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Compaia General de Tabacos de Filipinas vs.

City of Manila
G.RNo. L-16619. June 29, 1963.
COMPAIA GENERAL DE TABACOS DE FILIPINAS, plaintiffappellee, vs. CITY OF MANILA, ET AL.,
defendants-appellants.

Facts:

Appellee Compaia General de Tabacos de Filipinas filed this action in the Court of First Instance of
Manila to recover from appellants, City of Manila the sum of P15,280.00 allegedly overpaid by it as taxes
on its wholesale and retail sales of liqou.

Tabacalera, as a duly licensed first class wholesale and retail liquor dealer paid the City the fixed license
fees for the years 1954 to 1957, inclusive, and, as a wholesale and retail dealer of general merchandise,
it also paid the sales taxes.

Tabacalera's action for refund is based on the theory that, in connection with its liquor sales, it should
pay the license fees prescribed by Ordinance No. 3358 but not the municipal sales taxes imposed by
Ordinances Nos. 3634, 3301, and 3816; and since it already paid the license fees aforesaid, the sales
taxes paid by itamounting to the sum of P15,208.00 15,208.00under the three ordinances
mentioned heretofore is an overpayment made by mistake, and therefore refundable.

Issue: Whether or not double taxation exist

Held:

The term "tax" appliesgenerally speakingto all kinds of exactions which become public funds. The
term is often loosely used to include levies for revenue as well as levies for regulatory purposes. Thus,
license fees are commonly called taxes. Legally speaking, however, license fee is a legal concept quite
distinct from tax; the former is imposed in the exercise of police power for purposes of regulation, while
the latter is imposed under the taxing power for the purpose of raising revenues.

That Tabacalera is being subjected to double taxation is more apparent than real. As already stated what
is collected under Ordinance No. 3358 is a license fee for the privilege of engaging in the sale of liquor, a
calling in whichit is obviousnot anyone or anybody may freely engage, considering that the sale of
liquor indiscriminately may endanger public health and morals. On the other hand, what the three
ordinances mentioned heretofore impose is a tax for revenue purposes based on the sales made of the
same article or merchandise. It is already settled in this connection that both a license fee and a tax may
be imposed on the same business or occupation, or for selling the same article, this not being in
violation of the rule against double taxation. This is precisely the case with the ordinances involved in
the case at bar.

WHEREFORE, the decision appealed from is reversed, with the result that this case should be, as it is
hereby dismissed, with costs.
Villanueva vs. City of Iloilo
G. R. No. L-26521. December 28, 1968.
EUSEBIO VILLANUEVA, ET AL., plaintiffs-appellees, vs. CITY OF ILOILO, defendant-appellant

Facts:

Municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as follows: (1) tenement
house (2) tenement house, partly or wholly engaged in or dedicated to business in the streets of J.M.
Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly engaged in
business in any other streets, P12.00 per apartment.

The validity and constitutionality of this ordinance were challenged by the spouses Eusebio Villanueva
and Remedios Sian Villanueva, owners of four tenement houses containing 34 apartments.

The plaintiffs-appellees filed a complaint, and an amended complaint, respectively, against the City of
Iloilo, in the aforementioned court, praying that Ordinance 11, series of 1960, be declared "invalid for
being beyond the powers of the Municipal Council of the City of Iloilo to enact, and unconstitutional for
being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the equal
protection clause of the Constitution," and that the City be ordered to refund the amounts collected
from them under the said ordinance.

Lower court rendered judgment declaring the ordinance illegal on the grounds that (a) "Republic Act
2264 does not empower cities to impose apartment taxes," (b) the same is "oppressive and
unreasonable," for the reason that it penalizes owners of tenement houses who fail to pay the tax, (c) it
constitutes "not only double taxation, but treble at that," and (d) it violates the rule of uniformity of
taxation.

Issue:

Whether or nots Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double
taxation?

Held:

It is our view, that the tax in question is not a real estate tax. Obviously, the appellees confuse the tax
with the real estate tax within

A property tax is ordinarily measured by the amount of property owned by the taxpayer on a given day,
and not on the total amount owned by him during the year. It is ordinarily assessed at stated periods
determined in advance, and collected at appointed times, and its payment is usually enforced by sale of
the property taxed, and, occassionally, by imprisonment of the person assessed."

"A 'real estate tax' is a tax in rem against realty without personal liability therefor on part of owner
thereof, and a judgment recovered in proceedings for enforcement of real estate tax is one in rem
against the realty without personal liability against the owner."

4 'The term 'license tax' or 'license fee' implies an imposition or exaction on the right to use or dispose
of a property, to pursue a business, occupation, or calling, or to exercise a privilege."
"The term 'excise tax' is synonymous with 'privilege tax', and the two are often used interchangeably,
and whether a tax is characterized in the statute imposing it as a privilege tax or an excise tax is merely a
choice of synonymous words, for an excise tax is a privilege tax." (51 Am. Jur. 62, citing Bank of
Commerce & T. Co. vs. Senter, 149 Tenn. 569, 260 SW 144) "Thus, it is said that an excise tax is a charge
imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an
occupation." (51 Am. Jur. 61)

A real estate tax is a direct tax on the ownership of lands and buildings or other improvements thereon,
not specially exempted,8 and is payable regardless of whether the property is used or not, although the
value may vary in accordance with such factor.9 The tax is usually single or indivisible, although the land
and building or improvements erected thereon are assessed separately, except when the land and
building or improvements belong to separate owners.10 It is a fixed proportion11 of the assessed value
of the property taxed, and requires, therefore, the intervention of assessors.12 It is collected or payable
at appointed times,13 and it constitutes a superior lien on and is enforceable against the property
subject to such taxation, and not by imprisonment of the owner.

The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not a tax
on the land on which the tenement houses are erected, although both land and tenement houses may
belong to the same owner. The tax is not a fixed proportion of the assessed value of the tenement
houses, and does not require the intervention of assessors or appraisers. It is not payable at a
designated time or date, and is not enf orceable against the tenement houses either by sale or distraint.
Clearly, therefore, the tax in question is not a real estate tax.

"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court
looks less to its words and more to the context, subject-matter, consequence and effect. Accordingly,
what is within the spirit is within the ordinance although it is not within the letter thereof, while that
which is in the letter, although not within the spirit, is not within the ordinance."15 It is within neither
the letter nor the spirit of the ordinance that an additional real estate tax is being imposed, otherwise
the subject-matter would have been not merely tenement houses. On the contrary, it is plain from the
context of the ordinance that the intention is to impose a license tax on the operation of tenement
houses, which is a form of business or calling. The ordinance, in both its title and body, particularly
sections 1 and 3 thereof, designates the tax imposed as a "municipal license tax" which, by itself, means
an "imposition or exaction on the right to use or dispose of property, to pursue a business, occupation,
or calling, or to exercise a privilege."16

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14 Sec. 38 of Com. Act 158 provides: "Such lien shall' be superior to all other liens, mortgages or
incumbrances of any kind whatsoever, and shall be enforceable against the property whether in the
possession of the delinquent or any subsequent owner, and can only be removed by the payment of the
tax and penalty."

15 62 C.J.S. 845; Manila Race Horse Trainers Assn. vs. De la Fuente, L-2947, Jan. 11, 1951, 88 Phil. 60.

16 51 Am. Jur. 59-60; 33 Am. Jur. 325-326.


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Villanueva vs. City of lloilo

"The character of a tax is not to be fixed by any isolated words that may be employed in the statute
creating it, but such words must be taken in the connection in which they are used, and the true
character is to be deduced from the nature and essence of the subject."17 The subject-matter of the
ordinance is tenement houses whose nature and essence are expressly set f orth in section 2 which
defines a tenement house as "any building or dwelling for renting space divided into separate
apartments or accessorias." The Supreme Court, in City of Iloilo vs Remedios Sian Villanueva, et al., L-
12695, March 23, 1959, adopted the definition of a tenement house18 as "any house or building, or
portion thereof, which is rented, leased, or hired out to be occupied, or is occupied, as the home or
residence of three families or more living independently of each other and doing their cooking in the
premises, or by more than two families upon any floor, so living and cooking, but having a common right
in the halls, stairways, yards, water-closets, or privies, or some of them." Tenement houses, being
necessarily offered for rent or lease by their very nature and essence, therefore constitute a distinct
form of business or calling, similar to the hotel or motel business, or the operation of lodging houses or
boarding houses. This is precisely one of the reasons why this Court, in the said case of City of Iloilo vs.
Remedios Sian Villanueva, et al., supra, declared Ordinance 86 ultra vires, because, although the
municipal board of Iloilo City is empowered, under sec. 21, par. j, of its Charter, "to tax, fix the license
fee for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding houses,
livery garages, public warehouses, pawnshops, theaters, cinematographs," tenement houses, which
constitute a different business enterprise,19 are not mentioned in the af ore-

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17 51 Am. Jur. 56, citing Eyre v. Jacob, 14 Gratt (Va.) 422; 73 Am. Dec. 367.

18 Webster's New International Dictionary, 2nd Ed., p. 2601.

19 City of Iloilo vs. Remedios Sian Villanueva, et al., L12695, March 23, 1959: "As may be seen from the
definition of each establishment hereunder quoted, a tenement house is different from hotel, lodging
house, or boarding house. These are different business enterprises. They have been established for
different purposes."

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Villanueva vs. City of Iloilo

stated section of the City Charter of Iloilo. Thus, in the aforesaid case, this Court explicitly said:

"And it not appearing that the power to tax owners of tenement houses is one among those clearly and
expressly granted to the City of Iloilo by its Charter, the exercise of such power cannot be assumed and
hence the ordinance in question is ultra vires insofar as it taxes a tenement house such as those
belonging to defendants."

The lower court has interchangeably denominated the tax in question as a tenement tax or an
apartment tax. Called by either name, it is not among the exceptions listed in section 2 of the Local
Autonomy Act. On the other hand, the imposition by the ordinance of a license tax on persons engaged
in the business of operating tenement houses finds authority in section 2 of the Local Autonomy Act
which provides that chartered cities have the authority to imposed municipal license taxes or fees upon
persons engaged in any occupation or business, or exercising privileges within their respective
territories, and "otherwise to levy for public purposes, just and uniform taxes, licenses, or fees."

2. The trial court condemned the ordinance as constituting "not only double taxation but treble at that,"
because "buildings pay real estate taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of
the National Internal Revenue Code, besides the tenement tax under the said ordinance." Obviously,
what the trial court refers to as "income taxes" are the fixed taxes on business and occupation provided
for in section 182, Title V, of the National Internal Revenue Code, by virtue of which persons engaged in
"leasing or renting property, whether on their account as principals or as owners of rental property or
properties," are considered "real estate dealers" and are taxed according to the amount of their annual
income.20

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20 National Internal Revenue Code:

"SEC. 182. Fixed taxes.(A) On business x x x; (3) Other fixed taxes.The following fixed taxes shall be
collected as follows, the amount stated being for the whole year, when not otherwise specified:

x x x

"(s) Stockbrokers, dealers in securities, real estate brokers.

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SUPREME COURT REPORTS ANNOTATED

Villanueva vs. City of Iloilo

While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the National
Internal Revenue Code as real estate dealers, and still taxable under the ordinance in question, the
argument against double taxation may not be invoked. The same tax may be imposed by the national
government as well as by the local government. There is nothing inherently obnoxious in the exaction of
license f ees or taxes with respect to the same occupation, calling or activity by both the State and a
political subdivision thereof.21

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real estate dealers, commercial brokers, customs brokers, and immigration brokers, one hundred and
fifty pesos: Provided, however, That in the case of real estate dealers, the annual fixed tax to be
collected shall be as follows:

"One hundred and fifty pesos, if the annual income from buying, selling, exchanging, leasing, or renting
property (whether on their own account as principals or as owners of rental property or properties) is
four thousand pesos or more but not exceeding ten thousand pesos;

"Three hundred pesos, if such annual income exceeds ten thousand pesos but does not exceed thirty
thousand pesos; and

"Five hundred pesos, if such annual income exceeds thirty thousand pesos."

21 Punsalan, et al. vs. Mun. Board of the City of Manila, et al., L-4817, May 26, 1954, 95 Phil. 46, per
Reyes, J.: In this case the Supreme Court upheld the validity of Ordinance 3398 of the City of Manila,
approved on July 25, 1950, imposing a municipal occupation tax on persons exercising various
professions (lawyers, medical practitioners, public accountants, dental surgeons, pharmacists, etc.), in
the city and penalizes non-payment of the tax by a fine of not more than P200.00 or by imprisonment of
not more than 6 months, or by both such fine and imprisonment in the discretion of the court, although
section 201 [now sec. 182(B)] of the National Internal Revenue Code requires the payment of taxes on
occupation or professional taxes. Said Justice Reyes: "The argument against double taxation may not be
invoked where one tax is imposed by the state and the other is imposed by the city (1 Cooley on
Taxation, 4th ed., p. 492), it being widely recognized that there is nothing obnoxious in the requirement
that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the
state and the political subdivision thereof. (51 Am. Jur., 341.)"

A month after the promulgation of the above decision, Congress passed Rep. Act 1166, approved on
June 18, 1954, providing as follows: "Any provisions of existing laws, city

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Villanueva vs. City of Iloilo

The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate
taxes and the tenement tax imposed by the ordinance in question, is also devoid of merit. It is a well-
settled rule that a license tax may be levied upon a business or occupation although the land or property
used in connection therewith is subject to property tax. The State may collect an ad valorem tax on
property used in a calling, and at the same time impose a license tax on that calling, the imposition of
the latter kind of tax being in no sense a double tax.22

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charters and ordinances, executive orders and regulations, or parts thereof, to the contrary
notwithstanding, every professional legally authorized to practice his profession, who has paid the
corresponding annual privilege tax on professions required by Sec. 182 of the NIRC, Com. Act No. 466,
shall be entitled to practice the profession for which he has been duly qualified under the law, in all
parts of the Philippines without being subject to any other tax, charge, license or fee for the practice of
such profession; Provided, however, That they have paid to the office concerned the registration fees
required In their respective professions."

22 People vs. Santiago Mendaros, et al., L-6975, May 27, 1955, 97 Phil. 958-959, per Bautista Angelo, J.
Appeal from the decision of the CFI of Zambales. Defendants-appellees were convicted by the JP Court
of Palauig, Zambales, and sentenced to pay a fine of P5.00, for failure to pay the occupation tax imposed
by a municipal ordinance on owners of fishponds on lands of private ownership. The Supreme Court, in
sustaining the validity of the ordinance, held.

"The ground on which the trial court declared the municipal ordinance invalid would seem to be that,
since the land on which the fishpond is situated is already subject to land tax, it would be unfair and
discriminatory to levy another tax on the owner of the fishpond because that would amount to double
taxation. This view is erroneous because it is a well-settled rule that a license tax may be levied upon a
business or occupation although the land or property used therein is subject to property tax. It was also
held that 'the state may collect an ad valorem tax on property used in a calling, and at the same time
impose a license tax on the pursuit of that calling.' The imposition of this kind of tax is in no sense called
a double tax." Veronica Sanchez vs. The Collector of Internal Revenue, L-7521, Oct. 18, 1955, 97 Phil.
687, per Reyes, J.B.L., J.

"Considering that appellant constructed her four-door 'accessoria' purposely for rent or profit; that she
has been continuously leasing the same to third persons since its construction

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Villanueva vs. City of Iloilo

"In order to constitute double taxation in the objectionable or prohibited sense the same property must
be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or
subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the
same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or
character of tax."23 It has been shown that a real estate tax and the tenement tax imposed by the
ordinance, although imposed by the same taxing authority, are not of the same kind or character.

At all events, there is no constitutional prohibition against double taxation in the Philippines.24 It is
something not favored, but is permissible, provided some other consti-

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in 1947; that she manages her property herself; and that said leased holding appears to be her main
source of livelihood, she is engaged in the leasing of real estate, and is a real estate dealer as defined in
section 194(s) [now, Sec. 182(A) (3) (s)] of the Internal Revenue Code, as amended by Rep. Act No. 42.

"Appellant argues that she is already paying real estate taxes on her property, as well as income tax on
the income derived therefrom, so that to further subject its rentals to the 'real estate dealers' tax'
amounts to double taxation. This argument has already been rejected by this Court in the case of People
vs. Mendaros, et al., L-6975, promulgated May 27, 1955, wherein we held that it is a well-settled rule
that license tax may be levied upon a business or occupation although the land or property used therein
is subject to property tax, and that 'the state may collect an ad valorem tax on property used in a calling,
and at the same time impose a license tax on the pursuit of that calling' the imposition of the latter kind
of tax being in no sense a double tax.'"

23 84 C.J.S. 131-132.

24 Manufacturers' Life Insurance Co. vs. Meer, L-2910, June 29, 1951; City of Manila vs. Interisland Gas
Service, L-8799, Aug. 31, 1956; Commissioner of Internal Revenue vs. Hawaiian-Philippine Co., L-16315,
May 30, 1964; Pepsi-Cola Bottling Co. of the Philippines vs. City of Butuan, et al, L-22814, Aug. 28, 1968.
Pepsi-Cola Bottling Co. vs. City of Butuan, supra:

"The second and last objections are manifestly devoid of merit. Indeedindependently of whether or
not the tax in question, when considered in relation to the sales tax prescribed by Acts of Congress,
amounts to double taxation, on which we need not and do not express any opiniondouble taxation, in
gen

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Villanueva vs. City of Iloilo

tutional requirement is not thereby violated, such as the requirement that taxes must be uniform.25

3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not only
oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months or both,
if the owner or owners of the tenement buildings divided into apartments do not pay the tenement or
apartment tax fixed in said ordinance," but also unconstitutional as it subjects the owners of tenement
houses to criminal prosecution for "non-payment of an obligation which is purely sum of money." The
lower court apparently had in mind, when it made the above ruling, the provision of the Constitution
that "no person shall be imprisoned for a debt or non-pay-

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eral, is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction
against double taxation found in the Constitution of the United States and some States of the Union.
Then, again, the general principle against delegation of legislative powers, in consequence of the theory
of separation of powers is subject to one well-established exception, namely; legislative powers may be
delegated to local governmentsto which said theory does not applyin respect of matters of local
concern."

