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January 25, 2017 G.R. No.

205045

COMMISSIONER OF INTERNAL REVENUE, Petitioner vs. SAN MIGUEL CORPORATION, Respondent,

G.R. No. 205723

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SAN MIGUEL CORPORATION, Respondent.

FACTS: These consolidated cases consider whether "San Mig Light" is a new brand or a variant of one of
San Miguel Corporation's existing beer brands, and whether the Bureau of Internal Revenue may issue
notices of discrepancy that effectively changes "San Mig Light"'s classification from new
brand to variant. The issues involve an application of Section 143 of the 1997 National Internal Revenue
Code (Tax Code), as amended, on the definition of a variant, which is subject to a higher excise tax rate
than a new brand. This case also applies the requirement in Rep. Act No. 9334 that reclassification of
certain fermented liquor products introduced between January 1, 1997 and December 31, 2003 can only
be done by an act of Congress.

The Petition1 docketed as G.R. No. 205045 assails the Court of Tax Appeals En Bane's September 20,
2012 Decision2 affirming the Third Division's grant of San Miguel Corporation's refund claim in CTA Case
No. 7708, and the December 11, 2012 Resolution3 denying reconsideration. The Commissioner of
Internal Revenue prays for the reversal and setting aside of the assailed Decision and Resolution, as well
as the issuance of a new one denying San Miguel Corporation's claim for tax refund or credit.4

On the other hand, the Petition5 docketed as G.R. No. 205723 and consolidated with G.R. No. 205045
assails the Court of Tax Appeals En Bane's October 24, 2012 Decision6 dismissing the Commissioner of
Internal Revenue's appeal, and the February 4, 2013 Resolution7 denying reconsideration. The
Commissioner of Internal Revenue prays for the reversal and setting aside of the assailed Decision and
Resolution, the issuance of a new one remanding the case to the Court of Tax Appeals for the
production of evidence in San Miguel Corporation's possession, or, in the alternative, the dismissal of
the Petitions in CTA Case Nos. 7052, 7053, and 7405.8

On October 19, 1999, Virgilio S. De Guzman (De Guzman), San Miguel Corporation's Former Assistant
Vice President for Finance, wrote the Bureau of Internal Revenue Excise Tax Services Assistant
Commissioner Leonardo B. Albar (Assistant Commissioner Albar) to request the registration of and
authority to manufacture "San Mig Light," to be taxed at 12.15 per liter.9 The letter dated October 27,
1999 granted this request. 10

On November 3, 1999, De Guzman advised Assistant Commissioner Albar that "San Mig Light" would be
sold at a suggested net retail price of 21.15 per liter or 6.98 per bottle, less value-added tax and
specific tax. "San Mig Light" would also be classified under "Medium Priced Brand" to be taxed at 9.15
per liter. 11

On January 28, 2002, Alfredo R. Villacorte (Villacorte), San Miguel Corporation's Vice President and
Manager of the Group Tax Services, wrote the Bureau of Internal Revenue Chief of the Large Taxpayers
Assistance Division II (LTAD II) to request information on the tax rate and classification of "San Mig Light"
and another beer product named "Gold Eagle King." 12

On February 7, 2002, LTAD II Acting Chief Conrado P. Item replied to Villacorte's letter. 13 He confirmed
that based on the submitted documents, San Miguel Corporation was allowed to register, manufacture,
and sell "San Mig Light" as a new brand, had been paying its excise tax for a considerable length of time,
and that the tax classification and rate of "San Mig Light" as a new brand were in order. 14

However, on May 28, 2002, Edwin R. Abella (Assistant Commissioner Abella), Bureau of Internal
Revenue Large Taxpayers Service Assistant Commissioner, issued a Notice of Discrepancy against San
Miguel Corporation. The Notice stated that "San Mig Light" was a variant of its existing beer products
and must, therefore, be subjected to the higher excise tax rate for variants.15 Specifically, for the year
1999, "San Mig Light" should be taxed at the rate of 19.91 per liter instead of 9.15 per liter; and for
the year 2000, the 12% increase should be based on the rate of Pl9.91 per liter under Section l 43(C)(2)
of the Tax Code.16 Hence, the Notice demanded payments of deficiency excise tax in the amount of

824,750,204.97, exclusive of increments for years 1999 to April 2002.17

The Finance Manager of San Miguel Corporation's Beer Division wrote a letter-reply dated July 9, 2002
requesting the withdrawal of the Notice of Discrepancy.18 San Miguel Corporation stated, among other
things, that "San Mig Light" was not a variant of any of its existing beer brands because of "the
distinctive shape, color scheme[,] and general appearance"; and the "different alcohol content and
innovative low calorie formulation."19 It also emphasized that the Escudo logo was not a beer brand logo
but a corporate logo.20

On October 14, 2002, Assistant Commissioner Abella wrote a letterrejoinder reiterating its finding that
"San Mig Light Pale Pilsen" was truly a variant of "San Miguel Pale Pilsen."21 The letter-rejoinder cited
certain statements in San Miguel Corporation's publication, "Kaunlaran," and the corporation's Annual
Report as support for its finding. 22

On November 20, 2002, Villacorte replied by requesting that "San Mig Light be reconfirmed as a new
brand . . . the deficiency assessment be set aside and the demand for payment be withdrawn."23

Subsequently, three (3) conferences were held on the "San Mig Light" tax classification issue. At the
conference held on December 16, 2003, Commissioner Guillermo Parayno, Jr. (Commissioner Parayno)
informed San Miguel Corporation that five (5) members of the Bureau of Internal Revenue Management
Committee voted that "San Mig Light" was a variant of "Pale Pilsen in can," while two (2) members
voted that it was a variant of "Premium," a high-priced beer product of San Miguel Corporation.24

On January 6, 2004, Commissioner Parayno wrote San Miguel Corporation and validated the findings
that "San Mig Light" was a variant of "San Miguel Pale Pilsen in can," subject to the same excise tax rate
of the latter-that is, P13.61 per liter-and that an assessment for deficiency excise tax against San Miguel
Corporation was forthcoming.25
On January 28, 2004, a Preliminary Assessment Notice (PAN) was issued against San Miguel Corporation
for deficiency excise tax in the amount of P852,039,418.15, inclusive of increments, purportedly for the
removals of "San Mig Pale Pilsen Light," from 1999 to January 7, 2004.26

On February 4, 2004, a Notice of Discrepancy was issued against San Miguel Corporation on an alleged
deficiency excise tax in the amount of 28,876,108.84, from January 8, 2004 to January 29, 2004.27

Accordingly, on March 24, 2004, Bureau of Internal Revenue Deputy Commissioner Estelita C. Aguirre
(Deputy Commissioner Aguirre) issued a PAN against San Miguel Corporation for 29,967,465.37
representing deficiency excise tax, inclusive of increments, from January 8, 2004 to January 29, 2004.28

On April 12, 2004 and May 26, 2004, Deputy Commissioner Aguirre issued two (2) Formal Letters of
Demand29 to San Miguel Corporation with the accompanying Final Assessment Notice (FAN) Nos. LTS TF
004-06-02 and LTS TF 129-05-04, respectively, directing San Miguel Corporation to pay deficiency excise
taxes in the amounts of:

(a) 876,098,898.83, inclusive of interest until April 30, 2004, for the period of November to December
1999 at 12.52 per liter, and January 2000 to January 7, 2004 at 13.61 per liter;30 and

(b) P30,763,133.68, inclusive of interest until June 30, 2004, for the period January 8, 2004 to January
29, 2004.31

San Miguel filed a Protest/Request for Reconsideration against each FAN. 32

On August 17, 2004 and August 20, 2004, Former Large Taxpayers Service Officer-in-Charge Deputy
Commissioner Kim S. Jacinto-Henares informed San Miguel Corporation of the denial of the
Protest/Request for Reconsiderations against the two (2) FANs "for lack of legal and factual basis."33

G.R. No. 205723

On September 1 7, 2004 and September 22, 2004, San Miguel Corporation filed before the Court of Tax
Appeals Petitions for Review, docketed as CTA Case Nos. 7052 and 7053, assailing the denials of its
Protest/Request for Reconsiderations of the deficiency excise tax assessments.34

To prevent the issuance of additional excise tax assessments on San Mig Light products and the
disruption of its operations, San Miguel Corporation paid excise taxes at the rate of 13.61 beginning
February 1, 2004.35

On December 28, 2005, San Miguel Corporation filed with the Bureau of Internal Revenue its first refund
claim. The claim sought the refund of 782,238,161.47 for erroneous excise taxes collected on San Mig
Light products from February 2, 2004 to November 30, 2005.36

Due to inaction on its claim, on January 31, 2006, San Miguel Corporation filed before the Court Tax
Appeals a Petition for Review docketed as CTA Case No. 7405.37 The Court of Tax Appeals, upon motion,
later consolidated CTA Case No. 7405 with CTA Case Nos. 7052 and 7053.38
The Court of Tax Appeals First Division, in its Decision39 dated October 18, 2011, granted the Petitions in
CTA Case Nos. 7052 and 7053 and partially granted the Petition in CTA Case No. 7405.40 The Decision's
dispositive portion reads:

WHEREFORE, in view of the foregoing considerations, the consolidated Petitions for Review in CTA Case
Nos. 7052 and 7053 are hereby GRANTED. The (1) [sic] letters dated August 17, 2004 and August 20,
2004 of respondents, denying petitioner's Protest/Request for Reconsideration dated May 12, 2004 and
July 7, 2004, respectively, and (2) Assessment Notice Nos. LTS TF 004-06-02 and LTS TF 129-05-04 issued
by respondent against petitioner for the periods of November 1999 to January 7, 2004 and January 8,
2004 to January 29, 2004, are hereby CANCELLED and SET ASIDE.

