 3, 1999. On the same day, the Center
informed PSPC of the cancellation of the subject TCCs and the TDM
covering the application of the TCCs to PSPCs excise tax liabilities.
The objections of PSPC were brushed aside by the Center and the
assessment was issued by respondent on November 15, 1999,
without following the statutory and procedural requirements clearly
provided under the NIRC and applicable regulations.
What is applicable is RR 12-99, which superseded RR 12-85,
pursuant to Sec. 244 in relation to Sec. 245 of the NIRC
implementing Secs. 6, 7, 204, 228, 247, 248, and 249 on the
assessment of national internal revenue taxes, fees, and charges.
The procedures delineated in the said statutory provisos and RR 12-
99 were not followed by respondent, depriving PSPC of due process
in contesting the formal assessment levied against it. Respondent
ignored RR 12-99 and did not issue PSPC a notice for informal
conference44 and a preliminary assessment notice, as required.45
PSPCs November 4, 1999 motion for reconsideration of the
purported Center findings and cancellation of the subject TCCs and
the TDM was not even acted upon.1wphi1
PSPC was merely informed that it is liable for the amount of excise
taxes it declared in its excise tax returns for 1992 and 1994 to
1997 covered by the subject TCCs via the formal letter of demand
and assessment notice. For being formally defective, the November
AL Ilagan-Malipol. AB. MD
15, 1999 formal letter of demand and assessment notice is void.
Paragraph 3.1.4 of Sec. 3, RR 12-99 pertinently provides:
3.1.4 Formal Letter of Demand and Assessment Notice.The
formal letter of demand and assessment notice shall be issued by
the Commissioner or his duly authorized representative. The letter
of demand calling for payment of the taxpayers deficiency tax or
taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void.
The same shall be sent to the taxpayer only by registered mail or
by personal delivery. x x x (Emphasis supplied.)
In short, respondent merely relied on the findings of the Center
which did not give PSPC ample opportunity to air its side. While
PSPC indeed protested the formal assessment, such does not
denigrate the fact that it was deprived of statutory and procedural
due process to contest the assessment before it was issued.
Respondent must be more circumspect in the exercise of his
functions, as this Court aptly held in Roxas v. Court of Tax Appeals:
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg." And, in the order to maintain the general
publics trust and confidence in the Government this power must be
used justly and not treacherously.46
WHEREFORE, the petition is GRANTED. The April 28, 2006 CTA En
Banc Decision in CTA EB No. 64 is hereby REVERSED and SET
ASIDE, and the August 2, 2004 CTA Decision in CTA Case No. 6003
disallowing the assessment is hereby REINSTATED. The assessment
of respondent for deficiency excise taxes against petitioner for 1992
and 1994 to 1997 inclusive contained in the April 22, 1998 letter of
respondent is canceled and declared without force and effect for
lack of legal basis. No pronouncement as to costs. SO ORDERED.
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