25 84 C J.S. 133-134; "Double taxation, although not favored, is permissible in the absence of express or
implied constitutional prohibition.

"Double taxation should not be permitted unless the legislature has authority to impose it. However,
since the taxing power is exclusively a legislative function, and since, 'except as it is limited or restrained
by constitutional provisions, it is absolute and unlimited, it is generally held that there is nothing, in the
absence of any express or implied constitutional prohibition against double taxation, to prevent the
imposition of more than one tax on property within the jurisdiction, as the power to tax twice is as
ample as the power to tax once. In such case whether or not there should be double taxation is a matter
within the discretion of the legislature.

"In some states where double taxation is not expressly prohibited, it is held that double taxation is
permissible, or not invalid or unconstitutional, or necessarily unlawful, provided some other
constitutional requirement is not thereby violated, as a requirement that taxes must be equal and
uniform."

The Constitution of the Philippines, Art. VI, sec. 22(1) provides: "The rule of taxation shall be uniform."

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Villanueva vs. City of Iloilo

ment of a poll tax."26 It is elementary, however, that "a tax is not a debt in the sense of an obligation
incurred by contract, express or implied, and theref ore is not within the meaning of constitutional or
statutory provisions abolishing or prohibiting imprisonment f or debt, and a statute or ordinance which
punishes the non-payment thereof by fine or imprisonment is not in conflict with that prohibition."27
Nor is the tax in question a poll tax, for the latter is a tax of a fixed amount upon all persons, or upon all
persons of a certain class, resident within a specified territory, without regard to their property or the
occupations in which they may be engaged.28 Therefore, the tax in question is not oppressive in the
manner the lower court puts it. On the other hand, the charter of Iloilo City29

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26 Art. III, sec. 1, par. 12, Constitution.

27 51 Am. Jur. 860-861, citing Cousins v. State, 50 Ala. 113, 20 Am. Rep. 290; Rosenbloom v. State, 64
Neb. 342, 89 NW 1053, 57 LRA 922; Voelkel v. Cincinnati, 112 Ohio St. 374, 147 NE 754, 40 ALR 73
(holding the provisions of an ordinance making the nonpayment of an 'excise tax levied in pursuance of
such ordinance a misdemeanor punishable by fine not in violation of the constitutional prohibition
against the imprisonment of any person for "debt in a civil action, or mesne or final process"); Ex parte
Mann, 39 Tex. Crim. Rep. 491, 46 SW 828, 73 Am. St. Rep. 961.

26 R.C.L. 25-26: "It is generally considered that a tax is not a debt, and that the municipality to which the
tax is payable is not a creditor of the person assessed. A debt is a sum of money due by certain and -
express agreement. It originates in, and is founded upon, contract express or implied. Taxes, on the
other hand, do not rest upon contract, express or implied. They are obligations imposed upon citizens to
pay the expenses of government. They are forced contributions, and in no way dependent upon the will
or contract, express or implied, of the persons taxed."

28 51 Am. Jur. 66-67; 'Capitation or poll taxes are taxes of a fixed amount upon all persons, or upon all
the persons of a certain class, resident within a specified territory, without regard to their property or
the occupations in which they may be engaged. Taxes of a specified amount upon each person
performing a certain act or engaging in a certain business or profession are not, however, poll taxes"

29 Com. Act No. 158 (An Act Establishing a Form of Government for the City of Iloilo), section 21:
"Except as otherwise provided by law, and subject to the conditions and limita

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Villanueva vs. City of lloilo

empowers its municipal board to "fix penalties for violations of ordinances, which shall not exceed a fine
of two hundred pesos or six months' imprisonment, or both such fine and imprisonment for each
offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court overruled the pronouncement of
the lower court declaring illegal and void an ordinance imposing an occupation tax on persons exercising
various professions in the City of Manila because it imposed a penalty of fine and imprisonment for its
violation.30

4. The trial court brands the ordinance as violative of the rule of uniformity of taxation
"x x x because while the owners of the other buildings only pay real estate tax and income taxes the
ordinance imposes aside from these two taxes an apartment or tenement tax. It should be noted that in
the assessment of real estate tax all parts of the building or buildings are included so that the
corresponding real estate tax could be properly imposed. If aside from the real estate tax the owner or
owners of the tenement buildings should pay apartment taxes as required in the ordinance then it will
violate the rule of uniformity of taxation."

Complementing the above ruling of the lower court, the appellees argue that there is "lack of
uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo are singled out to
pay taxes on their tenement houses, while citizens of other cities, where their councils

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tions thereof, the Municipal Board shall have the following legislative powers: "(aa) x x x and to fix
penalties for the violation of ordinances, which shall not exceed a fine of two hundred pesos or six
months' imprisonment, or both such fine and imprisonment, for each offense."

30 "To begin with the defendants' appeal, we find that the lower court was in error in saying that the
imposition of the penalty provided for in the ordinance was without the authority of law. The last
paragraph (kk) of the very section that authorizes the enactment of the ordinance (section 18 of the
Manila Charter) in express terms also empowers the Municipal Board to 'fix penalties f or the violation
of ordinances which not exceed to [sic] two hundred pesos fine or six months' imprisonment, or both
such fine and imprisonment, for a single offense/ Hence, the pronouncement below that the ordinance
in question is illegal and void because it imposes a penalty not authorized by law is clearly without legal
basis."

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do not enact a similar tax ordinance, are permitted to escape such imposition."

It is our view that both assertions are undeserving of extended attention. This Court has already ruled
that tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform
and equal when imposed upon all property of the same class or character within the taxing
authority."31 The fact, therefore, that the owners of other classes of buildings in the City of Iloilo do not
pay the taxes imposed by the ordinance in question is no argument at all against uniformity and equality
of the tax imposition. Neither is the rule of equality and uniformity violated by the fact that tenement
taxes are not imposed in other cities, for the same rule does not require that taxes for the same purpose
should be imposed in different territorial subdivisions at the same time.32 So

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31 51 Am. Jur. 203, citing Re Page, 60 Kan. 842, 58 P 478, 47 LRA 68: "Taxes are uniform and equal when
imposed upon all property of the same character within the taxing authority." Manila Race Horse
Trainers Assn., Inc. vs, De la Fuente, L-2947, Jan. 11, 1951, 88 Phil. 60: "In the case of Eastern Theatrical
Co., Inc. vs. Alfonso, [L-1104, May 31, 1949], 46 O.G. Supp. to No. 11, p. 303, it was said that there is
equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at the
same rate. Thus, it was held in that case, that 'the fact that some places of amusement are not taxed
while others, such as cinematographs, theaters, vaudeville companies, theatrical shows, and boxing
exhibitions and other kinds of amusements or places of amusement are taxed, is no argument at all
against equality and uniformity of the tax imposition.' Applying this criterion to the present case, there
would be discrimination if some boarding stables of the same class used for the same number of horses
were not taxed or were made to pay less or more than others." Tan Kim Kee vs. Court of Tax Appeals, et
al., L-18080, April 22, 1963, per Reyes, J.B.L., J.: "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."

32 Am. Jur. 203: "153. Uniformity of Operation Throughout Tax Unit.One requirement with respect to
taxation imposed by provisions relating to equality and uniformity, which has been introduced into
some state constitutions in express language, is that taxation must be uniform throughout the political
unit by or with respect to which the tax is levied. This means, for example, that a tax for a state purpose
must be uniform

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long as the burden of the tax f alls equally and impartially on all owners or operators of tenement
houses similarly classified or situated, equality and uniformity of taxation is accomplished.33 The
plaintiffs-appellees, as owners of tenement houses in the City of Iloilo, have not shown that the tax
burden is not equally or uniformly distributed among them, to overthrow the presumption that tax
statutes are intended to operate uniformly and equally.34

5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a mere
reproduc-

_______________

and equal throughout the state, a tax for a county purpose must be uniform and 'equal throughout the
county, and a tax for a city, village, or township purpose must be uniform and equal throughout the city,
village, or township. It does not mean, however, that the taxes levied by or with respect to the various
political subdivisions or taxing districts of the state must be at the same rate, or, as one court has
graphically put it, that a man in one county shall pay the same rate of taxation for all purposes .that is
paid by a man in an adjoining county. Nor does the rule require that taxes for the same purposes shall
be imposed in different territorial subdivisions at the same time. It has also been said in this connection
that the omission to tax any particular individual who may be liable does not render the whole tax illegal
or void."

33 84 C.J.S. 77: "Equality in taxation is accomplished when the burden of the tax falls equally and
impartially on all the persons and property subject to it [State ex rel. Haggart v. Nichols, 265 N.W. 859,
66 N.D. 355], so that no higher rate or greater levy in proportion to value is imposed on one person or
species of property than on others similarly situated or of like character."

84 C.J.S. 79: "The rule of uniformity in taxation applies to property of like kind and character and
similarly situated, and a tax, in order to be uniform, must operate alike on all persons, things, or
property, similarly situated. So the requirement is complied with when the tax is levied equally and
uniformly on all subjects of the same class and kind and is violated if particular kinds, species or items of
property are selected to bear the whole burden of the tax, while others, which should be equally
subjected to it, are left untaxed."

34 84 C.J.S. 81: "There is a presumption that tax statutes are intended to operate uniformly and equally
[Alaska Consol. Canneries v. Territory of Alaska, C.C.A. Alaska, 16 F. 2d. 256], and a liberal construction
will be indulged in order to accomplish fair and equal taxation of all property within the state."

600

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SUPREME COURT REPORTS ANNOTATED

Villanueva vs. City of Iloilo

tion of Ordinance 86 of the City of Iloilo which was declared by this Court in L-12695, supra, as ultra
vires, the decision in that case should be accorded the effect of res judicata in the present case or should
constitute estoppel by judgment. To dispose of this contention, it suffices to say that there is no identity
of subject-matter in that case and this case because the subject-matter in L-12695 was an ordinance
which dealt not only with tenement houses but also warehouses, and the said ordinance was enacted
pursuant to the provisions of the City charter, while the ordinance in the case at bar was enacted
pursuant to the provisions of the Local Autonomy Act. There is likewise no identity of cause of action in
the two cases because the main issue in L-12695 was whether the City of Iloilo had the power under its
charter to impose the tax levied by Ordinance 86, while one of the issues in the present case is whether
the City is empowered to impose the tax levied by Ordinance 11, series of 1960, under the Local
Autonomy Act which took effect on June 19, 1959, and therefore was not available for consideration in
the decision in L-12695 which was promulgated on March 23, 1959. Moreover, under the provisions of
section 2 of the Local Autonomy Act, local governments may now tax any taxable subject-matter or
object not included in the enumeration of matters removed from the taxing power of local
governments. Prior to the enactment of the Local Autonomy Act the taxes that could be legally levied by
local governments were only those specifically authorized by law, and their power to tax was construed
in strictissimi juris.35
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in question being valid, the
complaint is hereby dismissed. No pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Capistrano, JJ.,
concur.
Commissioner of Internal Revenue vs. Bank of Commerce

G.R. No. 149636. June 8, 2005.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF COMMERCE, respondent.

Taxation; Gross Receipts Tax; Words and Phrases; The word gross must be used in its plain and
ordinary meaning.The word gross must be used in its plain and ordinary meaning. It is defined as
whole, entire, total, without deduction. A common definition is without deduction. Gross is also
defined as taking in the whole; having no deduction or abatement; whole, total as opposed to a sum
consisting of separate or specified parts. Gross is the antithesis of net. Indeed, in China Banking
Corporation v. Court of Appeals, the Court defined the term in this wise: As commonly understood, the
term gross receipts means the entire receipts without any deduction. Deducting any amount from the
gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is
inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception.
As explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. Koppers
Company, Inc.Highly refined and technical tax concepts have been developed by the accountant and
legal technician primarily because of the impact of federal income tax legislation. However, this in no
way should affect or control the normal usage of words in the construction of our statutes; and we see
nothing that would require us not to include the proceeds here in question in the gross receipts
allocation unless statutorily such inclusion is prohibited. Under the ordinary basic methods of handling
accounts, the term gross receipts, in the absence of any statutory definition of the term, must be taken
to include the whole total gross receipts without any deductions, x x x.

Same; Same; There is no law which allows the deduction of 20% final tax from the respondent banks
interest income for the computation of the 5% gross receipts tax.The Court, likewise, declared that
Section 121 of the Tax Code expressly subjects interest income of banks to the gross receipts tax. Such
express inclusion of interest income in taxable gross receipts creates a presumption that the entire
amount of the interest income, without any deduction, is subject to the gross receipts tax. Indeed, there
is a presumption that receipts of a person engaging in business are

_______________

* SECOND DIVISION.

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Commissioner of Internal Revenue vs. Bank of Commerce

subject to the gross receipts tax. Such presumption may only be overcome by pointing to a specific
provision of law allowing such deduction of the final withholding tax from the taxable gross receipts,
failing which, the claim of deduction has no leg to stand on. Moreover, where such an exception is
claimed, the statute is construed strictly in favor of the taxing authority. The exemption must be clearly
and unambiguously expressed in the statute, and must be clearly established by the taxpayer claiming
the right thereto. Thus, taxation is the rule and the claimant must show that his demand is within the
letter as well as the spirit of the law. In this case, there is no law which allows the deduction of 20%
final tax from the respondent banks interest income for the computation of the 5% gross receipts tax.
On the other hand, Section 8(a)(c), Rev. Reg. No. 17-84 provides that interest earned on Philippine bank
deposits and yield from deposit substitutes are included as part of the tax base upon which the gross
receipts tax is imposed. Such earned interest refers to the gross interest without deduction since the
regulations do not provide for any such deduction. The gross interest, without deduction, is the amount
the borrower pays, and the income the lender earns, for the use by the borrower of the lenders money.
The amount of the final tax plainly covers for the interest earned and is consequently part of the taxable
gross receipt of the lender.

Same; Same; The bare fact that the final withholding tax is a special trust fund belonging to the
government and that the respondent bank did not benefit from it while in custody of the borrower does
not justify its exclusion from the computation of interest income.The bare fact that the final
withholding tax is a special trust fund belonging to the government and that the respondent bank did
not benefit from it while in custody of the borrower does not justify its exclusion from the computation
of interest income. Such final withholding tax covers for the respondent banks income and is the
amount to be used to pay its tax liability to the government. This tax, along with the creditable
withholding tax, constitutes payment which would extinguish the respondent banks obligation to the
government. The bank can only pay the money it owns, or the money it is authorized to pay.

Same; Same; Double Taxation; Words and Phrases; Double taxation means taxing the same property
twice when it should be taxed only once, that is, taxing the same person twice by the same jurisdiction
for the same thing; Otherwise described as direct duplicate taxation, the two taxes must be imposed
on the same subject matter, for the same purpose, by the

640

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

same taxing authority, within the same jurisdiction, during the same taxing period, and they must be of
the same kind or character.We reverse the ruling of the CA that subjecting the Final Withholding Tax
(FWT) to the 5% of gross receipts tax would result in double taxation. In CIR v. Solidbank Corporation,
we ruled, thus: We have repeatedly said that the two taxes, subject of this litigation, are different from
each other. The basis of their imposition may be the same, but their natures are different, thus leading
us to a final point. Is there double taxation? The Court finds none. Double taxation means taxing the
same property twice when it should be taxed only once; that is, x x x taxing the same person twice by
the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed twice, when it
should be but once. Otherwise described as direct duplicate taxation, the two taxes must be imposed
on the same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and they must be of the same kind or character.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Alvin Agustin T. Ignacio for respondent.

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No.
52706, affirming the ruling of the Court of Tax Appeals (CTA)2 in CTA Case No. 5415.

The facts of the case are undisputed.

In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of interests or
discounts from its investments in government securities and private commercial papers. On several
occasions during the said period, it paid 5% gross

_______________

1 Penned by Associate Justice Presbitero J. Velasco, Jr. (now Court Administrator) with Associate Justices
Ruben T. Reyes and Juan Q. Enriquez, Jr., concurring; Rollo, pp. 23-31.

2 Penned by Presiding Judge Ernesto D. Acosta with Judges Ramon O. De Veyra, concurring and Amancio
Q. Saga, dissenting.

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Commissioner of Internal Revenue vs. Bank of Commerce

receipts tax on its income, as reflected in its quarterly percentage tax returns. Included therein were the
respondent banks passive income from the said investments amounting to P85,384,254.51, which had
already been subjected to a final tax of 20%.

Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank Corporation v. Commissioner
of Internal Revenue, CTA Case No. 4720, holding that the 20% final withholding tax on interest income
from banks does not form part of taxable gross receipts for Gross Receipts Tax (GRT) purposes. The CTA
relied on Section 4(e) of Revenue Regulations (Rev. Reg.) No. 12-80.
Relying on the said decision, the respondent bank filed an administrative claim for refund with the
Commissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its gross receipts tax
for 1994 to 1995 by P853,842.54, computed as follows:

Gross receipts subjected to

Final Tax Derived from Passive

Investment

P85,384,254.51

x 20%

20% Final Tax Withheld

17,076,850.90

at Source

x 5%
P 853,842.54

Before the Commissioner could resolve the claim, the respondent bank filed a petition for review with
the CTA, lest it be barred by the mandatory two-year prescriptive period under Section 230 of the Tax
Code (now Section 229 of the Tax Reform Act of 1997).

In his answer to the petition, the Commissioner interposed the following special and affirmative
defenses:

...

5. The alleged refundable/creditable gross receipts taxes were collected and paid pursuant to law and
pertinent BIR implementing rules and regulations; hence, the same are not refundable. Petitioner must
prove that the income from which the refundable/creditable taxes were paid from, were declared and
included in its gross income during the taxable year under review;

642

642

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

6. Petitioners allegation that it erroneously and excessively paid its gross receipt tax during the year
under review does not ipso facto warrant the refund/credit. Petitioner must prove that the exclusions
claimed by it from its gross receipts must be an allowable exclusion under the Tax Code and its pertinent
implementing Rules and Regulations. Moreover, it must be supported by evidence;

7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt taxes were neither
automatically applied as tax credit against its tax liability for the succeeding quarter/s of the succeeding
year nor included as creditable taxes declared and applied to the succeeding taxable year/s;

8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer as it partakes the
nature of an exemption from tax and it is incumbent upon the petitioner to prove that it is entitled
thereto under the law. Failure on the part of the petitioner to prove the same is fatal to its claim for tax
refund/credit;

9. Furthermore, petitioner must prove that it has complied with the provision of Section 230 (now
Section 229) of the Tax Code, as amended.3

The CTA summarized the issues to be resolved as follows: whether or not the final income tax withheld
should form part of the gross receipts4 of the taxpayer for GRT purposes; and whether or not the
respondent bank was entitled to a refund of P853,842.54.5

The respondent bank averred that for purposes of computing the 5% gross receipts tax, the final
withholding tax does not form part of gross receipts.6 On the other hand, while the Commissioner
conceded that the Court defined gross receipts as all receipts of taxpayers excluding those which
have been especially earmarked by law or regulation for the government or some person other than

_______________

3 Rollo, p. 35.

4 Section 119 of the Tax Code.

5 Rollo, p. 37.

6 Citing the rulings in Asian Bank Corporation v. Commissioner of Internal Revenue, CTA Case No. 4720,
January 30, 1996; and in Court of Industrial Relations v. Manila Jockey Club, 108 Phil. 821 (1960).

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Commissioner of Internal Revenue vs. Bank of Commerce

the taxpayer in CIR v. Manila Jockey Club, Inc.,7 he claimed that such definition was applicable only to a
proprietor of an amusement place, not a banking institution which is an entirely different entity
altogether. As such, according to the Commissioner, the ruling of the Court in Manila Jockey Club was
inapplicable.

In its Decision dated April 27, 1999, the CTA by a majority decision8 partially granted the petition and
ordered that the amount of P355,258.99 be refunded to the respondent bank. The fallo of the decision
reads:

WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND in favor of
petitioner Bank of Commerce the amount of P355,258.99 representing validly proven erroneously
withheld taxes from interest income derived from its investments in government securities for the years
1994 and 1995.9

In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila Jockey Club, and held
that the term gross receipts excluded those which had been especially earmarked by law or regulation
for the government or persons other than the taxpayer. The CTA also cited its rulings in China Banking
Corporation v. CIR10 and Equitable Banking Corporation v. CIR.11

The CTA ratiocinated that the aforesaid amount of P355,258.99 represented the claim of the respondent
bank, which was filed within the two-year mandatory prescriptive period and was substantiated by
material and relevant evidence. The CTA applied Section 204(3) of the National Internal Revenue Code
(NIRC).12

The Commissioner then filed a petition for review under Rule 43 of the Rules of Court before the CA,
alleging that:
_______________

7 108 Phil. 821 (1960).

8 Penned by Presiding Judge Ernesto D. Acosta, with Judges Ramon O. De Veyra, concurring and
Amancio Q. Saga, dissenting.

9 Rollo, p. 44.

10 CTA Case No. 5433, October 7, 1995.

11 CTA Case No. 4720, January 30, 1996.

12 Rollo, pp. 42-43.

644

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

(1) There is no provision of law which excludes the 20% final income tax withheld under Section 50(a) of
the Tax Code in the computation of the 5% gross receipts tax.

(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue vs. Manila Jockey Club
(108 Phil. 821) in the resolution of the legal issues involved in the instant case.13

The Commissioner reiterated his stand that the ruling of this Court in Manila Jockey Club, which was
affirmed in Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue,14 is not decisive. He
averred that the factual milieu in the said case is different, involving as it did the wager fund. The
Commissioner further pointed out that in Manila Jockey Club, the Court ruled that the race tracks
commission did not form part of the gross receipts, and as such were not subjected to the 20%
amusement tax. On the other hand, the issue in Visayan Cebu Terminal was whether or not the gross
receipts corresponding to 28% of the total gross income of the service contractor delivered to the
Bureau of Customs formed part of the gross receipts was subject to 3% of contractors tax under Section
191 of the Tax Code. It was further pointed out that the respondent bank, on the other hand, was a
banking institution and not a contractor. The petitioner insisted that the term gross receipts is self-
evident; it includes all items of income of the respondent bank regardless of whether or not the same
were allocated or earmarked for a specific purpose, to distinguish it from net receipts.

On August 14, 2001, the CA rendered judgment dismissing the petition. Citing Sections 51 and 58(A) of
the NIRC, Section 4(e) of Rev. Reg. No. 12-8015 and the ruling of this Court in Manila Jockey Club, the CA
held that the P17,076,850.90 representing the final withholding tax derived from passive investments
subjected to final tax should not be construed as forming part of the gross receipts of the respondent
bank upon which the 5% gross receipts tax
_______________

13 CA Rollo, p. 9.

14 G.R. Nos. L-19530 and L-19444, 27 February 1965, 13 SCRA 357.

15 Issued on 7 November 1980.

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Commissioner of Internal Revenue vs. Bank of Commerce

should be imposed. The CA declared that the final withholding tax in the amount of P17,768,509.00 was
a trust fund for the government; hence, does not form part of the respondents gross receipts. The legal
ownership of the amount had already been vested in the government. Moreover, the CA declared, the
respondent did not reap any benefit from the said amount. As such, subjecting the said amount to the
5% gross receipts tax would result in double taxation. The appellate court further cited CIR v. Tours
Specialists, Inc.,16and declared that the ruling of the Court in Manila Jockey Club was decisive of the
issue.

The Commissioner now assails the said decision before this Court, contending that:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL WITHHOLDING TAX ON BANKS
INTEREST INCOME DOES NOT FORM PART OF THE TAXABLE GROSS RECEIPTS IN COMPUTING THE 5%
GROSS RECEIPTS TAX (GRT, for brevity).17

The petitioner avers that the reliance by the CTA and the CA on Section 4(e) of Rev. Reg. No. 12-80 is
misplaced; the said provision merely authorizes the determination of the amount of gross receipts
based on the taxpayers method of accounting under then Section 37 (now Section 43) of the Tax Code.
The petitioner asserts that the said provision ceased to exist as of October 15, 1984, when Rev. Reg. No.
17-84 took effect. The petitioner further points out that under paragraphs 7(a) and (c) of Rev. Reg. No.
17-84, interest income of financial institutions (including banks) subject to withholding tax are included
as part of the gross receipts upon which the gross receipts tax is to be imposed. Citing the ruling of the
CA in Commissioner of Internal Revenue v. Asianbank Corporation18 (which likewise cited Bank of
America NT & SA v. Court of Appeals,19) the petitioner posits that in computing the 5% gross re-

_______________

16 G.R. No. 66416, 21 March 1990, 183 SCRA 402.

17 Rollo, p. 11.
18 CA-G.R. SP No. 51248, 22 November 1999.

19 G.R. No. 103092, 21 July 1994, 234 SCRA 302.

646

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

ceipts tax, the income need not be actually received. For income to form part of the taxable gross
receipts, constructive receipt is enough. The petitioner is, likewise, adamant in his claim that the final
withholding tax from the respondent banks income forms part of the taxable gross receipts for
purposes of computing the 5% of gross receipts tax. The petitioner posits that the ruling of this Court in
Manila Jockey Club is not decisive of the issue in this case.

The petition is meritorious.

The issues in this case had been raised and resolved by this Court in China Banking Corporation v. Court
of Appeals,20 and CIR v. Solidbank Corporation.21

Section 27(D)(1) of the Tax Code reads:

(D) Rates of Tax on Certain Passive Incomes.

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties.A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That
interest income derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent
(7%) of such interest income.

On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of final tax on certain
income creditable at source:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes.Subject to rules and regulations, the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax imposed or prescribed by Sections

_______________

20 G.R. No. 146749, 10 June 2003, 403 SCRA 634.


21 G.R. No. 148191, 25 November 2003, 416 SCRA 436.

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Commissioner of Internal Revenue vs. Bank of Commerce

24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2),
27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall
be withheld by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source.The Secretary of Finance may, upon the recommendation
of the Commissioner, 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 tax deducted and withheld by withholding agents under the said provision shall be held as a special
fund in trust for the government until paid to the collecting officer.22

Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross receipts derived from
sources within the Philippines by all banks and non-bank financial intermediaries shall be computed in
accordance with the schedules therein:

(a) On interest, commissions and discounts from lending activitiesas well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived:

Short-term maturity (not in excess of two (2) years)

5%

Medium-term maturity (over two (2) years but not exceeding four (4) years)

3%

Long-term maturity
(1) Over four (4) years but not exceeding seven (7) years

1%

(2) Over seven (7) years

0%

(b) On dividends

0%

_______________

22 Section 58(A).

648

648

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

(c)

On royalties, rentals of property, real or personal, profits from exchange and all other items treated as
gross income under Section 32 of this Code

5%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pre-
termination, then the maturity period shall be reckoned to end as of the date of pre-termination for
purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be
applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities.

The Tax Code does not define gross receipts. Absent any statutory definition, the Bureau of Internal
Revenue has applied the term in its plain and ordinary meaning.23

In National City Bank v. CIR,24 the CTA held that gross receipts should be interpreted as the whole
amount received as interest, without deductions; otherwise, if deductions were to be made from gross
receipts, it would be considered as net receipts. The CTA changed course, however, when it
promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg. No. 12-80 and the ruling of this
Court in Manila Jockey Club, holding that the 20% final withholding tax on the petitioner banks interest
income should not form part of its taxable gross receipts, since the final tax was not actually received by
the petitioner bank but went to the coffers of the government.

The Court agrees with the contention of the petitioner that the appellate courts reliance on Rev. Reg.
No. 12-80, the rulings of the CTA in Asia Bank, and of this Court in Manila Jockey Club has no legal and
factual bases. Indeed, the Court ruled in China Banking Corporation v. Court of Appeals25 that:

_______________

23 China Banking Corporation v. Court of Appeals, supra; CIR v. Solidbank Corporation, supra.

24 CTA Case No. 52 (1952).

25 Supra.

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Commissioner of Internal Revenue vs. Bank of Commerce

. . . In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v. Commissioner, both
promulgated on 16 November 2001, the tax court ruled that the final withholding tax forms part of the
banks gross receipts in computing the gross receipts tax. The tax court held that Section 4(e) of Revenue
Regulations No. 12-80 did not prescribe the computation of the amount of gross receipts but merely
authorized the determination of the amount of gross receipts on the basis of the method of accounting
being used by the taxpayer.

The word gross must be used in its plain and ordinary meaning. It is defined as whole, entire, total,
without deduction. A common definition is without deduction.26 Gross is also defined as taking in
the whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate
or specified parts.27 Gross is the antithesis of net.28 Indeed, in China Banking Corporation v. Court of
Appeals,29 the Court defined the term in this wise:

As commonly understood, the term gross receipts means the entire receipts without any deduction.
Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless
the law itself makes an exception. As explained by the Supreme Court of Pennsylvania in
Commonwealth of Pennsylvania v. Koppers Company, Inc.,

Highly refined and technical tax concepts have been developed by the accountant and legal technician
primarily because of the impact of federal income tax legislation. However, this in no way should affect
or control the normal usage of words in the construction of our statutes; and we see nothing that would
require us not to include the proceeds here in question in the gross receipts allocation unless statutorily
such inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term gross
receipts, in the absence of any statutory definition of the term, must be taken to in-

_______________

26 First Trust Co. of St. Paul v. Commonwealth Co., 98 F.2d27 (1938).

27 Scott v. Hartley, 25 NE 826 (1890).

28 Laclede Gas Co. v. City of St. Louis, 253 S.W. 2d 832 (1953).

29 Supra.

650

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

clude the whole total gross receipts without any deductions, x x x. [Citations omitted] (Emphasis
supplied)

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word gross appearing in the term gross receipts, as used in the ordinance, must have been and
was there used as the direct antithesis of the word net. In its usual and ordinary meaning gross
receipts of a business is the whole and entire amount of the receipts without deduction, x x x. On the
contrary, net receipts usually are the receipts which remain after deductions are made from the gross
amount thereof of the expenses and cost of doing business, including fixed charges and depreciation.
Gross receipts become net receipts after certain proper deductions are made from the gross. And in the
use of the words gross receipts, the instant ordinance, of course, precluded plaintiff from first
deducting its costs and expenses of doing business, etc., in arriving at the higher base figure upon which
it must pay the 5% tax under this ordinance. (Emphasis supplied)

Absent a statutory definition, the term gross receipts is understood in its plain and ordinary meaning.
Words in a statute are taken in their usual and familiar signification, with due regard to their general and
popular use. The Supreme Court of Hawaii held in Bishop Trust Company v. Burns that

x x x It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the
legislature, the language used therein is to be taken in the generally accepted and usual sense. Courts
will presume that the words in a statute were used to express their meaning in common usage. This
principle is equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)

The Court, likewise, declared that Section 121 of the Tax Code expressly subjects interest income of
banks to the gross receipts tax. Such express inclusion of interest income in taxable gross receipts
creates a presumption that the entire amount of the interest income, without any deduction, is subject
to the gross receipts tax. Indeed, there is a presumption that receipts of a person engaging in business
are subject to the gross receipts tax. Such presumption may only be overcome by pointing to a specific
provision of law

651

VOL. 459, JUNE 8, 2005

651

Commissioner of Internal Revenue vs. Bank of Commerce

allowing such deduction of the final withholding tax from the taxable gross receipts, failing which, the
claim of deduction has no leg to stand on. Moreover, where such an exception is claimed, the statute is
construed strictly in favor of the taxing authority. The exemption must be clearly and unambiguously
expressed in the statute, and must be clearly established by the taxpayer claiming the right thereto.
Thus, taxation is the rule and the claimant must show that his demand is within the letter as well as the
spirit of the law.30

In this case, there is no law which allows the deduction of 20% final tax from the respondent banks
interest income for the computation of the 5% gross receipts tax. On the other hand, Section 8(a)(c),
Rev. Reg. No. 17-84 provides that interest earned on Philippine bank deposits and yield from deposit
substitutes are included as part of the tax base upon which the gross receipts tax is imposed. Such
earned interest refers to the gross interest without deduction since the regulations do not provide for
any such deduction. The gross interest, without deduction, is the amount the borrower pays, and the
income the lender earns, for the use by the borrower of the lenders money. The amount of the final tax
plainly covers for the interest earned and is consequently part of the taxable gross receipt of the
lender.31

The bare fact that the final withholding tax is a special trust fund belonging to the government and that
the respondent bank did not benefit from it while in custody of the borrower does not justify its
exclusion from the computation of interest income. Such final withholding tax covers for the respondent
banks income and is the amount to be used to pay its tax liability to the government. This tax, along
with the creditable withholding tax, constitutes payment which would extinguish the respondent banks
obligation to the government. The bank can only pay the money it owns, or the money it is authorized to
pay.32

_______________

30 Kewanee Industries, Inc. v. Reese, 845 P.2d 1238 (1993).

31 China Banking Corporation v. Court of Appeals, supra.

32 Supra.

652
652

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

In the same vein, the respondent banks reliance on Section 4(e) of Rev. Reg. No. 12-80 and the ruling of
the CTA in Asia Bank is misplaced. The Courts discussion in China Banking Corporation33 is instructive
on this score:

CBC also relies on the Tax Courts ruling in Asia Bank that Section 4(e) of Revenue Regulations No. 12-80
authorizes the exclusion of the final tax from the banks taxable gross receipts. Section 4(e) provides
that:

Sec. 4. x x x

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-
bank financial intermediaries not performing quasi-banking functions.The rates of taxes to be imposed
on the gross receipts of such financial institutions shall be based on all items of income actually
received. Mere accrual shall not be considered, but once payment is received on such accrual or in cases
of prepayment, then the amount actually received shall be included in the tax base of such financial
institutions, as provided hereunder: x x x. (Emphasis supplied by Tax Court)

Section 4(e) states that the gross receipts shall be based on all items of income actually received. The
tax court in Asia Bank concluded that it is but logical to infer that the final tax, not having been received
by petitioner but instead went to the coffers of the government, should no longer form part of its gross
receipts for the purpose of computing the GRT.