Moreover, the Petition for Review in CTA Case No. 7405 is hereby PARTIALLY GRANTED. Respondent CIR
is hereby ORDERED to REFUND petitioner, or to ISSUE A TAX CREDIT CERTIFICATE in its favor in, the
amount of SEVEN HUNDRED EIGHTY ONE MILLION FIVE HUNDRED FOURTEEN THOUSAND SEVEN
HUNDRED SEVENTY TWO PESOS AND FIFTY SIX CENTAVOUS [sic] (781,514,772.56), as determined
below:

Claims for Over-Payment of P782,238,161.47


Excise Taxes per Petition

Less: Deductions from claims

1. Excise taxes due on SML P420,252.62


removals per ODI which
were not paid per Returns
Polo Plant

2. Excise taxes due per Excise 121,975.00


Tax Returns were Lesser
than [the] amounts per ODI
Polo Plant

3. SML Removals per shipping


Memorandum were Greater
than OD Is

San Fernando Plant Bacolod 181,080.11


Plant
81.18
723,388.91

Recomputed Excise Taxes for P781,5l4,772.56


Refund/Issuance of Tax Credit
Certificate

SO ORDERED.41 (Emphasis in the original)

The Commissioner filed a Motion for Reconsideration with Motion for Production of Documents praying
that San Miguel Corporation be compelled to produce the following: (a) "Kaunlaran" publication for the
months of October 1999 and January 2000; (b) 1999 Annual Report to stockholders; and (c) copies of the
video footage of two (2) San Mig Light commercials as seen in its website.42 The Commissioner claimed
"that the admission of said documents would lead to a better illumination of the oucome of the case."43

The Court of Appeals First Division denied the Motions in its Resolution44 dated February 6, 2012:

WHEREFORE, premises considered, respondent's [CIR's] MOTION FOR RECONSIDERATION WITH


MOTION FOR PRODUCTION OF DOCUMENTS (Re: Decision promulgated 18 October 2011) and
SUPPLEMENTAL MOTION FOR PRODUCTION OF DOCUMENTS are hereby DENIED for lack of merit.

SO ORDERED.45 (Emphasis in the original)

The Court of Tax Appeals En Banc, in its Decision46 dated October 24, 2012, dismissed the Petition and
affirmed the Division.47 It also denied reconsideration through the Resolution48 dated February 4, 2013.

Hence, the Commissioner on Internal Revenue filed the Petition for Review on Certiorari49 docketed as
G.R. No. 205723.

G.R. No. 205045

On August 30, 2007, San Miguel Corporation filed its second refund claim with the Bureau of Internal
Revenue in the amount of 926,389,172.02.50 Due to inaction on its claim, San Miguel Corporation filed
before the Court Tax Appeals a Petition for Review, docketed as CTA Case No. 7708, on November 27,
2007.51

The Court of Tax Appeals Third Division, in its Decision dated January 7, 2011, partially granted the
Petition.52 It also denied reconsideration.53 The Decision's dispositive portion reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is
hereby ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor [of] petitioner in the amount
of 926,169,056.74, representing erroneously, or excessively and/or illegally collected, and overpaid
excise taxes on "San Mig Light" during the period from December 1, 2005 up to July 31, 2007.
SO ORDERED.54 (Emphasis in the original)

On September 20, 2012, the Court of Tax Appeals En Banc55 affirmed the Division and thereafter also
denied reconsideration. The Decision's dispositive portion reads:

WHEREFORE, the present Petition for Review is hereby DENIED for lack of merit. The assailed decision
and resolution of the Third Division of this Court promulgated on January 7, 2011 and March 23, 2011,
respectively, in CTA Case No. 7708 entitled "SAN MIGUEL CORPORATION vs. COMMISSIONER OF
INTERNAL REVENUE["], are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of


respondent in the amount of 926,169,056.74, representing erroneously, excessively and/or illegally
collected and overpaid excise taxes on "San Mig Light" during the period December 1, 2005 to July 31,
2007.

SO ORDERED.56 (Emphasis in the original)

Hence, the Commissioner on Internal Revenue filed the Petition for Review on Certiorari57 docketed as
G.R. No. 205045. The two (2) cases were consolidated.

Respondent San Miguel Corporation filed its Comment58 on the Petitions, to which petitioner filed its
Reply.59 The parties then filed their respective memoranda. 60

The issues for resolution are:

First, whether a motion for production of documents and objects may be availed of after the court has
rendered judgment;

Second, whether petitioner complied with all requisites of a motion for production of documents and
objects under Rule 27, such as a showing of good cause;

Third, whether "San Mig Light" is a new brand and not a variant of "San Miguel Pale Pilsen";

Fourth, whether the "classification freeze" in Rep. Act No. 9334 refers to the freezing of classification of
brands, and not to the freezing of net retail prices of brands;

Fifth, whether the deficiency excise tax assessments issued by the Bureau of Internal Revenue against
respondent dated April 12, 2004 and May 26, 2004 are valid; and

Lastly, whether respondent is entitled to a refund of excess payment of excise taxes on "San Mig Light"
in the amount of 781,514, 772.56 for the period from February 1, 2004 up to November 30, 2005, and
in the amount of 926,169,056.74 for the period from December 1, 2005 up to July 31, 2007.

Petitioner questions the denial of its Motion for Production of Documents and Objects. It argues that
this motion may be filed after pretrial or during the pendency of the action since Rule 27, Section 1 of
the Revised Rules of Civil Procedure does not explicitly provide that it must be availed of before trial or
pre-trial.61 Petitioner contends that all requisites for filing the motion were satisfied.62 Assuming the
Motion was belatedly filed, it should have been granted in the higher interest of justice. 63

Respondent counters that the Motions, which were filed only after the Court of Tax Appeals Division
rendered judgment, were belatedly filed since this mode of discovery must be availed of before
trial.64 Rule 27, Section 1 used the phrase, "in which an action is pending"; thus, this defines which court
has authority to resolve the motion and does not define when the motion must be made.65 Respondent
contends that this remedy must be availed of before trial in order to facilitate and expedite case
preparations.66 Respondent adds that petitioner also failed to comply with the requisites for the motion.
Specifically, the Motion did not adequately describe the contents of the documents to be produced to
show their materiality and relevance to the case.67

Respondent further submits that the documents and objects are immaterial and irrelevant to the issues.
The documents petitioner sought to have respondent produce are referred to as having to do with the
taste, alcohol content, and calories of "San Mig Light," when the Tax Code definition of variant has
nothing to do with these matters.68 Respondent submits that in filing the Motions after judgment,
petitioner was effectively seeking new trial, which it may only avail itself of with "newly discovered"
evidence. 69

Rule 27, Section 1 of the Revised Rules of Civil Procedure provides:

SECTION 1. Motion for production or inspection; order. - Upon motion of any party showing good
cause therefore, the court in which an action is pending may (a) order any party to produce and permit
the inspection and copying or photographing, by or on behalf of the moving party, of any designated
documents, papers, books, accounts, letters, photographs, objects or tangible things, not privileged,
which constitute or contain evidence material to any matter involved in the action and which are in his
possession, custody or control; or (b) order any party to permit entry upon designated land or other
property in his possession or control for the purpose of inspecting, measuring, surveying, or
photographing the property or any designated relevant object or operation thereon. The order shall
specify the time, place and manner of making the inspection and taking copies and photographs, and
may prescribe such terms and conditions as are just. (Emphasis supplied)

Rule 18, Section 6 of the Rules of Court on Pre-Trial requires that the pre-trial briefs shall include "[a]
manifestation of their having availed or intention to avail themselves of discovery procedures."

On July 13, 2004, this Court approved A.M. No. 03-1-09-SC, otherwise known as the Rule on Guidelines
to be Observed by Trial Court Judges and Clerks of Court in the Conduct of Pre-Trial and Use of
Deposition - Discovery Measures. Among other things, these rules direct trial courts to require parties to
submit, at least three (3) days before pretrial, pre-trial briefs containing "[a] manifestation of the parties
of their having availed or their intention to avail themselves of discovery procedures or referral to
commissioners."70

Republic v. Sandiganbayan71 explained the purpose and policy behind modes of discovery:
The truth is that "evidentiary matters" may be inquired into and learned by the parties before the trial.
Indeed, it is the purpose and policy of the law that the parties - before the trial if not indeed even
before the pre-trial - should discover or inform themselves of all the facts relevant to the action, not
only those known to them individually, but also those known to their adversaries; in other words,
the desideratum is that civil trials should not be carried on in the dark; and the Rules of Court make this
ideal possible through the deposition-discovery mechanism set forth in Rules 24 to 29. The experience in
other jurisdictions has been that ample discovery before trial, under proper regulation, accomplished
one of the most necessary ends of modern procedure: it not only eliminates unessential issues from
trials thereby shortening them considerably, but also requires parties to play the game with the cards
on the table so that the possibility of/air settlement before trial is measurably increased ....

As just intimated, the deposition-discovery procedure was designed to remedy the conceded
inadequacy and cumbersomeness of the pre-trial functions of notice-giving, issue-formulation and fact
revelation theretofore performed primarily by the pleadings.

The various modes or instruments of discovery are meant to serve (1) as a device, along with the pre-
trial hearing under Rule 20, to narrow and clarify the basic issues between the parties, and (2) as a
device for ascertaining the facts relative to those issues. The evident purpose is, to repeat, to enable the
parties, consistent with recognized privileges, to obtain the fullest possible knowledge of the issues and
facts before civil trials and thus prevent that said trials are carried on in the dark. 72(Emphasis supplied,
citations omitted)

Specifically, this Court discussed the importance of a motion for production of documents under Rule 27
of the Rules of Court in expediting time-consuming trials:

This remedial measure is intended to assist in the administration of justice by facilitating and expediting
the preparation of cases for trial and guarding against undesirable surprise and delay; and it is
designed to simplify procedure and obtain admissions of facts and evidence, thereby shortening costly
and time-consuming trials. It is based on ancient principles of equity. More specifically, the purpose of
the statute is to enable a party-litigant to discover material information which, by reason of an
opponent's control, would otherwise be unavailable for judicial scrutiny, and to provide a convenient
and summary method of obtaining material and competent documentary evidence in the custody or
under the control of an adversary. It is a further extension of the concept of pretrial. 73(Emphasis
supplied)

Consistent with litigation's quest for truth, parties should welcome every opportunity in attaining this
objective, such as acting in good faith to reveal material documents. 74

The scope of discovery must be liberally construed, as a general rule, to serve its purpose of providing
the parties with essential information to reach an amicable settlement or to expedite trial. 75 "Courts, as
arbiters and guardians of truth and justice, must not countenance any technical ploy to the detriment of
an expeditious settlement of the case or to a fair, full and complete determination on its merits."76
Rule 27, Section 1 of the Rules of Court does not provide when the motion may be used. Hence, the
allowance of a motion for production of document rests on the sound discretion of the court where the
case is pending, with due regard to the rights of the parties and the demands of equity and justice. 77

In Eagleridge Development Corporation v. Cameron Granville 3 Asset Management, Inc., 78 we held that
a motion for production of documents may be availed of even beyond the pre-trial stage, upon showing
of good cause as required under Rule 27.79 We allowed the production of documents because the
petitioner was able to show "good cause" and relevance of the documents sought to be produced, and
the trial court had not yet rendered its judgment.

In this case, petitioner filed its Motion for Production of Documents after the Court of Tax Appeals
Division had rendered its judgment. According to the Court of Tax Appeals Division, the documents
sought to be produced were already discussed in the Commissioner's Memorandum dated October 21,
2010 and were already considered by the tax court when it rendered its Decision. 80 If petitioner
believed that the evidence in the custody and control of respondent "would provide a better
illumination of the outcome of the case," it should have sought their production at the earliest
opportunity as it had been already aware of their existence.81 Petitioner's laxity is inexcusable and is a
fatal omission.

Under these circumstances, there was indeed no further need for the production of documents and
objects desired by petitioner. These pieces of evidence could have served no useful purpose. On the
contrary, the production of those documents after judgment defeats the purpose of modes of discovery
in expediting case preparation and shortening trials.

We find no reversible error on the part of the Court of Tax Appeals En Banc in affirming the Division's
denial of petitioner's Motion for Production of Documents.

II

These consolidated cases involve the Tax Code provision defining new brand as opposed to variant of
brand, as these two are treated differently for excise tax on fermented liquor.

Effective January 1, 1998, Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997,
reproduced as Section 143 the provisions of Section 140 of the old Tax Code, as amended by Republic
Act No. 8240, governing excise taxes on fermented liquor. Section 143 distinguishes a new brand from a
variant of brand:

Sec. 143. Fermented Liquor. - There shall be levied, assessed and collected an excise tax on beer, lager
beer, ale, porter and other fermented liquors except tuba, basi, tapuy and similar domestic fermented
liquors in accordance with the following schedule:

(a) If the net retail price (excluding the excise tax and value-added tax) per liter of volume capacity is less
than Fourteen pesos and fifty centavos (14.50), the tax shall be Six pesos and fifteen centavos (P6.15)
per liter;
(b) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is
Fourteen pesos and fifty centavos (P14.50) up to Twenty-two pesos (P22.00), the tax shall be Nine pesos
and fifteen centavos (P9.15) per liter;

(c) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is
more than Twenty-two pesos (P22.00), the tax shall be Twelve pesos and fifteen centavos (Pl2.15) per
liter.

Variants of existing brands which are introduced in the domestic market after the ejfectivity of
Republic Act No. 8240 shall be taxed under the highest classification of any variant of that brand.

Fermented liquor which are brewed and sold at micro-breweries or small establishments such as pubs
and restaurants shall be subject to the rate in paragraph (c) hereof. The excise tax from any brand of
fermented liquor within the next three (3) years from the effectivity of Republic Act No. 8240 shall not
be lower than the tax which was due from each brand on October 1, 1996. The rates of excise tax on
fermented liquor under paragraphs (a), (b) and (c) hereof shall be increased by twelve percent (12%) on
January 1, 2000. New brands shall he classified according to their current net retail price.

For the above purpose, 'net retail price' shall mean the price at which the fermented liquor is sold on
retail in twenty (20) major supermarkets in Metro Manila (for brands of fermented liquor marketed
nationally), excluding the amount intended to cover the applicable excise tax and the value-added tax.
For brands which are marketed only outside Metro Manila, the 'net retail price' shall mean the price at
which the fermented liquor is sold in five (5) major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.

The classification of each brand of fermented liquor based on its average net retail price as of October 1,
1996, as set forth in Annex 'C,' shall remain in force until revised by Congress.

A 'variant of brand' shall refer to a brand on which a modifier is prefixed and/or suffixed to the root
name of the brand and/or a different brand which carries the same logo or design of the existing
brand.

Every brewer or importer of fermented liquor shall, within thirty (30) days from the effectivity of R.A.
No. 8240, and within the first five (5) days of every month thereafter, submit to the Commissioner a
sworn statement of the volume of sales for each particular brand of fermented liquor sold at his
establishment for the three-month period immediately preceding.

Any brewer or importer who, in violation of this Section, knowingly misdeclares or misrepresents in his
or its sworn statement herein required any pertinent data or information shall be penalized by a
summary cancellation or withdrawal of his or its permit to engage in business as brewer or importer of
fermented liquor.

Any corporation, association or partnership liable for any of the acts or omissions in violation of this
Section shall be fined treble the amount of deficiency taxes, surcharges and interest which may be
assessed pursuant to this Section.
Any person liable for any of the acts or omissions prohibited under this Section shall be criminally liable
and penalized under Section 254 of this Code. Any person who willfully aids or abets in the commission
of any such act or omission shall be criminally liable in the same manner as the principal.