The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80. Income may
be taxable either at the time of its actual receipt or its accrual, depending on the accounting method of
the taxpayer. Section 4(e) merely provides for an exception to the rule, making interest income taxable
for gross receipts tax purposes only upon actual receipt. Interest is accrued, and not actually received,
when the interest is due and demandable but the borrower has not actually paid and remitted the
interest, whether physically or constructively. Section 4(e) does not exclude accrued interest income
from gross receipts but merely postpones its inclusion until actual payment of the interest to the lending
bank. This is clear when Section 4(e) states that [m]ere accrual shall not be considered, but once
payment is received on such accrual or in case of prepayment, then the amount actually received shall
be included in the tax base of such financial institutions x x x.

_______________

33 Ibid.

653
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653

Commissioner of Internal Revenue vs. Bank of Commerce

Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical
receipt or constructive receipt. When the depository bank withholds the final tax to pay the tax liability
of the lending bank, there is prior to the withholding a constructive receipt by the lending bank of the
amount withheld. From the amount constructively received by the lending bank, the depository bank
deducts the final withholding tax and remits it to the government for the account of the lending bank.
Thus, the interest income actually received by the lending bank, both physically and constructively, is
the net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax
withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld
constitutes income earned by the taxpayer, then that amount manifestly forms part of the taxpayers
gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to
the government in payment of his tax liability. The amount withheld indubitably comes from income of
the taxpayer, and thus forms part of his gross receipts.

The Court went on to explain in that case that far from supporting the petitioners contention, its ruling
in Manila Jockey Club, in fact even buttressed the contention of the Commissioner. Thus:

CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the final withholding tax
on interest income does not form part of a banks gross receipts because the final tax is earmarked by
regulation for the government. CBCs reliance on the Manila Jockey Club is misplaced. In this case, the
Court stated that Republic Act No. 309 and Executive Order No. 320 apportioned the total amount of
the bets in horse races as follows:

87 % as dividends to holders of winning tickets, 12 % as commission of the Manila Jockey Club, of


which % was assigned to the Board of Races and 5% was distributed as prizes for owners of winning
horses and authorized bonuses for jockeys.

A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by ordering the
distribution of the bets as follows:

Sec. 19. Distribution of receipts.The total wager funds or gross receipts from the sale of pari-mutuel
tickets shall be apportioned as follows: eighty-seven and one-half per centum shall be dis-

654

654

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce


tributed in the form of dividends among the holders of win, place and show horses, as the case may be,
in the regular races; six and one-half per centum shall be set aside as the commission of the person,
racetrack, racing club, or any other entity conducting the races; five and one-half per centum shall be set
aside for the payment of stakes or prizes for win, place and show horses and authorized bonuses for
jockeys; and one-half per centum shall be paid to a special fund to be used by the Games and
Amusements Board to cover its expenses and such other purposes authorized under this Act. x x x.
(Emphasis supplied)

Under the distribution of receipts expressly mandated in Section 19 of RA No. 1933, the gross receipts
apportioned to Manila Jockey Club referred only to its own 6 % commission. There is no dispute that
the 5 % share of the horse-owners and jockeys, and the % share of the Games and Amusements
Board, do not form part of Manila Jockey Clubs gross receipts. RA No. 1933 took effect on 22 June 1957,
three years before the Court decided Manila Jockey Club on 30 June 1960.

Even under the earlier law, Manila Jockey Club did not own the entire 12 % commission. Manila Jockey
Club owned, and could keep and use, only 7% of the total bets. Manila Jockey Club merely held in trust
the balance of 5 % for the benefit of the Board of Races and the winning horse-owners and jockeys,
the real owners of the 5 1/2 % share.

The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary of Justice
made prior to RA No. 1933:

There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the bets registered by
the Totalizer. This portion represents its share or commission in the total amount of money it handles
and goes to the funds thereof as its own property which it may legally disburse for its own purposes. The
5% [sic] does not belong to the club. It is merely held in trust for distribution as prizes to the owners of
winning horses. It is destined for no other object than the payment of prizes and the club cannot
otherwise appropriate this portion without incurring liability to the owners of winning horses. It can not
be considered as an item of expense because the sum used for the payment of prizes is not taken from
the funds of the club but from a certain portion of the total bets especially earmarked for that purpose.
(Emphasis supplied)

Consequently, the Court ruled that the 5 % balance of the commission, not being owned by Manila
Jockey Club, did not form part of its gross receipts for purposes of the amusement tax. Manila Jockey
Club correctly

655

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655

Commissioner of Internal Revenue vs. Bank of Commerce

paid the amusement tax based only on its own 7% commission under RA No. 309 and Executive Order
No. 320.
Manila Jockey Club does not support CBCs contention but rather the Commissioners position. The
Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but merely held by
it in trust did not form part of Manila Jockey Clubs gross receipts. Conversely, receipts owned by the
Manila Jockey Club would form part of its gross receipts.34

We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% of gross
receipts tax would result in double taxation. In CIR v. Solidbank Corporation,35 we ruled, thus:

We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The
basis of their imposition may be the same, but their natures are different, thus leading us to a final
point. Is there double taxation?

The Court finds none.

Double taxation means taxing the same property twice when it should be taxed only once; that is, x x x
taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the
taxpayer is taxed twice, when it should be but once. Otherwise described as direct duplicate taxation,
the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and they must be of the same
kind or character.

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is
the passive income generated in the form of interest on deposits and yield on deposit substitutes, while
the subject matter of the GRT is the privilege of engaging in the business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather
than a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can
be taxed for engaging in business and further taxed differently for the income derived therefrom. Akin
to our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different
provisions.

_______________

34 China Banking Corporation v. Court of Appeals, supra.

35 Supra.

656

656

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Bank of Commerce

Second, although both taxes are national in scope because they are imposed by the same taxing
authoritythe national government under the Tax Codeand operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter
in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by the same taxing authority,
within the same jurisdiction, for the same purpose, in different taxing periods, some of the property in
the territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5%
GRT is clearly not double taxation.

IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the Court of Appeals in CA-G.R.
SP No. 52706 and that of the Court of Tax Appeals in CTA Case No. 5415 are SET ASIDE and REVERSED.
The CTA is hereby ORDERED to DISMISS the petition of respondent Bank of Commerce. No costs.

SO ORDERED.

Austria-Martinez (Actg. Chairman), Tinga and Chico-Nazario, JJ., concur.

Puno (Chairman, J.), On Official Leave.

Petition granted, assailed decision set aside and reversed.

Note.The term gross receipts means all amounts received by the prime or principal contractor as
the total price, undiminished by the amount paid to the subcontractor under a subcontract
arrangement, hence, could not be diminished by employers SSS, SIF, and Medicare contributions.
(Protectors Services, Inc. vs. Court of Appeals, 330 SCRA 404 [2000])

o0o

657

Copyright 2017 Central Book Supply, Inc. All rights reserved.

Copyright 2017 Central Book Supply, Inc. All rights reserved. VOL. 309, JUNE 25, 1999

87

__________________

28 Wonder Mechanical Engineering Corporation vs. CTA, 64 SCRA 555.


110

Copyright 2017 Central Book Supply, Inc. All rights reserved. 290

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

G.R. No. 147188. September 14, 2004.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR.,
represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.

Taxation; Tax Avoidance Distinguished from Tax Evasion. Tax avoidance and tax evasion are the two
most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Same; Same; Factors to Determine Tax Evasion.Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due,
or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being evil, in bad faith, willfull, or deliberate and not accidental; and (3) a course of
action or failure of action which is unlawful.

_______________

* FIRST DIVISION.

291

VOL. 438, SEPTEMBER 14, 2004

291

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

Same; Same; Fraud; Meaning of.Fraud in its general sense, is deemed to comprise anything
calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an
undue and unconscionable advantage is taken of another.

Same; Same; Same; The intermediary transaction in this case constitutes one of tax evasion.In a
nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.
Same; Prescriptions; The period within which to assess tax in cases of fraudulent returns, false returns
and failure to file a return is ten years from discovery of the fraud, falsification or omission.Put
differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to
file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification
or omission, as the case may be.

Same; Same; The issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.As stated above, the prescriptive period to assess the correct taxes in case of false
returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the
falsity thereof was claimed to have been discovered only on 8 March 1991. The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive period.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Bunag & Associates for The Estate of Benigno P. Toda, Jr.

292

292

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R.
SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency
income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989,
and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal
Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building
stands for an amount of not less than P90 million.4

_______________

1 Rollo, pp. 22-31. Per Associate Justice Rodrigo V. Cosico, with Associate Justices Ramon A. Barcelona
and Alicia J. Santos concurring.

2 Id., pp. 32-41; CTA Records, 524-533. Per Presiding Judge Ernesto D. Acosta, with Associate Judges
Ramon O. De Veyra and Amancio Q. Saga concurring.

3 Entitled The Estate of Benigno P. Toda, Jr., represented by Special Co-Administrators Lorna Patajo-
Kapunan and Mario Luza Bautista versus Commissioner of Internal Revenue.

4 CA Rollo, p. 73.

293

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Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in
turn, sold the same property on the same day to Royal Match, Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary
public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount of P75,728.021. After crediting
withholding taxes of P254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994,
Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand
letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.11
_______________

5 CA Rollo, pp. 74-78; 88-92.

6 Exh. E, CTA Records, p. 306.

7 Exh. L, CTA Records, p. 340.

8 Exhs. M, M-1, N and N-1, CTA Records, pp. 316-317.

9 Exh. P, CTA Records, pp. 357-365.

10 BIR Records, pp. 448-449.

11 Id., at pp. 446-447.

294

294

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
P79,099,999.22, computed as follows:

Income Tax1989

Net Income per return

P75,987,725.00

Add: Additional gain on sale of real property taxable under ordinary corporate income but were
substituted with individual capital gains
(P200M 100M)

100,000,000.00

Total Net Taxable Income

P175,987,725.00

per investigation

Tax Due thereof at 35%

P 61,595,703.75

Less: Payment already made

1. Per return

P26,595,704.00

2. Thru Capital Gains Tax made by R.A.

Altonaga

10,000,000.00

36,595,704.00

Balance of tax due

P 24,999,999.75

Add: 50% Surcharge


12,499,999.88

25% Surcharge

6,249,999.94

Total

P 43,749,999.57

Add: Interest 20% from 4/16/90-4/30/94 (.808)

35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE

P79,099,999.22

_______________

12 Id., at pp. 474-475.

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Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in the income structure of
the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of
the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to
assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the
difference between the second simulated sale for P200 million and the first simulated sale for P100
million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga,
instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989
with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was
discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the National Internal

_______________

13 Exh. H, CTA Records, pp. 314-315.

14 Exh. G, CTA Records, pp. 311-312.

15 CTA Records, pp. 1-15.

16 CTA Records, pp. 104-111.

17 Id., at pp. 121-128.

296

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of
the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC
should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the
beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of
CIC, should be held liable for the deficiency income tax, especially because the gains realized from the
sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead,
his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-
conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion.
There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law
for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The
assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing
the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for
deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued
by the Commissioner on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by
CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was
a representative, dummy,

_______________

18 CTA Records 535-540.

19 Id., pp. 534, 539.

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Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

and a close business associate of the former, having held his office in a property owned by CIC and
derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation
services rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to
file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary expertise in
matters of taxation, is better situated to determine the correctness, propriety, and legality of the
income tax assessments assailed by the Toda Estate.22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH
INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF
CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of
the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable
of purchasing it. She further points out that the documents themselves prove the fact of

_______________

20 Id., 550; CA Rollo, p. 32.

21 CA Rollo, pp. 7-20.

22 Rollo, p. 30.

298

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the
Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC
and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc.
91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the
same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration
of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion

or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme
used outside of those lawful means and when availed

299

VOL. 438, SEPTEMBER 14, 2004

299

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that
a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith,
willfull, or deliberate and not accidental; and (3) a course of action or failure of action which is
unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior
to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40
million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial
balance26 as other inv.Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and
reflected in RMIs trial balance as other inv.Cibeles Bldg. This would show that the real buyer of the
properties was RMI, and not the intermediary Altonaga.

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one
of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the
assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this
matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of Altonaga was unserved,28 Altonaga having
left for the United

_______________

23 Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000) (hereafter Vitug).

24 DE LEON, FUNDAMENTALS OF TAXATION 53 (1988 ed.), citing Batter, Fraud under Federal Tax Law 15
(1953 ed.).

25 Exh. 3, CTA Records, p. 476.

26 Exh. 6, CTA Records, p. 470.

27 Exh. 1, CTA Records, p. 461.

28 CTA Records, p. 466.


300

300

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the
admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That
admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one
hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is
absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to 5%.29 [Italics supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties,
i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax
planning. Such scheme is tainted with fraud.

Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is
taken of another.30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and

_______________

29 Respondents Memorandum, pp. 4-5; Rollo, pp. 78-79.

30 Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33; 257 SCRA 200, 225 (1996).

301

VOL. 438, SEPTEMBER 14, 2004

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Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to
him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless,
the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each
step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one
person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit
through which to pass title. To permit the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration
of the tax policies of Congress.33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga

_______________

31 See Commissioner of Internal Revenue v. Norton & Harrison Co., 120 Phil. 684, 691; 11 SCRA 714
(1964); Commissioner of Internal Revenue v. Rufino, G.R. No. L-33665-68, 27 February 1987, 148 SCRA
42.

32 VITUG, 138.

33 Commissioner v. Court Holding Co., 324 U.S. 334 (1945).

302

302

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

should be disregarded for income tax purposes.34 The two sale transactions should be treated as a
single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now
27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations.(a) Tax on domestic corporations.A tax is hereby imposed upon
the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or
organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of
the Tax Reform Act of 1997) is

_______________

34 See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v. United States, 435 U.S. 561 (1978);
Commissioner of Internal Revenue v. Court of Appeals, 361 Phil. 103, 126; 301 SCRA 152 (1999) citing
Asmussen v. Court of Internal Relations, 36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen v.
U.S., 192 F Supp 216; Herman v. Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. v. Pope,
239 F2d 881; U.S. v. Fewel, 255 F2d 396.

35 Sec. 34. Capital gains and loses.

...

(h) The provisions of paragraph (b) of this section to the contrary notwithstanding, sales, exchanges or
other dispositions of real property classified as capital assets, including pacto-de-retro sales and other
forms of conditional sale, by individuals, including estates and trusts, shall be taxed at the rate of 5%
based on the gross selling price or the fair market value prevailing at the time of sale, whichever is
higher.

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VOL. 438, SEPTEMBER 14, 2004

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Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of


assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.(a) In the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed,
or a proceeding in court after the collection of such tax may be begun without assessment, at any time
within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance
of in the civil or criminal action for collection thereof . . . .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the
BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the
transactions even prior to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As
earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that
there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not
reflect the true or ac-

_______________

36 Exh. A, CTA Records, p. 296.

304

304

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

tual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade
or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years
from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989 deficiency
income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for

the 1989 deficiency income tax of

Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may not generally be made to answer for the
liabilities of a corporation and vice versa. There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that personal liability of a corporate director,
trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders,
or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

_______________

37 Exh. 2, CTA Records, p. 464.

305

VOL. 438, SEPTEMBER 14, 2004

305

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

4. He is made, by specific provision of law, to personally answer for his corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987,
1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those
reported in its audited financial statement as of December 31, 1989, attached hereto as Annex B and
made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free
from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Italics
Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency
income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation
arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is
hereby rendered ordering

_______________

38 Atrium Management Corporation v. Court of Appeals, G.R. Nos. 109491 and 121794, 28 February
2001, 353 SCRA 23, 31, citing FCY Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1
February 2000, 324 SCRA 270.

39 CTA Records, pp. 200-201.

306

306

SUPREME COURT REPORTS ANNOTATED

Cojuangco, Jr. vs. Palma

respondent Estate of Benigno P. Toda, Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully
paid.

Costs against respondent.

SO ORDERED.

Quisumbing, Ynares-Santiago, Carpio and Azcuna, JJ.,

concur.

Petition granted, assailed decision reversed and set aside.

Note.A taxpayer only has thirty (30) days within which to protest an assessment. (Protectors Services,
Inc. vs. Court of Appeals, 330 SCRA 404 [2000])

o0o

Copyright 2017 Central Book Supply, Inc. All rights reserved. 576

SUPREME COURT REPORTS ANNOTATED


Commissioner of Internal Revenue vs. Marubeni Corporation

G.R. No. 137377. December 18, 2001.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.

Taxation; Tax Amnesties; Section 4 (b) of E.O. No. 41 excepts from income tax amnesty those taxpayers
with income tax cases already filed in court as of the effectivity thereof on 22 August 1986.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It
excepts from income tax amnesty those taxpayers with income tax cases already filed in court as of the
effectivity hereof. The point of reference is the date of effectivity of E.O. No. 41. The filing of income
tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for
a taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in
court against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income
tax amnesty, provided of course he files it on or before the deadline for filing. E.O. No. 41 took effect on
August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch profit remittance
and contractors tax assessments was filed by respondent with the Court of Tax Appeals on September
26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet been
filed in court. Respondent corporation did not fall under the said exception in Section 4 (b), hence,
respondent was not disqualified from availing of the amnesty for income tax under E.O. No. 41.

Same; Same; Branch Profit Remittance Taxes; A branch profit remittance tax is a tax on income.The
same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit
remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal
Revenue Code. In the tax code, this tax falls under Title II on Income Tax. It is a tax on income.
Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.