If the offender is not a citizen of the Philippines, he shall be deported / immediately after serving the
sentence, without further proceedings for A deportation. (Emphasis supplied)

On January 1, 2005, Republic Act No. 933482 took effect, amending

Section 143 of the Tax Code to read:

Sec.143. Fermented Liquors. - There shall be levied, assessed and collected an excise tax on beer, lager
beer, ale, porter and other fermented liquors except tuba, basi, tapuy and similar fermented liquors in
accordance with the following schedule:

(a) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is
less than Fourteen pesos and fifty centavos (P14.50), the tax shall be Eight pesos and twenty-seven
centavos (P8.27) per liter;

(b) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is
Fourteen pesos and fifty centavos (P14.50) up to Twenty-two pesos (P22.00), the tax shall be Twelve
pesos and thirty centavos (P12.30) per liter;

(c) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is
more than Twenty-two pesos (P22.00), the tax shall be Sixteen pesos and thirty-three centavos (16.33)
per liter.

Variants of existing brands and variants of new brands which are introduced in the domestic market
after the effectivity of this Act shall be taxed under the proper classification thereof based on their
suggested net retail price: Provided, however, That such classification shall not, in any case, be lower
than the highest classification of any variant of that brand.

A 'variant of a brand' shall refer to a brand on which a modifier is prefvced and/or suffvced to the root
name of the brand.

Fermented liquors which are brewed and sold at micro-breweries or small establishments such as pubs
and restaurants shall be subject to the rate in paragraph (c) hereof.

New brands, as defined in the immediately following paragraph, shall initially be classified according to
their suggested net retail price.

'New brand' shall mean a brand registered after the date of effectivity of R.A. No. 8240.

'Suggested net retail price' shall mean the net retail price at which new brands, as defined above, of
locally manufactured or imported fermented liquor are intended by the manufacturer or importer to be
sold on retail in major supermarkets or retail outlets in Metro Manila for those marketed nationwide,
and in other regions, for those with regional markets. At the end of three (3) months from the product
launch, the Bureau of Internal Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct tax bracket to which a particular
new brand of fermented liquor, as defined above, shall be classified. After the end of eighteen (18)
months from such validation, the Bureau of Internal Revenue shall revalidate the initially validated net
retail price against the net retail price as of the time of revalidation in order to finally determine the
correct tax bracket which a particular new brand of fermented liquors shall be classified: Provided,
however, That brands of fermented liquors introduced in the domestic market between January 1,
1997 and December 31, 2003 shall remain in the classification under which the Bureau of Internal
Revenue has determined them to belong as of December 31, 2003. Such classification of new brands
and brands introduced between January 1, 1997 and December 31, 2003 shall not be revised except by
an act of Congress.

'Net retail price', as determined by the Bureau of Internal Revenue through a price survey to be
conducted by the Bureau of Internal Revenue itself, or the National Statistics Office when deputized for
the purpose by the Bureau of Internal Revenue, shall mean the price at which the fermented liquor is
sold on retail in at least twenty (20) major supermarkets in Metro Manila (for brands of fermented
liquor marketed nationally), excluding the amount intended to cover the applicable excise tax and the
value-added tax. For brands which are marketed outside Metro Manila, the 'net retail price' shall mean
the price at which the fermented liquor is sold in at least five (5) major supermarkets in the region
excluding the amount intended to cover the applicable excise tax and the value-added tax.

The classification of each brand of fermented liquor based on its average net retail price as of October
1, 1996, as set forth in Annex 'C', including the classification of brands for the same products which,
although not set forth in said Annex 'C', were registered and were being commercially produced and
marketed on or after October 1, 1996, and which continue to be commercially produced and marketed
after the e/fectivity of this Act, shall remain in force until revised by Congress.

The rates of tax imposed under this Section shall be increased by eight percent (8%) every two years
starting on January 1, 2007 until January 1, 2011.

Any downward reclassification of present categories, for tax purposes, of existing brands of fermented
liquor duly registered at the time of the effectivity of this Act which will reduce the tax imposed herein,
or the payment thereof, shall be prohibited.

Every brewer or importer of fermented liquor shall, within thirty (30) days from the effectivity of this
Act, and within the first five (5) days of every month thereafter, submit to the Commissioner a sworn
statement of the volume of sales for each particular brand of fermented liquor sold at his establishment
for the three-month period immediately preceding.

Any brewer or importer who, in violation of this Section, knowingly misdeclares or misrepresents in his
or its sworn statement herein required any pertinent data or information shall be penalized by a
summary cancellation or withdrawal of his or its permit to engage in business as brewer or importer of
fermented liquor.
Any corporation, association or partnership liable for any of the acts or omissions in violation of this
Section shall be fined treble the amount of deficiency taxes, surcharges and interest which may be
assessed pursuant to this Section.

Any person liable for any of the acts or omissions prohibited under this Section shall be criminally liable
and penalized under Section 254 of this Code. Any person who willfully aids or abets in the commission
of any such act or omission shall be criminally liable in the same manner as the principal.

If the offender is not a citizen of the Philippines, he shall be deported immediately after serving the
sentence, without further proceedings for deportation. (Emphasis supplied)

On December 19, 2012, Rep. Act No. 10351, otherwise known as the Sin Tax Law,83 was promulgated to
further amend certain provisions on excise taxes on alcohol and tobacco products. Among the
amendments to Section 143 were:

(1) Increase in the excise tax rates and transition from three (3)- tiered to two (2)-tiered tax rates
starting January 1, 2014 until December 31, 2016; and to a single tax rate beginning January 1, 201 7,
irrespective of the price levels at which the products were sold in the market;

(2) All fermented liquors existing in the market at the time of the effectivity of the Act shall be classified
according to the net retail prices and the tax rates provided, based on the latest price survey of the
fermented liquors conducted by the Bureau of Internal Revenue. However, any downward
reclassification is prohibited;

(3) Fermented liquors introduced in the domestic market after the effectivity of the Act shall be initially
tax-classified according to their suggested net retail prices until such time that their correct tax bracket
is finally determined under a specified period; and

(4) The proper tax classification of fermented liquors, whether registered before or after the effectivity
of the Act, shall be determined every two (2) years from the date of effectivity of the Act.

Excise taxes are imposed on the production, sale, or consumption of specific goods. Generally, excise
taxes on domestic products are paid by the manufacturer or producer before removal of those products
from the place of production.84 The excise tax based on weight, volume capacity, or any other physical
unit of measurement is referred to as "specific tax." If based on selling price or other specified value, it is
referred to as "ad valorem" tax. 85

The excise tax on beer is a specific tax based on volume, or on a per liter basis. Before its amendment,
Section 143 provided for three (3) layers of tax rates, depending on the net retail price per liter. How a
new beer product is taxed depends on its classification, i.e. whether it is a variant of an existing brand or
a new brand. Variants of a brand that were introduced in the market after January 1, 1997 are taxed
under the highest tax classification of any variant of the brand. On the other hand, new brands are
initially classified and taxed according to their suggested net retail price, until a survey is conducted by
the Bureau of Internal Revenue to determine their current net retail price in accordance with the
specified procedure.
III

Petitioner argues that "San Mig Light," launched in November 1999, is not a new brand but merely a
low-calorie variant of "San Miguel Pale Pilsen."86 Thus, the application of the higher excise tax rate for
variant products is appropriate and respondent should not be entitled to a refund or issuance of a tax
credit certificate. 87

Respondent counters that "San Mig Light" is a new brand; the classification of "San Mig Light" as a new
and medium-priced brand may not be revised except by an act of Congress;88 and the Court of Tax
Appeals did not err in granting its claim for refund or issuance of tax credit certificate.

The refund claim in CTA Case No. 7405, subject of the Petition docketed as G.R. No. 205723, covers the
period from February 2, 2004 to November 30, 2005, while the refund claim in CTA Case No. 7708,
subject of the Petition docketed as G.R. No. 205045, covers the period from December 1, 2005 up to July
31, 2007.

We find for respondent.

Parenthetically, the Bureau of Internal Revenue's actions reflect its admission and confirmation that
"San Mig Light" is a new brand.

When respondent's October 19, 1999 letter requested the registration and authority to manufacture
"San Mig Light," to be taxed at 12.15 per liter,89 the Bureau of Internal Revenue granted the request.90

The response dated February 7, 2002 of the LTAD II Acting Chief confirmed that respondent was allowed
to register, manufacture, and sell "San Mig Light" as a new brand.91

The Joint Stipulation of Facts, Documents and Issues in CTA Cases Nos. 7052 and 7053 dated July 29,
2005,92signed by both parties, includes paragraph 1.08, which reads:

1.08. From the time of its registration as a new brand in October 1999 and its production in November
1999, "San Mig Light" products have been withdrawn and sold, and taxes have been paid on such
removals, on the basis of its registration and tax rate as a new brand. (CTA No. 7052: Petition, par. 5.06;
Answer, par. 2[e]; CTA No. 7053: Petition, par. 5.06; Answer, par. 2[e]). 93 (Emphasis supplied)

The May 28, 2002 Notice of Discrepancy was effectively nullified by the subsequent issuance of Revenue
Memorandum Order No. 6-2003, which included "San Mig Light" as a new brand.

The Bureau of Internal Revenue issued Revenue Memorandum Order No. 6-2003 dated March 11, 2003
with the subject, Prescribing the Guidelines and Procedures in the Establishment of Current Net Retail
Prices of New Brands of Cigarettes and Alcohol Products Pursuant to Revenue Regulations No. 9-2003.
Annex "A-3" is the Master List of Registered Brands of Locally Manufactured Alcohol Products as of
February 28, 2003, and the list includes "San Mig Light,"94 classified as "NB" or "new brand registered on
or after January 1, 1997" : 95
INTENDED
REMARKS
MARKET

BRAND NAME CLASS SPECIFICATION PACKAGE


Date of
Domestic
Export Status Last
Sale
Production

B.
FERMENTED

LIQUOR

I. SAN MIGUEL
CORPORATION

....

"San Mig NB 330ml flint 24 bots x x Active96


Light" bottle

IV

Any reclassification of fermented liquor products should be by act of Congress. Section 143 of the Tax
Code, as amended by Rep. Act No. 9334, provides for this classification freeze referred to by the parties:

Provided, however, That brands of fermented liquors introduced in the domestic market between
January 1, 1997 and December 31, 2003 shall remain in the classification under which the Bureau of
Internal Revenue has determined them to belong as of December 31, 2003. Such classification of new
brands and brands introduced between January 1, 1997 and December 31, 2003 shall not be revised
except by an act of Congress.

....

The classification of each brand of fermented liquor based on its average net retail price as of October 1,
1996, as set forth in Annex 'C', including the classification of brands for the same products which,
although not set forth in said Annex 'C', were registered and were being commercially produced and
marketed on or after October 1, 1996, and which continue to be commercially produced and marketed
after the effectivity of this Act, shall remain in force until revised by Congress.97 (Emphasis supplied)

In her Dissenting Opinion, Court of Tax Appeals Associate Justice Cielito N. Mindaro-Grulla discussed
that British American Tobacco v. Camacho98 explained the purpose and application of the classification
freeze. 99 Her Dissenting Opinion concludes that the classification freeze does not apply when a brand is
a variant erroneously determined as a new brand. 100

British American Tobacco involves Section 145 of the Tax Code governing excise taxes for cigars and
cigarettes.

This Court in British American Tobacco discussed that Rep. Act No. 9334 includes, among other things,
the legislative freeze on cigarette brands introduced between January 2, 1997 and December 31, 2003,
in that these cigarette brands will remain in the classification determined by the Bureau of Internal
Revenue as of December 31, 2003 until revised by Congress.101 In other words, after a cigarette brand is
classified under the low-priced, medium-priced, high-priced, or premium-priced tax bracket based on its

current net retail price, its classification is frozen unless Congress reclassifies it.102

The petitioner in British American Tobacco questioned this legislative freeze under Section 145 for
creating a "grossly discriminatory classification scheme between old and new brands." 103 This Court
ruled that the classification freeze provision does not violate the constitutional provisions on equal
protection. 104

This Court discussed the legislative intent behind the classification freeze, that is, to deter the potential
for abuse if the power to reclassify is delegated and much discretion is given to the Department of
Finance and Bureau of Internal Revenue:

To our mind, the classification freeze provision was in the main the result of Congress' earnest efforts to
improve the efficiency and effectivity of the tax administration over sin products while trying to balance
the same with other state interests. In particular, the questioned provision addressed Congress'
administrative concerns regarding delegating too much authority to the DOF and BIR as this will open
the tax system to potential areas of abuse and corruption. Congress may have reasonably conceived
that a tax system which would give the least amount of discretion to the tax implementers would
address the problems of tax avoidance and tax evasion. 105

British American Tobacco discussed the legislative history of the classification freeze, but it did not
explicitly rule that the classification freeze only refers to retail price tax brackets.

In any event, petitioner's letters and Notices of Discrepancy, which effectively changed San Mig Light's
brand's classification from "new brand to variant of existing brand," necessarily changes San Mig Light's
tax bracket. Based on the legislative intent behind the classification freeze provision, petitioner has no
power to do this.

A reclassification of a fermented liquor brand introduced between January 1, 1997 and December 31,
2003, such as "San Mig Light," must be by act of Congress. There was none in this case.

V
Before Rep. Act No. 9334 was passed, the Tax Code under Republic Act No. 8240 defined a "variant of a
brand" as follows:

A variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root
name of the brand and/or a different brand which carries the same logo or design of the existing
brand. 106

This definition includes two (2) types of "variants." The first involves the use of a modifier that is
prefixed and/ or suffixed to a brand root name, and the second involves the use of the same logo or
design of an existing brand.

Rep. Act No. 9334 took effect on January 1, 2005 and deleted the second type of "variant" from the
definition:

A 'variant of a brand' shall refer to a brand on which a modifier is prefixed and/or suffixed to the root
name of the brand. 107

Revenue Regulations No. 3-2006, with the subject: "Prescribing the Implementing Guidelines of the
Revised Tax Rates on Alcohol and Tobacco Products Pursuant to the Provisions of Republic Act No. 9334,
and Clarifying Certain Provisions of Existing Revenue Regulations Relative Thereto " reiterated the
deletion of the second type of "variant":

SEC. 2. DEFINITION OF TERMS. - For purposes of these Regulations, the following words and phrases
shall have the meaning indicated below:

....

(d) VARIANT OF A BRAND - shall refer to a brand of alcohol or tobacco products on which a modifier is
pref1Xed and/or suff1Xed to the root name of the brand. (Emphasis supplied)

For this purpose, the term "root name" shall refer to a letter, word, number, symbol, or character; or a
combination of letters, words, numbers, symbols, and/or characters that may or may not form a word;
or shall consist of a word or group of words, which may or may not describe the other word or words:
Provided, That the root name has been originally registered as such with the Bureau of Internal Revenue
(BIR).

Examples of root name: "L & M", "b W ", "10'', "Pall Mall'', "Blue Ice'', "Red Horse'', etc.

The term "modifier" shall refer to a word, a number or a combination of words and/or numbers that
specifically describe the root name to distinguish one variant from another whether or not the use of
such modifier is a common industry practice. The root name, although accompanied by a modifier at the
time of the original brand registration, shall be the basis in determining the tax classification of
subsequent variants of such brands.

Examples of modifiers: ...


For beer: "Light", "Dry", "Ice'', "Lager",

"Hard", "Premium", etc.

Any variation in the color and/or design of the label (such as logo, font, picturegram, and the like),
manner and/or form of packaging or size of container of the brand originally registered with the BIR
shall not, by itself, be deemed an introduction of a new brand or a variant of a brand: Provided, That all
instances of such variation shall require a prior written permit from the BIR.

In case such BIR-registered brand has more than one (1) tax classification as a result of the shift in the
manner of taxation from ad valorem tax to specific tax under R.A. No. 8240, the highest tax classification
shall be applied to such brand bearing a new label, package, or volume content per package, subject to
the provisions of the immediately preceding paragraph.

ILLUSTRATION:

No. 1. -

....

In case a letter(s), number(s), symbols(s) or word(s) is/are deleted from or replaced by another letter(s),
number(s), symbol(s) or word(s) in the root name of a previously BIR-registered brand, such that the
introduction of the said brand bearing such change(s) shall ride on the popularity of the said previously
registered brand, the same shall be classified as a variant of such previously registered brand: Provided,
That where the introduction of such brand by another manufacturer or importer will give rise to any
legal action with respect to infringement of patent or unfair competition, such brand shall be considered
a variant of such previously registered brand.

ILLUSTRATION:

No. 2.