Same; Same; Statutory Construction; While an amendment is generally construed as becoming a part of
the original act as if it had always been contained therein, it may not be given a retroactive effect unless
it is so provided expressly or by necessary implication and no vested right or obligations or contract are
thereby impaired.By virtue of Section 8 as afore-

_______________

* FIRST DIVISION.

577

VOL. 372, DECEMBER 18, 2001

577

Commissioner of Internal Revenue vs. Marubeni Corporation

quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also
applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has income tax cases already filed in court as of the effectivity
hereof. As to what Executive Order the exception refers to, respondent argues that because of the
words income and hereof, they refer to Executive Order No. 41. In view of the amendment
introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O. No. 41 and its date of
effectivity. The general rule is that an amenda-tory act operates prospectively. While an amendment is
generally construed as becoming a part of the original act as if it had always been contained therein, it
may not be given a retroactive effect unless it is so provided expressly or by necessary implication and
no vested right or obligations of contract are thereby impaired.

Same; Same; Same; Where a statute amending a tax law is silent as to whether it operates retroactively,
the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject
to tax under the original actevery case of doubt must be resolved against its retroactive effect.There
is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the
original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should
apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not
merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not
covered in the first. It has been held that where a statute amending a tax law is silent as to whether it
operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past
transactions not subject to tax under the original act. In an amendatory act, every case of doubt must be
resolved against its retroactive effect.

Same; Same; Words and Phrases; A tax amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a
revenue or tax lawit partakes of an absolute forgiveness or waive by the government of its right to
collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.
E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver by the government of
its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean

578

578

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the
terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. For the right of taxation is inherent in government. The State
cannot strip itself of the most essential power of taxation by doubtful words. He who claims an
exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of
organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the
intent of the legislature, that doubt must be resolved in favor of the state.
Same; Same; Same; The term income tax cases in Section 4 (b) of E.O. No. 41, as amended by E.O. No.
64, should be read to refer to estate and donors taxes and taxes on business while the word hereof,
to E.O. No. 64.In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term income tax cases should be read as to
refer to estate and donors taxes and taxes on business while the word hereof, to E.O. No. 64. Since
Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No.
64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November
17, 1986.

Same; Same; Same; An independent contractor is a person whose activity consists essentially of the sale
of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such contractors or their employees.Under the
afore-quoted provision, an independent contractor is a person whose activity consists essentially of the
sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls
for the exercise or use of the physical or mental faculties of such contractors or their employees. The
word contractor refers to a person who, in the pursuit of independent business, undertakes to do a
specific job or piece of work for other persons, using his own means and methods without submitting
himself to control as to the petty details.

Same; Same; Same; A contractors tax is a tax imposed upon the privilege of engaging in businessit is
generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather
than a sale on products, and is directly collectible from the person exercising the privilege.A
contractors tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature
of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on

579

VOL. 372, DECEMBER 18, 2001

579

Commissioner of Internal Revenue vs. Marubeni Corporation

products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can
be levied by the taxing authority only when the acts, privileges or business are done or performed within
the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.

Same; Same; Services for the design, fabrication, engineering and manufacture of the materials and
equipment made and completed in Japan, thus rendered outside the taxing jurisdiction of the
Philippines, are not subject to contractors tax.Clearly, the service of design and engineering, supply
and delivery, construction, erection and installation, supervision, direction and control of testing and
commissioning, coordination . . . of the two projects involved two taxing jurisdictions. These acts
occurred in two countriesJapan and the Philippines. While the construction and installation work were
completed within the Philippines, the evidence is clear that some pieces of equipment and supplies
were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats
and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished products when shipped to the Philippines.
The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not finished products when shipped to the
Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan.
All services for the design, fabrication, engineering and manufacture of the materials and equipment
under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside
the taxing jurisdiction of the Philippines and are therefore not subject to contractors tax.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Litigation & Prosecution Division for petitioner.

Sycip, Salazar, Hernandez & Gatmaitan for respondent Marubeni Corp.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15,
1999 of the Court of

580

580

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of the Court of Tax
Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal Revenue to desist
from collecting the 1985 deficiency income, branch profit remittance and contractors taxes from
Marubeni Corporation after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business. It is
duly registered to engage in such business in the Philippines and maintains a branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority
to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal
year ending March 1985. In the course of the examination, petitioner found respondent to have
undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984.
One of the contracts was with the National Development Company (NDC) in connection with the
construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer
Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial
Development Estate.

On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency income,
branch profit remittance, contractors and commercial brokers taxes. Respondent questioned this
assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive
of surcharge and interest, were as follows:

581

VOL. 372, DECEMBER 18, 2001

581

Commissioner of Internal Revenue vs. Marubeni Corporation

I. DEFICIENCY INCOME TAX

FY ended March 31, 1985

Undeclared gross income (Philphos

and and NDC construction projects) ...............

P967,269,811.14

Less: Cost and expenses (50%) ..................................

483,634,905.57

Net undeclared income ..............................................

483,634,905.57

Income tax due thereon .............................................

169,272,217.00

Add: 50% surcharge ...................................................

84,636,108.50

20% int. p.a. fr. 7-15-85 to

to 8-15-86 ................................................

36,675,646.90
TOTAL AMOUNT DUE ............................................

P290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

FY ended March 31, 1985

Undeclared net income from

Philphos and NDC

construction projects.........................................

P483,634,905.57

Less: Income tax thereon ..........................................

169,272,217.00

Amount subject to Tax ..............................................

314,362,688.57

Tax due thereon .........................................................

47,154,403.00

Add: 50% surcharge...................................................

23,577,201.50

20% int. p.a. fr. 4-26-85

to 8-15-86 ...........................................................

12,305,360.66

TOTAL AMOUNT DUE ............................................

P 83,036,965.16

III. DEFICIENCY CONTRACTORS TAX

FY ended March 31, 1985

Undeclared gross receipts/gross income from

Philphos and NDC construction projects .......

P967,269,811.14

Contractors tax due thereon (4%) ...............................

38,690,792.00

Add: 50% surcharge for non-declaration .....................


19,345,396.00

25% surcharge for late payment ...................................

9,672,698.00

Sub-total .......................................................................

67,708,886.00

Add: 20% int. p.a. fr. 4-21-85 to 8-15-86.......................

17,854,739.46

TOTAL AMOUNT DUE .............................................

P 85,563,625.46

582

582

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

IV. DEFICIENCY COMMERCIAL BROKERS TAX

FY ended March 31, 1985

Undeclared share from commission income

(denominated as subsidy from Home

Office)................................................................

P 24,683,114.50

Tax due thereon ...........................................................

1,628,569.00

Add: 50% surcharge for non-declaration .....................

814,284.50

25% surcharge for late payment ..................................

407,142.25

Sub-total .......................................................................

2,849,995.75

Add: 20% int. p.a. fr. 4-21-85 to 8-15-86 ......................


751,539.98

TOTAL AMOUNT DUE ..............................................

P 3,600,535.68

The 50% surcharge was imposed for your clients failure to report for tax purposes the aforesaid taxable
revenues while the 25% surcharge was imposed because of your clients failure to pay on time the above
deficiency percentage taxes.

xxx xxx x x x.1

Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the
gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and installation of facilities in the Philippines, the
entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue
taxes. The assessment letter further stated that the same was petitioners final decision and that if
respondent disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty
(30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The
first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and
contractors tax assessments in petitioners assessment letter. The second, CTA Case No. 4110,
questioned the deficiency commercial brokers assessment in the same letter.

_______________

1 Assessment Letter of the Commissioner of Internal Revenue, Rollo, pp. 73-74; also marked as Exhibit
C Pet. and Exhibit 2 Resp. Folder No. 11, BIR Records, pp. 2072-2076.

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Commissioner of Internal Revenue vs. Marubeni Corporation

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty covering unpaid
income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of
the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his
net worth as of December 31, 1985; (b) file a certified true copy of his statement declaring his net worth
as of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record
exists, file a statement of said net worth subject to verification by the BIR; and (c) file a return and pay a
tax equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980 to December
31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30,
1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal Year
(FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and respondent paid
the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981
and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5,
1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.)
No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O.
No. 643 included estate and donors taxes under Title III and the tax on business under Chapter II, Title V
of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax
liabilities, and the period within which the taxpayer could avail of the amnesty was

_______________

2 Entitled Declaring a One-Time Tax Amnesty Covering Unpaid Income Taxes for the Years 1981 to
1985.

3 Entitled Declaring a One-Time Tax Amnesty Covering Income Taxes, Estate and Donors Taxes Under
Title III, And The Tax on Business Under Chapter II, Title V, of the National Internal Revenue Code, As
Amended, For the Years 1981-1985.

584

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

extended to December 15, 1986. Those taxpayers who already filed their amnesty return under E.O. No.
41, as amended, could avail themselves of the benefits, immunities and privileges-under the new E.O. by
filing an amended return and paying an additional 5% on the increase in net worth to cover business,
estate and donors tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O. No. 95 dated
December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O.
No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the
increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed
cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:

WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST from
collecting the 1985 deficiency taxes it had assessed against petitioner and the same are deemed
considered [sic] CANCELLED and WITHDRAWN by reason of the proper availment by petitioner of the
amnesty under Executive Order No. 41, as amended.4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of
Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court
of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals
which ruled that herein respondents deficiency tax liabilities were extinguished upon respondents
availment of tax amnesty under Executive Orders Nos. 41 and 64.

_______________

4 CTA Decision, Annex B to Petition, Rollo, p. 45.

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Commissioner of Internal Revenue vs. Marubeni Corporation

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractors
taxes assessed by petitioner.5

The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of
E.O. Nos. 41 and 64. There are three (3) types of taxes involved hereinincome tax, branch profit
remittance tax and contractors tax. These taxes are covered by the amnesties granted by E.O. Nos. 41
and 64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties
because the latter falls under the exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder,
viz.:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b)Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as of the
effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended,
insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity
hereof as a result of information furnished under Section 316 of the National Internal Revenue Code, as
amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter
Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended.

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA
Case No. 4109 had already been

_______________

5 Petition, p. 6; Rollo, p. 15.

586

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

filed and was pending before the Court of Tax Appeals. Respondent therefore fell under the exception in
Section 4 (b) of E.O. No. 41.

Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It
excepts from income tax amnesty those taxpayers with income tax cases already filed in court as of the
effectivity hereof. The point of reference is the date of effectivity of E.O. No. 41. The filing of income
tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for
a taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in
court against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income
tax amnesty, provided of course he files it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income,
branch profit remittance and contractors tax assessments was filed by respondent with the Court of Tax
Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No.
4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in
Section 4 (b), hence, respondent was not disqualified from availing of the amnesty for income tax under
E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit
remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal
Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a tax on income.
Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractors tax assessment and respondents availment of
the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate
and donors taxes and tax on business. Estate and donors taxes fall under Title III of the Tax Code while
business

_______________

6 1984 and 1986 NIRC.

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Commissioner of Internal Revenue vs. Marubeni Corporation

taxes fall under Chapter II, Title V of the same. The contractors tax is provided in Section 205, Chapter II,
Title V of the Tax Code; it is defined and imposed under the title on business taxes, and is therefore a tax
on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage
of the amnesty for business, estate and donors taxes. Instead, Section 8 of E.O. No. 64 provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent
with this amendatory Executive Order shall remain in full force and effect.

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with
the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to
amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision
excepts from tax amnesty coverage a taxpayer who has income tax cases already filed in court as of the
effectivity hereof. As to what Executive Order the exception refers to, respondent argues that because
of the words income and hereof, they refer to Executive Order No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O.
No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively.9
While an amendment is generally construed as becoming a part of the original act as if it had always
been contained therein,10 it may not be given a retroactive effect unless it is so
_______________

7 Title V, 1984 and 1986 NIRC. Business taxes were replaced in 1988 by the Value-Added Tax under
Executive Order No. 273.

8 Comment, pp. 14-15; Rollo, pp. 99-100.

9 Agpalo, Statutory Construction, p. 395 (1998); Sutherland, Statutory Construction, vol. 1A (5th ed.)
Sec. 22.36, p. 304 (1992-1994).

10 People v. Garcia, 85 Phil. 651, 655 (1951); Sutherland, supra, Sec. 22.35.

588

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

provided expressly or by necessary implication and no vested right or obligations of contract are thereby
impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No.
41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does
not merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not
covered in the first.12 It has been held that where a statute amending a tax law is silent as to whether it
operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past
transactions not subject to tax under the original act.13 In an amendatory act, every case of doubt must
be resolved against its retroactive effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate.16 A tax amnesty, much like a

_______________

11 Buyco v. Philippine National Bank, 112 Phil. 588, 592; 2 SCRA 682 (1961); Pacia v. Kapisanan ng mga
Manggagawa sa MRR Co., 99 Phil. 45, 48 (1956); Agpalo, supra, pp. 370, 395 (1998).

12 A supplementary act is an amendatory act that supplies a deficiency, adds to, or completes or
extends that which is already in existence without changing or modifying the originalSutherland,
supra, Secs. 22.24 and 22.01.
13 Collector of Internal Revenue v. La Tondea, Inc., 115 Phil. 841, 846-847; 5 SCRA 665 (1962).

14 Montilla v. Agustinian Corp., 24 Phil. 220, 222 (1913); Agpalo, supra, at 370, 395.

15 Republic v. Intermediate Appellate Court, 196 SCRA 335, 340 (1991) citing Commissioner of Internal
Revenue v. Botelho Corporation & Shipping Co., Inc., 20 SCRA 487 (1967).

16 Ibid.

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Commissioner of Internal Revenue vs. Marubeni Corporation

tax exemption, is never favored nor presumed in law.17 If granted, the terms of the amnesty, like that of
a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.18 For the right of taxation is inherent in government. The State cannot strip itself of the most
essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed
to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be
resolved in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be
construed strictly against the taxpayer. The term income tax cases should be read as to refer to estate
and donors taxes and taxes on business while the word hereof, to E.O. No. 64. Since Executive Order
No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are
concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17,
1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent
filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the
exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax
amnesty granted therein.

It is respondents other argument that assuming it did not validly avail of the amnesty under the two
Executive Orders, it is still not liable for the deficiency contractors tax because the income from the
projects came from the Offshore Portion of the contracts. The two contracts were divided into two
parts, i.e., the Onshore

_______________

17 Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152, 171-172 (1999); People v.
Castaneda, 165 SCRA 327, 341 (1988).
18 People v. Castaeda, supra, at 341; E. Rodriguez, Inc. v. Collector of Internal Revenue, 28 SCRA 1119,
1127-1128 (1969); Commissioner of Internal Revenue v. A.D. Guerrero, 21 SCRA 180, 183-185 (1967);
Asiatic Petroleum v. Llanes, 49 Phil. 466, 471 (126).

19 Asiatic Petroleum v. Llanes, supra, at 471-472.

590

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

Portion and the Offshore Portion. All materials and equipment in the contract under the Offshore
Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.

Before going into respondents arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment
arm of the Philippine Government, established the Philphos to engage in the large-scale manufacture of
phosphatic fertilizer for the local and foreign markets.20 The Philphos plant complex which was
envisioned to be the largest phosphatic fertilizer operation in Asia, and among the largest in the world,
covered an area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient
and integrated wharf/port complex at the Leyte Industrial Development Estate. The wharf/port complex
was intended to be one of the major facilities for the industrial plants at the Leyte Industrial
Development Estate. It was to be specifically adapted to the site for the handling of phosphate rock,
bagged or bulk fertilizer products, liquid materials and other products of Philphos, the Philippine
Associated Smelting and Refining Corporation (Pasar),21 and other industrial plants within the Estate.
The bidding was participated in by Marubeni Head Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corpora-

_______________

20 Exh. AA, Project Background, Philippine Phosphatic Fertilizer Corporation, Folder No. 5, CTA Case
No. 4109.

21 Pasar is a copper smelter plant whose sulfuric acid by-product is used in manufacturing fertilizers
Exhibit AA-1 Pet, Folder No. 5, CTA Case No. 4109.
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Commissioner of Internal Revenue vs. Marubeni Corporation

tion.22 The Port Development Project would consist of a wharf, berths, causeways, mechanical and
liquids unloading and loading systems, fuel oil depot, utilities systems, storage and service buildings,
offsite facilities, harbor service vessels, navigational aid system, fire-fighting system, area lighting,
mobile equipment, spare parts and other related facilities.23 The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and know-
how,24 and:

x x x the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Wharf-Port Complex as set forth
in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of
a part or the whole of the Wharf/Port Complex through the Owner, with the design and construction of
other facilities around the site. The scope of works shall also include any activity, work and supply
necessary for, incidental to or appropriate under present international industrial port practice, for the
timely and successful implementation of the object of this Contract, whether or not expressly referred
to in the abovementioned Annex I.25

The contract price for the wharf/port complex was 12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen
Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as the
Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen
credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by suppliers credit in
favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of
Finance of Japan extended by the

_______________

22 Exhibit J Pet, Wharf/Port Complex, Turn-Key Contract for Leyte Industrial Estate Port Project
Between the National Development Company [sic] and Marubeni Corporation (hereinafter to be
referred to as the NDC Contract), Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

23 Exhibit J Pet, NDC Contract, Article 1, supra.

24 Exhibit J Pet, NDC Contract, Article 2.1, supra.

25 Scope of Work, Exhibit J Pet, NDC Contract, Article 2.2, supra.

592
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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

Japanese government as assistance to foreign governments to promote economic development.26 The


OECF extended to the Philippine Government a loan of 7,560,000,000.00 for the Leyte Industrial Estate
Port Development Project and authorized the NDC to implement the same.27 The other type of
financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-Import
Bank of Japan to advance payment to its subcontractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were
further broken down and subdivided according to the materials, equipment and services rendered on
the project. The price breakdown and the corresponding materials, equipment and services were
contained in a list attached as Annex III to the contract.29

A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent
corporation entered into an agreement entitled Turn-Key Contract for Ammonia Storage Complex
Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation.30 The object of the
contract was to establish and place in operating condition a modern, reliable, efficient and integrated
ammonia storage complex adapted to the site for the receipt and storage of liquid anhydrous

_______________

26 Exhibit JJJ Pet, Exchange of Notes dated June 9, 1981 by and between the Japanese and Philippine
Governments, Folder No. 8, CTA Case No. 4109 and CTA Case No. 4110.