ROOT NAME MODIFIER IS PREFIXED MODDIFIER IS MODIFIED ROOT


SUFFIXED NAME

L&M Kings L& M L & M Lights M&L

10 Perfect 10 10 Menthols Ten

Blue Ice Wild Blue Ice Blue Ice Supreme Blue Iced

Red Horse Flying Red Horse Red Horse Premium Reddish Horse
Pall Mall Long Pall Mall Pall Mall Filter Pal Mall

Petitioner submits that the complete name of "San Mig Light" is "San Mig Light Pale Pilsen," and Section
143 of the Tax Code, in relation to its Annexes C-1 and C-2, show that the parent brands of San Mig Light
are RPT108 in cans or San Miguel Beer Pale Pilsen in can 330 ml, Pale Pilsen, and Super Dry. 109 It contends
that the root name of the existing brand is "Pale Pilsen," and RPT had the highest tax classification at the
time "San Mig Light" was introduced. 110 "San Miguel Beer Pale Pilsen" and "San Mig Light" have almost
identical labels, and only these two labels bear the same "Pale Pilsen."111

Respondent counters that petitioner changed its theory of the case on appeal, and this should not be
allowed. 112 It argues that petitioner categorically invoked the second part of the definition of variant in
Section 143, and this part of the definition has been deleted by Rep. Act No. 9334. 113 Moreover,
petitioner made no categorical assertion on the first part of the definition, but only a vague statement
that "the root name of the existing brand is 'Pale Pilsen."' 114 Respondent adds that petitioner "has not
specified which type of 'San Mig Light', in bottle or in can, is a variant of 'RPT' in can (San Miguel Beer
Pale Pilsen)." 115

Petitioner, on the other hand, maintains that even during the trial stage, its theory has always been that
"San Mig Light" falls under both first and second parts of Section 143, before its amendment by Rep. Act
No. 9334. 116

A change of theory on appeal is generally disallowed in this jurisdiction for being unfair to the adverse
party. 117

Even then, the Court of Tax Appeals En Banc, in both assailed Decisions, quoted with approval the First
Division's finding that "San Mig Light" does not fall under both first and second parts of the definition of
variant:

The fact that "San Mig Light" is a "new brand" and not merely a variant of an existing brand is bolstered
by the fact that Annexes "C-1" and "C-2" of RA No. 8240, which enumerated the fermented liquors
registered with the BIR do not include the brand name "San Mig Light". Instead, what were listed, as
existing brands of petitioner, as of the effectivity of RA No. 8240, were as follows: "Pale Pilsen 320 ml.",
"Super Dry 355 ml." and "Premium Can 330 ml." Even in Section 4 of RR No. 2- 97, which provides for
the classification and manner of taxation of existing brands, new brands and variants of existing brands,
the list of existing brands of fermented liquors of petitioner does not include the brand "San Mig Light",
but merely "RPT in cans 330 ml.", "Premium Bottles 355 ml.", "Premium Bottles 355 ml." and "Premium
Bottle Can 330 ml." for high priced brands; and "Super Dry 355 ml.", "Pale Pilsen 320 ml.", and "Grande"
for medium-priced brands.118

Thus, it is clear that when the product "San Mig Light" was introduced in 1999, it was considered as an
entirely new product and a new brand of petitioner's fermented liquor, there being no root name of
"San Miguel" or "San Mig" in its existing brand names. The existing registered and classified brand
name of petitioner at that time was "Pale Pilsen." Therefore, the word "Light" cannot he considered as
a mere suff1:x to the word "San Miguel," hut it is part and parcel of an entirely new brand name, "San
Mig Light." Evidently, as correctly pointed out by petitioner, "San Mig Light" is not merely a variant of
an existing brand, but an entirely new brand:

Anent the second type of "variant of brand," i.e., when a different brand carries the same logo or design
of an existing brand, records show that there are marked differences in the designs of the existing
brand "Pale Pilsen" and the new brand "San Mig Light":

a) as to "Pale Pilsen" and "San Mig Light" in bottles:

1. the size, shape and color of the respective bottles are different. Each brand has a distinct design in its
packaging. "Pale Pilsen" is in a steiny bottle, while "San Mig Light" is packed in a tall and slim transparent
bottle;

2. the design and color of the inscription on the bottles are different from each other. "Pale Pilsen" has
its label encrypted or embossed on the bottle itself, while "San Mig Light" has a silver and blue label of
distinctive design that is printed on paper pasted on the bottle; and

3. the color of the letters in the "Pale Pilsen" brand is white against the color of the bottle, while that of
the words "San Mig" is white against a blue background and the word "Light" is blue against a silver
background.

b) As to "Pale Pilsen" and "San Mig Light" in cans:

1. the words "Pale Pilsen" are in ordinary font printed horizontally in black on the can against a
diagonally striped light yellow gold background, while the words "San Mig" are in Gothic font printed
diagonally on the can against a blue background and the word "Light" in ordinary font printed diagonally
against a diagonally striped silver background; and

2. the general color scheme of "Pale Pilsen" is light yellow gold, while that of "San Mig Light" is silver.

Though the "escudo" logo appears on both "Pale Pilsen" bottle and "San Mig Light" bottle and can, the
same cannot be considered as an indication that "San Mig Light" is merely a variant of the brand "Pale
Pilsen", since the said "escudo" insignia is the corporate logo of petitioner. It merely identifies the
products, as having been manufactured by petitioner, but does not form part of its brand. In fact, it
appears not only in petitioner's beer products, but even in its non-beer products. 119

VI

A variant under the Tax Code has a technical meaning. It 1s determined by the brand (name) or logo of
the beer product.

To be sure, all beers are composed of four (4) raw materials: barley, hops, yeast, and water. 120 Barley
grain has always been used and associated with brewing beer, while hops act as the bittering
substance. 121 Yeast plays a role in alcoholic fermentation, with bottom-fermenting yeasts resulting in
light lager and top-fermenting ones producing the heavy and rich ale. 122 With only four (4) ingredients
combined and processed in varying quantities, all beer are essentially related variants of these mixtures.

A manufacturer of beer may produce different versions of its products, distinguished by features such as
flavor, quality, or calorie content, to suit the tastes and needs of specific segments of the domestic
market. It can also leverage on the popularity of its existing brand and sell a lower priced version to
make it affordable for the low-income consumers. These strategies are employed to gain a higher
overall level of share or profit from the market.

In intellectual property law, a registered trademark owner has the right to prevent others from the use
of the same mark (brand) for identical goods or services. The use of an identical or colorable imitation of
a registered trademark by a person for the same goods or services or closely related goods or services of
another party constitutes infringement. It is a form of unfair competition123 because there is an attempt
to get a free on the reputation and selling power of another manufacturer by passing of one's goods as
identical or produced by the same manufacturer as those carrying the other mark (brand). 124

The variant contemplated under the tax Code has a technical meaning. A variant is determined by the
brand (name) of the beer product, whether it was formed by prefixing or suffixing a modifier to the root
name of the alleged parent brand, or whether it carries the same logo or design. The purpose behind the
definition was to properly tax brands that were presumed to be riding on the popularity of previously
registered brands by being marketed under an almost identical name with a prefix, suffix, or a
variant. 125 It seeks to address price differentials employed by a manufacturer on similar products
differentiated only in brand or design. Specifically, the provision was meant to obviate any tax avoidance
by manufacturing firms from the sale of lower priced variants of its existing beer brands, thus, falling in
the lower tax bracket with lower excise tax rates. To favor government, a variant of a brand is taxed
according to the highest rate of tax for that particular brand.

"San Mig Light" and "Pale Pilsen" do not share a root word. Neither is there an existing brand in the list
(Annexes C-1 and C-2 of the Tax Code) called "San Mig" to conclude that "Light" is a suffix rendering
"San Mig Light" as its "variant."126 As discussed in the Court of Tax Appeals Decision, "San Mig Light"
should be considered as one brand name. 127

Respondent's statements describing San Mig Light as a low-calorie variant is not conclusive of its
classification as a variant for excise tax purposes. Burdens are not to be imposed nor presumed to be
imposed beyond the plain and express terms of the law. 128 "The general rule of requiring adherence to
the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication." 129

Furthermore, respondent's payment of the higher taxes starting January 30, 2004 after deficiency
assessments were made cannot be considered as an admission that its San Mig Light is a variant. Section
130(A)(2) of the Tax Code requires payment of excise tax "before removal of domestic products from
place of production." 130 These payments were made in protest as respondent subsequently filed refund
claims.
VII

Petitioner argues that although the Bureau of Internal Revenue erroneously allowed San Miguel
Corporation to manufacture and sell "San Mig Light" in 1999 as a "new brand" with the lower excise tax
rate for "new brands," government is not estopped from correcting previous errors by its agents. 131

Petitioner submits that the Notice of Discrepancy was to remedy the misinterpretation"132 of "San Mig
Light" as new brand. It submits that respondent's self-assessment of excise taxes as a new brand was
without approval:

San Mig Light was never registered with BIR as a new brand but always as a variant. Thus, petitioner's
payment of excise taxes on San Mig Light as a new brand is based on its own classification of San Mig
Light as a new brand without approval of the BIR. Under existing procedures in the payment of excise
taxes, taxpayers are required to pay their taxes based on self-assessment system with the government
relying heavily on the honesty of taxpayers. Such being the case, any payments made, even those
allegedly made as a condition for the withdrawal of the product from the place of production, cannot be
considered as a confirmation by the BIR 133 of the correctness of such payment.

Section 143 of the Tax Code, as amended by Rep. Act No. 9334, provides for the Bureau of Internal
Revenue's role in validating and revalidating the suggested net retail price of a new brand of fermented
liquor for purposes of determining its tax bracket:

'Suggested net retail price' shall mean the net retail price at which new brands, as defined above, of
locally manufactured or imported fermented liquor are intended by the manufacturer or importer to be
sold on retail in major supermarkets or retail outlets in Metro Manila for those marketed nationwide,
and in other regions, for those with regional markets.At the end of three (3) months from the product
launch, the Bureau of InternalRevenue shall validate the suggested net retail price of the new
brandagainst the net retail price as defined herein and determine the correcttax bracket to which a
particular new brand of fermented liquor, asdefined above, shall be classified. After the end of
eighteen (18) monthsfrom such validation, the Bureau of Internal Revenue shall revalidatethe initially
validated net retail price against the net retail price as of thetime of revalidation in order to finally
determine the correct tax bracketwhich a particular new brand of fermented liquors shall be
classified: Provided, however, That brands of fermented liquors introduced in the domestic market
between January 1, 1997 and December 31, 2003 shall remain in the classification under which the
Bureau of Internal Revenue has determined them to belong as of December 31, 2003. Such classification
of new brands and brands introduced between January 1, 1997 and December 31, 2003 shall not be
revised except by an act of Congress.

When respondent launched "San Mig Light" in 1999, it wrote the Bureau of Internal Revenue on October
19, 1999 requesting registration and authority to manufacture "San Mig Light" to be taxed as P12.15.

The Bureau of Internal Revenue granted this request in its October 27, 1999 letter. Contrary to
petitioner's contention, the registration granted was not merely for intellectual property
protection 134 but "for internal revenue purposes only":
Your request dated October 19, 1999, for the registration of San Miguel Corporation commercial label
for beer bearing the trade mark "San Mig Light" Pale Pilsen, for domestic sale or export, 24 bottles in a
case, each flint bottle with contents of 330 ml., is hereby granted.

....

Please follow strictly the requirements of internal revenue laws, rules and regulations relative to the
marks to be placed on each case, cartons or box used as secondary containers. It is understood that the
said brand be brewed and bottled in the breweries at Polo, Valenzuela (A-2-21).

You are hereby informed that the registration of commercial labels in this Office is for internal revenue
purposes only and does not give you protection against any person or entity whose rights may be
prejudiced by infringement or unfair competition resulting from your use of the above indicated
trademark. 135 (Emphasis supplied)

Because the Bureau of Internal Revenue granted respondent's request in its October 27, 1999 letter and
confirmed this grant in its subsequent letters, respondent cannot be faulted for relying on these actions
by the Bureau of Internal Revenue.

While estoppel generally does not apply against government, especially when the case involves the
collection of taxes, an exception can be made when the application of the rule will cause injustice
against an innocent party.136

Respondent had already acquired a vested right on the tax classification of its San Mig Light as a new
brand. To allow petitioner to change its position will result in deficiency assessments in substantial
amounts against respondent to the latter's prejudice.

The authority of the Bureau of Internal Revenue to overrule, correct, or reverse the mistakes or errors of
its agents is conceded. However, this authority must be exercised reasonably,137 i.e., only when the
action or ruling is patent y erroneous138 or patent y contrary to law.139 For the presumption lies in the
regularity of performance of official duty,140and reasonable care has been exercised by the revenue
officer or agent in evaluating the facts before him or her prior to rendering his or her decision or ruling-
in this case, prior to the approval of the registration of San Mig Light as a new brand for excise tax
purposes. A contrary view will create disorder and confusion in the operations of the Bureau of Internal
Revenue and open the administrative agency to inconsistencies in the administration and enforcement
of tax laws.

In Commissioner v. Algue:141

It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard-earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If
it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxf:ayer can
demonstrate, as it has here, that the law has not been observed.142

VIII

The Tax Code includes remedies for erroneous collection and overpayment of taxes. Under Sections 229
and 204(C) of the Tax Code, a taxpayer may seek recovery of erroneously paid taxes within two (2) years
from date of payment:

SEC. 229. Recovery of tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening case that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.

....

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. -The
Commissioner may

....

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the purchaser,
and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and
refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty: Provided, however, That a return filed showing an
overpayment shall be considered as a written claim for credit or refund.

A Tax Credit Certificate validly issued under the provisions of this Code may be applied against any
internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. Any request
for conversion into refund of unutilized tax credits may be allowed, subject to the provisions of Section
230 of this Code: Provided, That the original copy of the Tax Credit Certificate showing a creditable
balance is surrendered to the appropriate revenue officer for verification and cancellation: Provided,
further, That in no case shall a tax refund be given resulting from availment of incentives granted
pursuant to special laws for which no actual payment was made.

The Commissioner shall submit to the Chairmen of the Committee on Ways and Means of both the
Senate and House of Representatives, every six (6) months, a report on the exercise of his powers under
this Section, stating therein the following facts and information, among others: names and addresses of
taxpayers whose cases have been the subject of abatement or compromise; amount involved; amount
compromised or abated; and reasons for the exercise of power: Provided, That the said report shall be
presented to the Oversight Committee in Congress that shall be constituted to determine that said
powers are reasonably exercised and that the Government is not unduly deprived of revenues.

In G.R. No. 205045, the Court of Tax Appeals En Banc ruled that "San Mig Light" is a new brand and not a
variant of an existing brand. Accordingly, it ordered the refund of erroneously collected excise taxes
on"San Mig Light" products in the amount of 926,169,056.74 for the period of December 1, 2005 to
July 31, 2007. 143

In G.R. No. 205723, the Court of Tax Appeals En Banc found proper the refund of erroneously collected
excise taxes on "San Mig Light" products in the amount of '781,514,772.56 for the period of February
2, 2004 to November 30, 2005. 144 It referred to, and agreed with, the findings of the Court-
commissioned Independent Certified Public Accountant Normita L. Villaruz on reaching this
amount. 145 The Court of Tax Appeals also found, from the records, that respondent timely filed its
administrative claim for refund on December 28, 2005, and its judicial claim on January 31, 2006. 146

This Court accords the highest respect to the factual findings of the Court of Tax Appeals. We recognize
its developed expertise on the subject as it is the court dedicated solely to considering tax issues, unless
there is a showing of abuse in the exercise of authority. 147 We find no reason to overturn the factual
findings of the Court of Tax Appeals on the amounts allowed for refund.

WHEREFORE, the Petitions are DENIED. The assailed Decisions and Resolutions of the Court of Tax
Appeals En Banc in CTA Case Nos. 7052, 7053, 7405, and 7708 are AFFIRMED.

SO ORDERED.
EN BANC

April 25, 2017

G.R. No. 199669

SOUTHERN LUZON DRUG CORPORATION, Petitioner,


vs.
THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT, THE NATIONAL COUNCIL FOR THE
WELFARE OF DISABLED PERSONS, THE DEPARTMENT OF FINANCE, and THE BUREAU OF INTERNAL
REVENUE, Respondents

DECISION

REYES, J.:

Before the Court is a Petition for Review on Certiorari1under Rule 45 of the Rules of Court, assailing the
Decision2dated June 17, 2011, and Resolution3 dated November 25, 2011 of the Court of Appeals (CA) in
CA-G.R. SP No. 102486, which dismissed the petition for prohibition filed by Southern Luzon Drug
Corporation (petitioner) against the Department of1 Social Welfare and Development (DSWD), the
National Council for the Welfare of Disabled Persons (NCWDP) (now National Council on Disability
Affairs or NCDA), the Department of Finance (DOF) and the Bureau of: Internal Revenue (collectively, the
respondents), which sought to prohibit the implementation of Section 4(a) of Republic Act (R.A.) No.
9257, otherwise known as the "Expanded Senior Citizens Act of 2003" and Section 32 of R.A. No. 9442,
which amends the "Magna Carta for Disabled Persons," particularly the granting of 20% discount on the
purchase of medicines by senior citizens and persons with disability (PWD),: respectively, and treating
them as tax deduction.