27 Exhibit JJJ-1 Pet, Loan Agreement for the Leyte Industrial Estate Port Development Project,
Folder No. 8, CTA Case No. 4109 and CTA Case No 4110.

28 Takeshi Hojo, TSN of March 23, 1990, pp. 17-20.

29 Exhibit J-2 Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract
Price, Annex III to NDC Contract, Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

30 Exhibit I Pet, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.

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Commissioner of Internal Revenue vs. Marubeni Corporation


ammonia31 and for the delivery of ammonia to an integrated fertilizer plant adjacent to the storage
complex and to vessels at the dock.32 The storage complex was to consist of ammonia storage tanks,
refrigeration system, ship unloading system, transfer pumps, ammonia heating system, fire-fighting
system, area lighting, spare parts, and other related facilities.33 The scope of the works required for the
completion of the ammonia storage complex covered the supply, including grants of licenses and
transfer of technology and know-how,34 and:

x x x the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Ammonia Storage Complex as set
forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the
use of a part or the whole of the Ammonia Storage Complex through the Owner with the design and
construction of other facilities at and around the Site. The scope of works shall also include any activity,
work and supply necessary for, incidental to or appropriate under present international industrial
practice, for the timely and successful implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I.35

The contract price for the project was 3,255,751,000.00 and P17,406,000.00. Like the NDC contract,
the price was divided into three portions. The price in Japanese currency was broken down into the
Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine currency was classified
as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by suppliers credit
from the Export-Import Bank of Japan. The

_______________

31 Ammonia is one of the raw materials for fertilizer productionHojo, TSN of March 21, 1990, pp. 20-
21.

32 Exhibit I Pet, Article 2.1, Turn-key Contract for Ammonia Storage Complex Between Philippine
Phosphate Fertilizer Corporation and Marubeni Corporation, (hereinafter referred to as Philphos
Contract), supra.

33 Exhibit I Pet, Article I, Ammonia Storage Complex, Philphos Contract, supra.

34 Exhibit I Pet, Article 2.1, Philphos Contract, supra.

35 Scope of Work, Exhibit I Pet, Article 2.2, Philphos Contract, supra.

594

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SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation


price stated in the three portions were further broken down into the corresponding materials,
equipment and services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III.36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the
two contracts corresponds to the two parts into which the contracts were classifiedthe Foreign
Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I
corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the Philippine Pesos Portion
correspond to the Philippine Onshore Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractors tax on
the income from the two projects. In fact respondent claims, which petitioner has not denied, that the
income it derived from the Onshore Portion of the two projects had been declared for tax purposes and
the taxes thereon already paid to the Philippine government.39 It is with regard to the gross receipts
from the Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments
subject of this case arose. Petitioner argues that since the two agreements are turn-key,40 they call for
the supply of both materials and services to the client, they are contracts for a piece of work and are
indivisible. The situs of the two projects is in the Philippines, and the materials provided and services
rendered were all done and completed within the territorial jurisdiction of the Phil-

_______________

36 Exhibit 1-2 Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract
Price, Annex III to Philphos Contract, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.

37 Hojo, TSN of March 22, 1990, pp. 6-7.

38 Id.

39 Footnote No. 2, Comment, p. 16; Rollo, p. 19.

40 A turn-key job is defined as a job or contract in which the contractor agrees to complete the work
of building and installation to the point of readiness for operation or occupancyWebsters Third New
International Dictionary of the English Language, Unabridged (1993).

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Commissioner of Internal Revenue vs. Marubeni Corporation

ippines.41 Accordingly, respondents entire receipts from the contracts, including its receipts from the
Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor
and materials should be subjected to contractors tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co. 42
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:

Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors tax of four
percent of the gross receipts is hereby imposed on proprietors or operators of the following business
establishments and/or persons engaged in the business of selling or rendering the following services for
a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;

xxx xxx xxx

(q) Other independent contractors. The term independent contractors includes persons (juridical or
natural) not enumerated above (but not including individuals subject to the occupation tax under the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. It does not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
Region.

xxx xxx x x x.43

_______________

41 Exhibit 4 Resp, Memorandum of Head Revenue Examiner to the Commissioner of Internal Revenue,
BIR Records, Folder No. 11, CTA Case No. 4109 and CTA Case No. 4110; Exhibit 2 Resp, Letter
Assessment of Commissioner Tan, Rollo, pp. 73-77.

42 64 SCRA 590 (1975).

43 1984 NIRC; Sec. 170, 1986 NIRC. The contractors tax was replaced in 1988 by the Value-Added Tax
pursuant to Executive Order No. 273.

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Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. The word contractor refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his own means and methods
without submitting himself to control as to the petty details.44

A contractors tax is a tax imposed upon the privilege of engaging in business.45 It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products;46 and is directly collectible from the person exercising the privilege.47 Being an excise tax, it
can be levied by the taxing authority only when the acts, privileges or business are done or performed
within the jurisdiction of said authority.48 Like property taxes, it cannot be imposed on an occupation or
privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of
the two subject contracts.

_______________

44 Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590, 597-598
(1975).

45 Section 205 in relation to Section 188, 1984 NIRC; Aranas, National Internal Revenue Code, vol. 2, p.
134 (1983).

46 Commissioner of Internal Revenue v. Court of Tax Appeals and Avecilla Building Corp., 134 SCRA 49,
54 (1985); Celestino & Co. v. Collector, 99 Phil. 841, 843 (1956); E. Gonzales and C. Gonzales, National
Internal Revenue Code, p. 527 (1984).

47 Gonzales and Gonzales, National Internal Revenue Code, p. 456 (1986).

48 Iloilo Bottlers, Inc. v. City of Iloilo, 164 SCRA 607, 615 (1988); Commissioner of Internal Revenue v.
British Overseas Airways Corp., 149 SCRA 395, 410 (1987).

49 Gulf Refining Co. v. City of Knoxville, 136 Tenn 23, 188 SW 798, 799 (1916); Robinson v. City of
Norfolk, 108 Va. 14, 60 SE 762, 763-764, 15 LRA (N.S.) 294 (1908)a license tax for revenue cannot be
imposed by a city upon a circus exhibiting beyond its territorial limits; see also Cooley, The Law of
Taxation, vol. 4, Secs. 1675, 1683; Cooley, vol. 1, Secs. 46, 94-95 (1924).

597

VOL. 372, DECEMBER 18, 2001

597

Commissioner of Internal Revenue vs. Marubeni Corporation

Respondent, however, argues that the work therein were not all performed in the Philippines because
some of them were completed in Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be made
and the works and services to be performed by respondent are indeed classified into two. The first part,
entitled Breakdown of Japanese Yen Portion I provides:

Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of
materials and equipment which will be shipped to Leyte as units and lots. This subdivision of price is to
be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the Contract. The
agreed subdivision of Japanese Yen Portion I is as follows:

xxx xxx x x x.50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II
and the Philippine Pesos Portion enumerate other materials and equipment and the construction and
installation work on the project. In other words, the supplies for the project are listed under Portion I
while labor and other supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi
Hojo, then General Manager of the Industrial Plant Section II of the Industrial Plant Department of
Marubeni Corporation in Japan who supervised the implementation of the two projects, testified that all
the machines and equipment listed under Japanese Yen Portion I in Annex III were manufactured in
Japan.51 The machines and equipment were designed, engineered and fabricated by Japanese firms
sub-contracted by Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and

_______________

50 Exhibit J-2 Pet, Annex III to NDC Contract, supra; Exhibit 1-2 Pet, Annex III to Philphos Contract,
supra.

51 Hojo, TSN of March 22, 1990, pp. 11, 15.

52 Exhibits J-8-a to J-8-d Pet, Vendors List, Chapter 1.14, Leyte Industrial Estate Port Development
Project, Technical Appendices to the Contract, pp. 1-127 to 1-131, Folder No. 2, CTA Case No. 4109;
Exhibits I-13-a to 1-13-i Pet, Vendors List for Main Items, Chapter II, Technical

598

598

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

supplies to Kawasaki Steel Corporation which did the design, fabrication, engineering and manufacture
thereof;53 Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided
the rubber fenders of the mobile equipment;54 and B.S. Japan for the supply of radio equipment.55 The
engineering and design works made by Kawasaki Steel Corporation included the lay-out of the plant
facility and calculation of the design in accordance with the specifications given by respondent.56 All
subcontractors and manufacturers are Japanese corporations and are based in Japan and all engineering
and design works were performed in that country.57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2)
sets of ship unloader and loader; several boats and mobile equipment.58 The ship unloader unloads
bags or bulk products from the ship to the port while the ship loader loads products from the port to the
ship. The unloader and loader are big steel structures on top of each is a large crane and a compartment
for operation of the crane. Two sets of these equipment were completely manufactured in Japan
according to the specifications of the project. After manufacture, they were

_______________

Appendices for Leyte Fertilizer Project, Ammonia Storage Complex, pp. II-5.7-1 to II-5.7-9, Folder No. 1,
CTA Case No. 4109.

53 Hojo, TSN of March 22, 1990, p. 34; Kenjiro Yamakawa, TSN of Deposition Upon Oral Examination,
January 31, 1992, p. 6; Exhibit OO Pet, Plant Supply Contract between Marubeni and Kawasaki Steel
Corporation for NDC Project, Folder No. 6, CTA Case No. 4109; Exhibit BBB-1 Pet, Plant Supply
Contract between Marubeni and Kawasaki Steel Corporation for Philphos Project, Folder No. 7, CTA Case
No. 4109. Both contracts allow Marubeni to procure materials and equipment from an approved list of
sub-contractors without need of further approval from the ownerArticle 8.4, Philphos contract; Article
8.4, NDC contract, supra.

54 Hojo, TSN of March 22, 1990, p. 34.

55 Exhibit AAA-1 to AAA-1-b Pet, Folder No. 7, CTA Case No. 4109.

56 Hojo, TSN of March 21, 1990, p. 32.

57 Hojo, TSN of March 21, 1990, pp. 33-34.

58 Exhibit J-2 Pet, Annex III to NDC Contract, pp. 356-363, supra.

599

VOL. 372, DECEMBER 18, 2001

599

Commissioner of Internal Revenue vs. Marubeni Corporation

rolled on to a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader and loader
were rolled off the barge and pulled to the pier to the spot where they were installed.60 Their
installation simply consisted of bolting them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in
Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four
sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and completed in
Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port. These pieces of
equipment were all on wheels and self-propelled. Once unloaded at the port, they were ready to be
driven and perform what they were designed to do.62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the
NDC contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a
causeway, a warehouse, a transit shed, an administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams and other steel structures,
navigational and communication as well as electrical equipment.63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent were
the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were manufactured
and cut in Japan according to drawings and specifications and then shipped to Isabel. Once there,
respondents employees put the steel plates together to form the storage tank. As to

_______________

59 Exhibit FF Pet, Photograph of ship unloader and loader on a barge, Folder No. 5, CTA Case No.
4109.

60 Hojo, TSN of March 22, 1990, pp. 11-12; Exhibit FF-1 Pet, Photograph of roll off works for ship
unloader, Folder No. 5, CTA Case No. 4109.

61 Hojo, TSN of March 22, 1990, pp. 11-12; TSN of March 23, 1990, pp. 39-40.

62 Hojo, TSN of March 23, 1990, pp. 38-39; Exhibits II and JJ Pet, Photographs of mobile equipment,
Folder No. 5, supra.

63 Annex III to NDC Contract, pp. 357-363, Exhibit J-2 Pet, Folder No. 2, CTA Case No. 4109 and CTA
Case No. 4110.

64 Hojo, TSN of March 23, 1990, pp. 42-43.

600

600

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

the refrigeration units, they were completed and assembled in Japan and thereafter shipped to Isabel.
The units were simply installed there.65 Annex III to the Philphos contract lists down under the Japanese
Yen Portion I the materials for the ammonia storage tank, incidental equipment, piping facilities,
electrical and instrumental apparatus, foundation material and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in Japan prior
to shipment in accordance with the terms of the contracts.66 The inspection was made by
representatives of respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services of
a private consultancy firm to verify the correctness of the tests on the machines and equipment67 while
Philphos sent a representative to Japan to inspect the storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant
General Manager and Manager of the Steel Plant Marketing Department, Engineering & Construction
Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the two projects
provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such
payments were duly issued by Kawasaki in Japanese and English.69 Yashima & Co. Ltd. and B.S. Japan
were likewise paid by Marubeni in Japan.70

_______________

65 Hojo, TSN of March 23, 1990, pp. 42-43.

66 Exhibit J Pet, Article 11, pp. 45-47, NDC Contract, supra; Exhibit I Pet, Article 11.5, pp. 43-44,
Philphos Contract, supra.

67 Exhibit KK Pet, NDC Board Resolution appointing Pacific Consultants, Intl., Folder No. 3, CTA Case
No. 4109.

68 Exhibit LL Pet, letter of Philphos VP appointing a representative to inspect storage equipment,


Folder No. 5, CTA Case No. 4109.

69 Exhibits VV, VV-1 to VV-50-a Pet, Folder No. 7, CTA Case No. 4109; Exhibits CCC-1 to CCC-27-
a Pet, Folder No. 6, CTA Case No. 4109.

70 Hisatsugu Yoshida, TSN of September 20, 1991, pp. 15-33; Exhibits VV Pet, ZZ, ZZ-2-d, AAA
Pet, Folder No. 6, CTA Case No. 4109.

601

VOL. 372, DECEMBER 18, 2001

601

Commissioner of Internal Revenue vs. Marubeni Corporation

Between Marubeni and the two Philippine corporations, payments for all materials and equipment
under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC,
through the Philippine National Bank, established letters of credit in favor of respondent through the
Bank of Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with the
Bank of Tokyo. The Bank of Tokyo, upon respondents submission of pertinent documents, released the
amount in the letters of credit in favor of respondent and credited the amount therein to respondents
account within the same bank.71
Clearly, the service of design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination . . .72 of the
two projects involved two taxing jurisdictions. These acts occurred in two countriesJapan and the
Philippines. While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed and engineered
in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project
and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were
already finished products when shipped to the Philippines. The other construction supplies listed under
the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental
apparatus, these were not finished products when shipped to the Philippines. They, however, were
likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I
were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to contractors tax.

_______________

71 Yoshida, TSN of Deposition Upon Oral Interrogatories, January 27, 1993, pp. 11-12; Exhibits JJJ-3 to
JJJ-17-c Pet, Folder No. 10, CTA Case No. 4109.

72 Scope of Work, Exhibit J Pet, Article 2.1, NDC Contract; Exhibit I Pet, Article 2.1 Philpos
Contract.

602

602

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Marubeni Corporation

Contrary to petitioners claim, the case of Commissioner of Internal Revenue v. Engineering Equipment
& Supply Co 73 is not in point. In that case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed centralized airconditioning systems for clients
who contracted its services. Engineering, however, did not manufacture all the materials for the
airconditioning system. It imported some items for the system it designed and installed.74 The issues in
that case dealt with services performed within the local taxing jurisdiction. There was no foreign
element involved in the supply of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Kapunan, Pardo and Ynares-Santiago, JJ., concur.
Judgment affirmed.

Notes.Rulings and circulars, rules and regulations promulgated by the Commissioner of Internal
Revenue would have no retroactive application if to so apply them would be prejudicial to the
taxpayers. (Commissioner of Internal Revenue vs. Court of Appeals, 267 SCRA 557 [1997])

Income tax returns, being public documents, until controverted by competent evidence, are prima facie
correct with respect to the entries therein. (Ropali Trading Corporation vs. National Labor Relations
Commission, 296 SCRA 309 [1998])

o0o

_______________

73 64 SCRA 590 (1975).

74 Such as refrigeration compressors in complete set, heat exchangers or coilsId., at 598.

603

Copyright 2017 Central Book Supply, Inc. All rights reserved. [No. 18316. September 23, 1922]

LUZON STEVEDORING COMPANY, plaintiff and appellee, vs. WENCESLAO TRINIDAD, Collector of Internal
Revenue, defendant and appellant.

1.INTERNAL REVENUE; CONTRACTOR, DEFINED.ln a general sense every person who enters into a
contract may be called a contractor, yet the word, for want of a better one, has come to be

804

804

PHILIPPINE REPORTS ANNOTATED

Luzon Stevedoring Co. vs. Trinidad

used with special reference to a person who, in the pursuit of an independent business, undertakes to
do a specific piece of job or work for other persons, using his own means and methods without
submitting himself to control as to the petty details. The true test of a "contractor" would seem to be
that he renders service in the course of an independent occupation representing the will of his employer
only as to the result of his work, and not as to the means by which it is accomplished.

2.WORDS AND PHRASES, DEFINITION OF.The definition adopted by lexicographers cannot always be
adopted as a correct meaning for statutory words and phrases. The intention of the legislature and the
object which it intended to attain must be taken into consideration for the purpose of determining the
meaning of words and phrases in a statute, rather than the definition of lexicographers.

3.INTERNAL REVENUE LAWS, INTERPRETATION OF.Revenue laws imposing taxes on business must be
strictly construed in favor of the citizen. In construing a word. in a revenue statute susceptible of two or
more meanings, the court will adopt that interpretation most in accord with the manifest purpose of the
statute as gathered from the text. Where a particular word is obscure or of doubtful meaning, taken by
itself, its obscurity or doubt may be removed by reference to associate words.

APPEAL from a judgment of the Court of First Instance of Manila. Concepcion, J.

The facts are stated in the opinion of the court.

Attorney-General Villa-Real for appellant.

Fisher & DeWitt and A. M. Opisso for appellee.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the City of Manila on the 18th day of May,
1921. Its -purpose was to recover of the defendant as Internal Revenue Collector, the sum of 2,422.81,
which sum had been paid by the plaintiff to the defendant under protest. The defendant presented a
demurrer to the complaint, which was overruled, and later answered. The answer contained a general
and special defense. In his special defense the defendant alleged that during the first quarter of the year
1921 the plaintiff was engaged in business as a con-

805

VOL. 43, SEPTEMBER 23, 1922

805

Luzon Stevedoring Co. vs. Trinidad

tractor, its gross receipts from said business during said quarter amounting to P242,281.33, and that the
defendant, under the provisions of section 1462 of Act No. 2711, levied and assessed on the above-
mentioned amount the percentage tax amounting to P2,422.81, which the plaintiff paid on April 18,
1921, under protest, this protest having been duly overruled by the defendant.

Upon the issue thus presented, the Honorable Pedro Concepcion, judge, for the reasons given in his
decision, rendered a judgment in favor of the plaintiff and against the defendant for the said sum of
P2,422.81, without any finding as to costs or interest. From that judgment the defendant appealed. The
appellant contends that the lower court committed an error in holding that the plaintiff is not a
contractor and in rendering a judgment in favor of the plaintiff.

From an examination of the evidence adduced during the trial of the cause and from the agreement of
the parties, it appears that the plaintiff is and was a corporation duly organized under the laws of the
Philippine Islands and doing business in the City of Manila; that it was engaged in the stevedoring
business in said city, said business consisting of loading and unloading cargo f rom vessels in port, at
certain rates of charge per unit of cargo; that all the work done by it is conducted under the direct
supervision of the officers of the ships and under the instruction given to plaintiff's men by the captain
and officers of said ships; that no liability attaches to the plaintiff for the improper loading or unloading
of vessels, the captain being responsible for said work; that the captain answers for all the cargo placed
on board and for the manner in which said cargo is loaded; that, while it is true that the plaintiff
undertakes to work in the loading or unloading of cargo from any vessel in port, yet it always does the
work under the direct supervision of the officers of the vessel; that said supervision is so effective that,
while the loading is made, plaintiff's laborers are under the direct control of the officers of the ship; and
that said supervision is so direct, that no

806

806

PHILIPPINE REPORTS ANNOTATED

Luzon Stevedoring Co. vs. Trinidad

discretion is left to the plaintiff nor its men. It was mutually agreed at the time of the trial that the
provisions of section 1462 of Act No. 2711 had been in force for a period of eight years (section 43, Act
No. 2339; section 1617, Act No. 2657; section 1462, Act No. 2711) before the defendant made any effort
to collect the taxes in question.

The only question presented by the appellant upon the foregoing facts is: Is the plaintiff a contractor ?
Generally speaking, every person who enters into a contract may be denominated a contractor, but
evidently the Legislature did not mean to apply the word "contractor," as used in said section 1462, to
every person, partnership or corporation who entered into a contract; or, otherwise, it would not have
been necessary to have mentioned in the same section other classes of business, such as
warehousemen, proprietors of dockyards and persons selling light, heat, or power, as well as persons
engaged in conducting telephone or telegraph line or exchanges, and proprietors of steam laundries and
of shops for the construction and repair of bicycles or vehicles of any kind, and keepers of hotels and
restaurants, etc. If the word "contractor" in said section 1462 meant every person who entered into a
contract, then it would have included warehousemen, and the other classes of business mentioned in
said section, for the reason that every transaction by the other persons mentioned in said section is by
virtue of an express or implied contract. The same thing might be said with reference to section 1463,
where keepers of livery stables and garages, transportation contractors, persons who transport
passengers or freight for hire, and common carriers, etc., are also subject to an internal revenue tax. If
the Legislature had intended the word "contractor," as used in section 1462, to cover all persons who
entered into a contract then it would have been unnecessary to have mentioned the other persons
referred to in sections 1462 and 1463.

Moreover, if the general and broad meaning is to be given to the word "contractor" as used in said
section 1462, it
807

VOL. 43, SEPTEMBER 23, 1922

807

Luzon Stevedoring Co. vs. Trinidad

would include bankers, merchants, brokers, lawyers, farmers in the sale of their product, and every
person who enter into a contract of whatever nature or character. It would also include school-teachers
in the public and private schools as well as common laborers who work by the day under a contract. It
would also apply to all persons loaning money upon promissory notes, for the reason that their
transaction is a contract and the parties thereto, broadly speaking, are contractors.

From all of the foregoing it does appear that the word "contractor," as used in said section 1462, must
have a limited and a very restricted meaning. It cannot have the broad meaning which would include
every person who entered into a contract. The lower court in holding that the plaintiff was not a
contractor in the sense that that word is used in said section, relied upon the definition given in vol. 1.3
Corpus Juris, page 211, where we find a "contractor" defined. The definition is: "One who agrees to do
anything for another; one who executes plans under a contract; one who contracts or covenants,
whether with a government or other public body or with private parties, to furnish supplies, or to
construct works, or to erect buildings, or to perform any work or service, at a certain price or rate, as a
paving contractor, or a labor contractor; one who contracts to perform work, or supply articles on a
large scale, at a certain price or rate, as in building houses or provisioning troops, or constructing a
railroad. Although, in a general sense, every person who enters into a contract may be called a
contractor, yet the word, for want of a better one, has come to be used with special reference to a
person who, in the pursuit of an independent business, undertakes to do a specific piece or job of work
for other persons, using his own means and methods without submitting himself to control as to the
petty details. The true test of a 'contractor' would seem to be that he renders the service in the course
of an independent occupation, representing the will of his employer only as to the result of his work,
and not

808

808

PHILIPPINE REPORTS ANNOTATED

Luzon Stevedoring Co. vs. Trinidad

as to the means by which it is accomplished." (In re Unger, 22 Okla., 755; State vs. McNally, 45 La. Ann.,
44, 46; Ney vs. Dubuque, etc., Railroad Co., 20 lowa, 347, 352; Lehigh, etc. Co. vs. Central Railroad Co. of
New Jersey, 29 N. J. Equity, 252, 255; State vs. Emerson, 72 Me., 455, 456; Todd vs. Kentucky Union Ry.
Co., 52 Fed. Rep., 241, 247 [18 L. R. A., 305]; Hale vs. Jonhson, 80 111., 185.)
The general rule, variously stated, is that when a person lets out work to another, the contractee
reserving no control over the work or workmen, the relation of contractor and contractee exists and not
that of master and servant, and ,the contractee is not liable for the negligence or improper execution of
the work by the contractor. (Laffery vs. United States Gypsum Co., 83 Kan., 349, 354.)

If the one rendering service submits himself to the direction of his employer as to the details of the
work, fulfilling his will not merely as to the result but also as to the means by which that result is to be
attained, the contractor becomes a servant and is not a contractor in respect to that work. (Shearman
and R. on Negligence, sec. 77; Knoxville Iron Co. vs. Dobson, 7 Lea [Tenn. Rep.], 367, 374.)

If on the other hand a person is engaged under a contract in an independent operation not subject to
the direction and control of his employer, the relation is not regarded as that of master and servant, but
is said, in modern phrase, to be that of contractor and contractee. (Campfield vs. Lang, 25 Fed. Rep.,
128, 131.)

The case of Brown vs. German-American, etc. Co. (174 Pa., 443) gave a definition for a contractor, which
was adopted with approval in the case of In re Unger (22 Okla., 755) "as one who contracts or covenants
either with * * * a public body or private parties * * * to * * * construct works or erect buildings * * * at
a certain price or rate." Said definition was adopted from the Century Dictionary. The definition of
lexicographers, however, cannot always be adopted as a correct meaning for statutory words and
phrases. The intention of the Legislature and the object which it intended to attain must be

809

VOL. 43, SEPTEMBER 23, 1922

809

Luzon Stevedoring Co. vs. Trinidad

taken into consideration for the purpose of determining the meaning of words and phrases used, rather
than the set definition of lexicographers. Moreover, revenue laws imposing taxes on business must be
strictly construed in f avor of the citizen. In construing a word or expression in the statute susceptible of
two or more meanings, the court will adopt that interpretation most in accord with the manifest
purpose of the statute as gathered from the context. Where a particular word is obscure or of doubtf ul
meaning, taken by itself, its obscurity or doubt may be removed by reference to associate words. (25
Ruling Case Law, 994, 995.)

If the question presented in the interpretation of a tariff law is one of doubt, the doubt would be
resolved in favor of the importer, as duties are never imposed upon citizens upon vague and doubtful
interpretation. (Hart Ranft vs. Wiegman, 129 U. S., 609, 616; Zamboanga Mutual Bldg. & Loan
Association vs. Rafferty, 42 Phil., 408.)

A very instructive decision on the question of who is a contractor, is found in the very well reasoned
case of Caldwell vs. Atlantic B. & A. Ry. Co. (161 Ala., 395). In the course of that decision the Supreme
Court of Alabama said: " 'The true test of a "Contractor" would seem to be that he renders the service in
the course of an independent occupation, representing the will of his employer only as to the result of
his work, and not as to the means by which it is accomplished.'" (Halstead vs. Stahl, 47 Ind. App., 6.00;
John's Admr., etc. vs. Wm. H. McKnight & Co., 117 Ky., 655; Pittsburg Construction Co. vs. West Side,
etc. R. Co., 232 Pa., 578; Freidman vs. Hampden County, 204 Mass., 494; Attorney-General vs. Detroit
Board of Education, 154 Mich., 584.)

The appellant lays great stress upon the decision in the case of Murray vs. Currie (65 L. R. A., 470) as well
as the case of Rankin vs. Merchants, etc. Co. (54 Am. Rep., 874, 876). In the first case, however, from a
reading of the decision it will appear that "Kennedy, the stevedore, undertook to execute the work of
unloading the ship, and for that purpose a steam winch belonging to the ship was placed at

810

810

PHILIPPINE REPORTS ANNOTATED

E. Gaskell & Co. vs. Tan Sit

his disposal. The work of unloading was done by Kennedy under a special contract. He was acting on his
own behalf, and did not in any sense stand in the relation of servant to the defendant. He had entire
control over the work which he was doing." In the second case (Rankin vs. Merchants, etc. Co., supra)
there is nothing in the case which does not show that the stevedore was not acting under the ship's
order. The case of Haas vs. Philadelphia, etc. Co. (32 Am. Rep., 462) shows that the ship's company had
no control over the stevedore or his men or their work. The cases therefore relied upon as authority by
the appellant do not support his contention in view of the definition of a "contractor" which is, by a
large weight of authority, accepted.

From all of the foregoing it seems clear to us that the plaintiff is not a contractor in the sense that that
word is used in said section 1462 of Act No. 2711, and therefore the tax paid by the plaintiff under
protest was illegally collected and should be repaid. For all of the foregoing reasons, we are of the
opinion, and so declare, that the judgment appealed from should be affirmed. So ordered.

Araullo, C. J., Street, Malcolm, Avancea, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

Judgment affirmed.

___________

Copyright 2017 Central Book Supply, Inc. All rights reserved.

Today is Saturday, July 01, 2017

Republic of the Philippines


SUPREME COURT

Manila

EN BANC

G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.

JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas
Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the defendant,
Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74,
paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst
thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the
aforesaid tax was [paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be
interest due on the tax in question and which was not included in the original assessment. From the
decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the
defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will
(Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922, proceedings for
the probate of his will and the settlement and distribution of his estate were begun in the Court of First
Instance of Zamboanga. The will was admitted to probate. Said will provides, among other things, as
follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.


5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of
for a period of ten (10) years after my death, and that the same be handled and managed by the
executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore,
Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for
the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew
Hanley to be disposed of in the way he thinks most advantageous.

xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew
Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to
appoint a trustee to administer the real properties which, under the will, were to pass to Matthew
Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed trustee.
Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29,
1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging
that the estate left by the deceased at the time of his death consisted of realty valued at P27,920 and
personalty valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an
inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in payment
consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of
25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the
testamentary proceedings pending before the Court of First Instance of Zamboanga (Special proceedings
No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of
P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under
protest, notifying the defendant at the same time that unless the amount was promptly refunded suit
would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund
the said amount hausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:


I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew
Hanley, from the moment of the death of the former, and that from the time, the latter became the
owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of
said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the death
of the testator, and not, as it should have been held, upon the value thereof at the expiration of the
period of ten years after which, according to the testator's will, the property could be and was to be
delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to
said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the
decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27,
representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30,
1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the
estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the
inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the
basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In
determining the net value of the estate subject to tax, is it proper to deduct the compensation due to
trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the
tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance
tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate?
Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the
course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or
deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code, "the
rights to the succession of a person are transmitted from the moment of his death." "In other words",
said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor.
The property belongs to the heirs at the moment of the death of the ancestor as completely as if the
ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs.
Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13;
Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil.,
489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38
Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs.
Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however,
asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it
operates only in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is
broad and makes no distinction between different classes of heirs. That article does not speak of forced
heirs; it does not even use the word "heir". It speaks of the rights of succession and the transmission
thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure
regarding the authentication and probate of a will as a necessary condition to effect transmission of
property does not affect the general rule laid down in article 657 of the Civil Code. The authentication of
a will implies its due execution but once probated and allowed the transmission is effective as of the
death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when
actual transmission of the inheritance takes place, succession takes place in any event at the moment of
the decedent's death. The time when the heirs legally succeed to the inheritance may differ from the
time when the heirs actually receive such inheritance. "Poco importa", says Manresa commenting on
article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario
entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la
adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe
considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.)
Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly
fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to
section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance
with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid
by the first, the former must pay the difference.

SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession of the
property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial
testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the
payment shall be made by the executor or administrator before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum
per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days
after the date of notice and demand thereof by the collector, there shall be further added a surcharge of
twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal
Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543,
should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from
the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted,
as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should
have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March
10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax
should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff
introduced evidence tending to show that in 1932 the real properties in question had a reasonable value
of only P5,787. This amount added to the value of the personal property left by the deceased, which the
plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and
surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes
its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax
vests instantly, the tax should be measured by the vlaue of the estate as it stood at the time of the
decedent's death, regardless of any subsequent contingency value of any subsequent increase or
decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance
Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The
right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily
measured as to any beneficiary by the value at that time of such property as passes to him. Subsequent
appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp.
1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in
possession or the contingency is settled. This rule was formerly followed in New York and has been
adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is
by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L.,
p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and
authorities that New York has varied and now requires the immediate appraisal of the postponed estate
at its clear market value and the payment forthwith of the tax on its out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y.
Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958;
Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc.
App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905,
sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable
at the time of the predecessor's death, notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary, and the tax measured by the value of the property
transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value
of the estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code).
In the case at bar, the defendant and the trial court allowed a deduction of only P480.81. This sum
represents the expenses and disbursements of the executors until March 10, 1924, among which were
their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees
of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be
deducted under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In
order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall
be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate
proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16
How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may
lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the
Philippines which requires trustees' commissions to be deducted in determining the net value of the
estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been
created, it does not appear that the testator intended that the duties of his executors and trustees
should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re
Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed
the desire that his real estate be handled and managed by his executors until the expiration of the
period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705)
but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The
compensation of a trustee, earned, not in the administration of the estate, but in the management
thereof for the benefit of the legatees or devises, does not come properly within the class or reason for
exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the
estate for the purpose of a distribution thereof to those entitled to it, and are not required or essential
to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before
the court, are created for the the benefit of those to whom the property ultimately passes, are of
voluntary creation, and intended for the preservation of the estate. No sound reason is given to support
the contention that such expenses should be taken into consideration in fixing the value of the estate
for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under
the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No.
3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when
the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended
by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of
the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee
and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may
be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the
incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But
legislative intent that a tax statute should operate retroactively should be perfectly clear. (Scwab vs.
Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs.
Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as
prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the
language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C.
J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance
makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable
to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no
provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the statute
by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606
are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature
and, therefore, should operate retroactively in conformity with the provisions of article 22 of the
Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed,
under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax
and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from
notice and demand by rthe Collector of Internal Revenue within which to pay the tax, instead of ten
days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the
state which, under the Constitution, the Executive has the power to pardon. In common use, however,
this sense has been enlarged to include within the term "penal statutes" all status which command or
prohibit certain acts, and establish penalties for their violation, and even those which, without expressly
prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws,
generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes
are not classed as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory
Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A.,
104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.)
Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear
legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may
be paid within another given time. As stated by this court, "the mere failure to pay one's tax does not
render one delinqent until and unless the entire period has eplased within which the taxpayer is
authorized by law to make such payment without being subjected to the payment of penalties for
fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the
delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that
delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the
meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This
contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the
trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word
"trust" is not mentioned or used in the will but the intention to create one is clear. No particular or
technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and
"trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not
conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator
must indicate in the will his intention so to do by using language sufficient to separate the legal from the
equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the
purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to
constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient
words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some
jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the
testator intended to create a trust. He ordered in his will that certain of his properties be kept together
undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound
judgment in appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of
Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in
relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed
in trust did not remove it from the operation of our inheritance tax laws or exempt it from the payment
of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10,
1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the
estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in
this case. A trustee is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90;
33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the
trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust
(Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial
interest in the estate. He took such legal estate only as the proper execution of the trust required (65 C.
J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested
absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold
that the payment of the tax could be postponed or delayed by the creation of a trust of the type at
hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided,
that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time.
In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer
period which does not offend the rule against petuities. The collection of the tax would then be left to
the will of a private individual. The mere suggestion of this result is a sufficient warning against the
accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet.,
435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon,
7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep.,
36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The
obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen
by the government but upon the necessity of money for the support of the state (Dobbins vs. Erie
Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely
because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct.
Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of
taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not
place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial
distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed.
Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros.,
Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a
tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute,
without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is
allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised
Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil.,
461), this court had occassion to demonstrate trenchment adherence to this policy of the law. It held
that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they
were prevented from praying their internal revenue taxes on time and by mutual agreement closed their
homes and stores and remained therein, does not authorize the Collector of Internal Revenue to extend
the time prescribed for the payment of the taxes or to accept them without the additional penalty of
twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes
adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the
proceedings of the officers, upon whom the duty is developed of collecting the taxes, may derange the
operations of government, and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11
Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance
tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The
interest due should be computed from that date and it is error on the part of the defendant to compute
it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and
neither the Collector of Internal Revenuen or this court may remit or decrease such interest, no matter
how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by
the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544,
subsec. (b), par. 2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal
Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the
payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the
tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate
became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff
in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas
Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties
worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing
allowable deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19 as
the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should
be imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon
the amount by which the share exceed thirty thousand pesos, plus an additional two hundred per
centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08.
Adding to these two sums an additional two hundred per centum, or P965.16, we have as primary tax,
correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the
Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate of
twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932,
the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and
interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on
both the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a
grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the
estate. This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim.
But, as we cannot give the defendant more than what he claims, we must hold that the plaintiff is liable
only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.

Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

Villa-Real, J., concurs.

The Lawphil Project - Arellano Law Foundation

VOL. 5, JULY 31, 1962

665

Collector of Internal Revenue vs. La Tondea, Inc.

No. L-10431. July 31, 1962.

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. LA TONDEA, INC.and THECOURT OF TAX APPEALS,
respondents.

Taxation; Specific tax on alcohol to be based on finished product.The Tax Code does not prohibit
further rectification or distillation of spirit by a rectifier, who as defined in Section 194 thereof is a
person who rectifies, purifies or refines distilled spirits. When alcohol, even if already distilled or
rectified is again rectified, purified or refined, the specific tax should be based on the finished product,
and not on the evaporated alcohol.

Taxation; Specific tax on rectified alcohol; Jan. 1, 1951 to Aug. 23, 1956.From January 1, 1951, when
Rep. Act No. 592, took effect, until August 23, 1958, when Rep. Act No. 1608 became a law the tax on
alcohol did not attach as soon as it was in existence as such, but on the finished product. During this
period alcohol lost thru evaporation is not subject to specific tax.

Same; Statutory Construction; In case of doubt tax statutes construed against government.In every
case of doubt, tax statutes are construed most strongly against the Government and in favor of the
citizens, because burdens are not to be imposed beyond what the statutes expressly and clearly import
(MRR Co. vs. Coll. of Customs, 52 Phil. 950; Luzon Stev. Co. vs.Trinidad, 43 Phil. 803.)

APPEAL from a decision of the Court of Tax Appeals.

The facts are stated in the opinion of the Court.

Solicitor General for petitioner.

Manuel V. San Jose for respondents.

PAREDES, J.:

The respondent "La Tondea, Inc." a duly licensed rectifier has been engaged in the business of
manufacturing wines, and liquors, with a distillery at 1068 Velasquez, Tondo, Manila. The principal
products of the respondent are "Ginebra San Miguel", "Manila Rum", "Oak Barrel Rum" "Mallorca
Wine", "Anizado", "Creme de Mente",

666

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SUPREME COURT REPORTS ANNOTATED

Collector of Internal Revenue vs. La Tondea, Inc.

"Creme de Cacao", etc. Since 1929, respondent has been purchasing the alcohol used in the
manufacture of its products, principally from Binalbagan Isabela Sugar Central, Negros Occidental and
Central Azucarera Don Pedro in Nasugbu, Batangas, and has been removing this alcohol from the
centrals to respondent's distillery under joint bonds, without prepayment of specific taxes, with the
express permission and approval of the petitioner Collector of Internal Revenue. The quantity of alcohol
purchased and received by the respondent from the centrals are recorded and entered in the BIR
Official Register Books of "La Tondea, Inc. A-Account", under the column "CRUDE spirit" (Exhs. A, A-1,
G, G-1), attested by the Inspector of the Bureau assigned to respondent's distillery. In the manufacture
of "Manila Rum", respondent uses as basic materials low test alcohol, purchased in crude form from the
suppliers, which it re-rectifies or subjects to further distillation, in order to suit the purpose of
respondent in producing only high quality products. In the process of further rectification or distillation,
losses thru evaporation had necessarily been incurred, for which the petitioner in the past had given the
respondent allowance of not exceeding 7% for said losses. Respondent stated that the process adopted
by it in the manufacture of its "Manila Rum", has now made this product the largest selling rum in the
Philippines and the specific taxes that it had been paying1 the government, had steadily increased from
P3,172,515.30 in 1950 to P4,973,123.40 in 1954. On May 8, 1954, petitioner wrote a demand letter to
respondent for the payment of specific taxes, in the total amount of P154,663.10 on alcohol lost by
evaporation, thru re-rectification or re-redistillation, covering the period from June 7, 1950 to February
7, 1954. A first extension of 30 days within which to reply was granted the respondent by the petitioner.
On July 26, 1954, it asked for another 30-day extension to reply (Exh. I-3). On August 2, 1954, petitioner
granted 5 days only, from August 2, 1954 (Exh. I-f), or until August 7, 1954. On August 6, 1954,
respondent answered the demand letter dated May 8, 1954 (Exh. I), protesting against the said
assessment (Exhs. I-5 and 1-b). In a letter dated August 26, 1954, the petitioner made

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Collector of Internal Revenue vs. La Tondea, Inc.

manifest its refusal to reconsider the assessment and urged the respondent to pay within 3 days from
receipt, the amount of the assessment, which communication was received by the respondent on
August 31, 1954 (Exh. I-7). On September 1, 1954, the respondent appealed the decision to the
Conference Staff in the same Bureau (Exh. I-8). On September 3, 1954, the Conference Staff gave the
appeal due course (Exh. I-9).

Before any hearing could be had in the Conference Staff, on January 8, 1955, the respondent received a
letter from the petitioner dated December 22, 1954, requiring it to comply with Department of Finance
Order No. 213, to deposit one-half of the amount of assessment in cash and the balance guaranteed by
a surety bond (Exh. I-11). Respondent requested for reconsideration of this requirement (Exh. I-1a) on
January 10, 1955, which was denied on February 10, 1955 (Exh. I-13). A second motion for
reconsideration presented on February 15, 1955 (Exh. I-14), followed by a supplementary letter (Exh. I-
15) dated February 17, 1955 was denied, same having been received by respondent on March 16, 1955,
and gave the respondent 5 days from receipt thereof, within which to comply with the said Order. Not
satisfied with the said rulings, the La Tondea, Inc. presented an action with the respondent Court of Tax
Appeals on March 18, 1955. The Tax Court on December 7, 1955, rendered the following judgment

"IN VIEW OF THE FOREGOING CONSIDERATION, the decision of respondent Collector of Internal
Revenue, dated May 8, 1954, is hereby modified, and petitioner La Tondea, Inc., is hereby ordered to
pay the respondent Collector of Internal Revenue the sum of P672.15, by way of specific tax. However,
with respect to the balance of the assessment amounting to P153,990.95, which corresponds to the
period after January 1, 1951 and up to February 27, 1954, pursuant to Republic Act No. 592, the
petitioner is declared exempt from liability for the specific taxes assessed therefor. Without
pronouncement as to costs."

On appeal to this Court, the petitioner alleges that the Court of Tax Appeals erred (1) In exempting the
respondent La Tondea, Inc. from the payment of the specific tax on rectified alcohol lost in process of
further rectification, during the period from January 1, 1951 to February 27, 1954; and (2) In assuming
jurisdiction over the case.

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SUPREME COURT REPORTS ANNOTATED

Collector of Internal Revenue vs. La Tondea, Inc.

It appears that the specific taxes in question were assessed by the petitioner "in accordance with section
133 of the Tax Code". Up to December 31, 1950, said section reads:

"SEC. 133. Specific tax on distilled spirits.On distilled spirits there shall be collected, except as
hereinafter provided, specific taxes as follows:

'(a) If produced from sap of the nipa, coconut, cassava, camote, or buri palm, or from the juice syrup, or
sugar of the cane, per proof liter, forty-five centavos.

'(b) If produced from any other material, per proof liter, one peso and seventy centavos.

'This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits.

'Distilled spirits,' as here used, includes all substances known as ethyl alcohol, hydrated oxide of ethyl, or
spirits of wine, which are commonly produced by the fermentation and subsequent distillation of grain
starch, molasses, or sugar, or of some syrup of sap, including all dilutions or mixtures; and the, tax shall
attach to this substance as soon as it is in existence as such, whether it be subsequently separated as
pure or impure spirits, or be immediately or at any subsequent time transformed into any other
substance either in process of original production or by any subsequent process.'"

Pursuant to the above provision of law, therefore, "the tax shall attach to this substance as soon as it is
in existence as such" etc. However, on January 1, 1951, Republic Act No. 592 took effect, amending
section 133 and the clause underlined above had been eliminated. The evident intention of the law
maker in deleting the all embracing underlined clauses, was to subject to specific tax not all kinds of
alcoholic substances, but only distilled spirits as finished products,actually removed from the factory or
bonded warehouse. The said amendment could not mean anything else; it is in harmony with section
129, of the same Tax Code which provides

"SEC.129. Removal of spirits or cigar under bond. Spirits requiring rectification may be removed from
the place of their manufacture to some other establishment for the purpose of rectification without the
prepayment of the specific tax, provided the distiller removing such spirits and the rectifier receiving
them shall file with the Collector of Internal Revenue their joint bond conditioned upon the future
payment by the rectifier of the specific tax that may be due on any finished product. xxx."

And if one would consider that the Tax Code does not

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Collector of Internal Revenue vs. La Tondea, Inc.


prohibit further rectification or distillation and defines in section 194 thereof, a rectifier as a person who
rectifies, purifies or refines distilled spirits, the conclusion is logical that when alcohol, even if already
distilled (as in the present case) or rectified, is again rectified, purified or refined,the specific tax should
be based on the finished product, and not on the evaporated alcohol. The intention not to subject to
specific tax all kinds of alcoholic substances but only distilled spirits as finished products, is reflected in
former Senator Garcia's observation on the floor of the Senate, during the discussion of House Bill No.
1443 (now Rep. Act No. 592), when he proposed the elimination of the phrase "and the tax shall attach
to this substance as soon as it is in existence as such, etc." He said

X X X X X

"That is why, Mr. President, in Section 1 of this Bill now under consideration. I have some serious
objections to the provisions where all kinds of alcoholic substance which falls under the definition of
proof spirits in the last paragraph of the same Section I of the proposed measure are taxable because
this is one of those that I consider of deterrent effect to the industrialization of this country xxx (Senate
Diario No. 6, Jan. 15, 1951, Original 4th Special Session; Italics supplied.)"

And on August 23, 1956, upon the recommendation of the Bureau of Internal Revenue itself, Rep. Act
No. 1608 was passed, amending section 133 of the Tax Code, as amended by R.A. No. 592, restoring the
very same clause which was eliminated (Sec. 7, R.A. No. 1608). The inference, therefore, is clear that
from January 1, 1951, when Rep. Act No. 592, took effect, until August 23, 1956, when R.A. No. 1608
became a law, the tax on alcohol did not attack as soon as it was in existence as such, but on the
finished product. And this must be so, otherwise a great injustice would be caused upon a duly licensed
rectifier, who, like the respondent herein, will be made to pay the specific tax on the alcohol lost thru
evaporation, from which no one has been benefited, based on the provision of laws then extant, of
doubtful application. In every case of doubt, tax statutes are construed most strongly against the
government and in favor of the citizens, because burdens are not to be imposed beyond what the
statutes expressly and

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SUPREME COURT REPORTS ANNOTATED

Collector of Internal Revenue vs. La Tondea, Inc.

clearly import (MRR Co. v. Coll. of Customs, 52 Phil. 950; Luzon Stev. Co. v. Trinidad, 43 Phil. 803, 809). It
should be pointed out also that said section 129 was amended by adding the following

"And provided, further, That in cases where alcohol has already been rectified either by original and
continuous distillation or by redistillation is further rectified, no loss for rectification and handling shall
be allowed and the rectifier thereof shall pay the specific tax due on such losses" (Sec. 5, Rep. Act Nc.
1608).
which obviously reveals that the purpose of the amendment is to tax, only now, alcohol lost, in further
distillation or rectification. This law certainly should not be given a retroactive effect, so as to cover the
period in question (January 1, 1951 to February 27, 1954). It is only after August 23, 1956 that the
government woke up from its lethargy and hastened to fill the hiatus.

The second assignment of error is predicated upon the proposition, that the respondent Court of Tax
Appeals had no jurisdiction over the case, because the petition for review was not filed within the 30-
day period as provided by section 11 of Rep. Act No. 1125 (Law creating the CTA), which states

"SEC.11. Who may appeal; effect of appealAny person, association or corporation adversely affected
by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs xxx or any
provincial or city Board of Assessment Appeals, may file an appeal in the Court of Tax Appeals within
thirty days after the receipt of such decision or ruling xxx."

Conceding for the purpose of argument that the ruling appealable was the letter-assessment dated May
1, 1954, still We believe that the petition for review to the Tax Court was filed within the time. The intra-
office arrangement in the Bureau of Internal Revenue allowed a taxpayer to appeal from the ruling of
the Collector to a Conference Staff of the same Bureau. The appeal made on September 1, 1954, to the
Conference Staff, from said letter-assessment dated May 8, 1954 (received by the respondent on May
28, 1954), which was reiterated in petitioner's letter of August 26, 1954, (received by the respondent on
August 31, 1954), had suspended the period because it was a remedy prescribed by the petitioner him-

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Collector of Internal Revenue vs. La Tondea, Inc.

self, made available to the respondent (Collector of Int. Rev. v. Suyoc Consolidated Mining Co., L-11527,
Nov. 25, 1958). When the Conference Staff gave due course to the appeal on September 3, 1954, the
petitioner gave the impression that his letter-assessments of May 8 and August 26, 1954, were still
subject to review by his Conference Staff. And when the Conference Staff finally refused to reconsider
its ruling requiring respondent to deposit 1/2 of the amount of the tax in cash,and payment of the
balance guaranteed by a surety bond, after the submission of two requests for reconsideration, the
second denial having been received by respondent only on March 16, 1955 (Exh. I-16), it was then only,
that the petitioner may or can be said to have rejected the administrative appeal and csgave finality to
his letter of August 26, 1954. We believe that petitioner did not create the Conference Staff and
permitted a taxpayer to appeal to it from his ruling, as a mere administrative expediency, to delay the
taxpayer from appealing to the Tax Court, and thus allow the period of his appeal to lapse. We should
presume that this injurious result was not intended by the Government. This being the case, as it is the
case, when respondent lodged its petition for review with the Tax Court on March 18, 1955, only three
(3) days in all, had elapsed, out of the period. The period within which the review must be sought,
should be counted from the denial of the motion for reconsideration because of the principle that all
administrative remedies must be exhausted before recourse to the courts can be had against orders or
decisions of administrative bodies (Sec. of Agriculture, etc., et al. v. Hora, et al., G.R. No. L-7752, May 27,
1955). If, as it should be, the final appealable ruling of the petitioner, was that received by respondent
on March 16, 1955, then, only two (2) days had been consumed by the respondent of the statutory
period. In either case, the appeal to the Tax Court was presented on time and the latter has jurisdiction
to take cognizance of the case.

WHEREFORE, the decision appealed from is hereby affirmed, without pronouncement as to costs.

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SUPREME COURT REPORTS ANNOTATED

People vs. Villanueva

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Barrera, Dizon, Regala and Makalintal, JJ.,
concur.

Padilla, J., took no part.

Decision affirmed.

Notes.As to the specific tax on distilled spirits, see La Tondea vs. Collector, L-14875, Sept. 29, 1962.

See also annotation on computation of thirty-day period for appealing to the Tax Court under Republic
vs. Lim Tian Teng, L-21731, March 31, 1966, 16 SCRA 584, 596-599.

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