The petitioner is a domestic corporation engaged in the business of: drugstore operation in the
Philippines while the respondents are government' agencies, office and bureau tasked to monitor
compliance with R.A. Nos. 9257 and 9442, promulgate implementing rules and regulations for their
effective implementation, as well as prosecute and revoke licenses of erring1 establishments.

Factual Antecedents

On April 23, 1992, R.A. No. 7432, entitled "An Act to Maximize the Contribution of Senior Citizens to
Nation-Building, Grant Benefits and Special Privileges and For Other Purposes," was enacted. Under the
said law, a senior citizen, who must be at least 60 years old and has an annual income of not more than
P60,000.00,4 may avail of the privileges provided in Section 4 thereof, one of which is 20% discount on
the purchase of medicines. The said provision states:

Sec. 4. Privileges for the Senior Citizen. - x x x:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment, restaurants and recreation centers
and purchase of medicine anywhere in the country: Provided, That private establishments may claim
the cost as tax credit[.]

x x x x (Emphasis ours)

To recoup the amount given as discount to qualified senior citizens, covered establishments can claim
an equal amount as tax credit which can be applied against the income tax due from them.

On February 26, 2004, then President Gloria Macapagal-Arroyo signed R.A. No. 9257, amending some
provisions of R.A. No. 7432. The new law retained the 20% discount on the purchase of medicines but
removed the annual income ceiling thereby qualifying all senior citizens to the privileges under the law.
Further, R.A. No. 9257 modified the tax treatment of the discount granted to senior citizens, from tax
credit to tax deduction from gross income, computed based on the net cost of goods sold or services
rendered. The pertinent provision, as amended by R.A. No. 9257, reads as follows:

SEC. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase
of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral
and burial services for the death of senior citizens;

xxxx

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based
on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax deduction net of value-added tax if
applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as amended. (Emphasis
ours)

On May 28, 2004, the DSWD issued the Implementing Rules and Regulations (IRR) of R.A. No. 9257.
Article 8 of Rule VI of the said IRR provides:

Article 8. Tax Deduction of Establishments. - The establishment may claim the discounts granted under
Rule V, Section 4 - Discounts for Establishments; Section 9, Medical and Dental Services in Private
Facilities and Sections 10 and 11 -Air, Sea and Land Transportation as tax deduction based on the net
cost of the goods sold or services rendered. Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted; Provided, further,
That the total amount of the claimed tax deduction net of value-added tax if applicable, shall be
included in their gross sales receipts for tax purposes and shall be subject to proper documentation and
to the provisions of the National Internal Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the
Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF). (Emphasis ours)
The change in the tax treatment of the discount given to senior citizens did not sit well with some drug
store owners and corporations, claiming it affected the profitability of their business. Thus, on January
13, 2005, I Carlos Superdrug Corporation (Carlos Superdrug), together with other. corporation and
proprietors operating drugstores in the Philippines, filed a Petition for Prohibition with Prayer for
Temporary Restraining Order (TRO) I and/or Preliminary Injunction before this Court, entitled Carlos
Superdrug I Corporation v. DSWD,5docketed as G.R. No. 166494, assailing the constitutionality of Section
4(a) of R.A. No. 9257 primarily on the ground that it amounts to taking of private property without
payment of just compensation. In a Decision dated June 29, 2007, the Court upheld the constitutionality
of the assailed provision, holding that the same is a legitimate exercise of police power. The relevant
portions of the decision read, thus:

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been purposely
veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough
room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest
benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of
powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by
the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes,
and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge
to be for the good and welfare of the commonwealth, and of the subjects of the same."

For this reason, when the conditions so demand as determined by the legislature, property rights must
bow to the primacy of police power because property rights, though sheltered by due process, must
yield to general welfare.

xxxx

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides
the precept for the protection of property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities, continuously serve as a reminder that the
right to property can be relinquished upon the command of the State for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means employed in
invoking the active participation of the private sector, in order to achieve the purpose or objective of the
law, is reasonably and directly related. Without sufficient proof that Section 4(a) of RA. No. 9257 is
arbitrary, and that the continued implementation of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a legislative act.

WHEREFORE, the petition is DISMISSED for lack of merit.6 (Citations omitted)

On August 1, 2007, Carlos Superdrug filed a motion for reconsideration of the foregoing decision.
Subsequently, the Court issued Resolution dated August 21, 2007, denying the said motion with
finality. 7
Meanwhile, on March 24, 1992, R.A. No. 7277 pertaining to the "Magna Carta for Disabled Persons" was
enacted, codifying the rights and privileges of PWDs. Thereafter, on April 30, 2007, R.A. No. 9442 was
enacted, amending R.A. No. 7277. One of the salient amendments in the law is the insertion of Chapter
8 in Title 2 thereof, which enumerates the other privileges and incentives of PWDs, including the grant
of 20% discount on the purchase of medicines. Similar to R.A. No. 9257, covered establishments shall
claim the discounts given to PWDs as tax deductions from the gross income, based on the net cost of
goods sold or services rendered. Section 32 ofR.A. No. 9442 reads:

CHAPTER 8. Other Privileges and Incentives

SEC. 32. Persons with disability shall be entitled to the following:

xxxx

(c) At least twenty percent (20%) discount for the purchase of medicines in all drugstores for the
exclusive use or enjoyment of persons with disability;

xxxx

The establishments may claim the discounts granted in subsections (a), (b), (c), (e), (t) and (g) as
taxdeductions based on the net cost of the goods sold or services rendered: Provided, however, That
the cost of the discount shall be allowed as deduction from gross income for the same taxable year that
the discount is granted: Provided, further, That the total amount of the claimed tax deduction net of
value-added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue Code (NIRC), as
amended. (Emphasis ours)

Pursuant to the foregoing, the IRR of R.A. No. 9442 was promulgated by the DSWD, Department of
Education, DOF, Department of Tourism and the Department of Transportation and
Communications.8Sections 5 .1 and 6.1.d thereof provide:

Sec. 5. Definition of Terms. For purposes of these Rules and Regulations, these terms are defined as
follows:

5.1. Persons with Disability are those individuals defined under Section 4 of RA 7277, "An Act Providing
for the Rehabilitation, Self-Development and Self-Reliance of Persons with Disability as amended and
their integration into the Mainstream of Society and for Other Purposes." This is defined as a person
suffering from restriction or different abilities, as a result of a mental, physical or sensory impairment, to
perform an activity in a manner or within the range considered normal for human being. Disability shall
mean: (1) a physical or mental impairment that substantially limits one or more psychological,
physiological or anatomical function of an individual or activities of such individual; (2) a record of such
an impairment; or (3) being regarded as having such an impairment.

xxxx
6.1.d Purchase of Medicine - At least twenty percent (20%) discount on the purchase of medicine for the
exclusive use and enjoyment of persons with disability. All drug stores, hospital, pharmacies, clinics and
other similar establishments selling medicines are required to provide at least twenty percent (20%)
discount subject to the guidelines issued by DOH and PHILHEALTH.

On February 26, 2008, the petitioner filed a Petition for Prohibition with Application for TRO and/or Writ
of Preliminary Injunction9 with the CA, seeking to declare as unconstitutional (a) Section 4(a) of R.A. No.
9257, and (b) Section 32 of R.A. No. 9442 and Section 5.1 of its IRR, insofar as these provisions only
allow tax deduction on the gross income based on the net cost of goods sold or services rendered as
compensation to private establishments for the 20% discount that they are required to grant to senior
citizens and PWDs. Further, the petitioner prayed that the respondents be permanently enjoined from
implementing the assailed provisions.

Ruling of the CA

On June 17, 2011, the CA dismissed the petition, reiterating the ruling of the Court in Carlos
Superdrug10particularly that Section 4(a) of R.A. No. 9257 was a valid exercise of police power.
Moreover, the CA held that considering that the same question had been raised by parties similarly
situated and was resolved in Carlos Superdrug, the rule of stare decisis stood as a hindrance to any
further attempt to relitigate the same issue. It further noted that jurisdictional considerations also
compel the dismissal of the action. It particularly emphasized that it has no original or appellate
jurisdiction to pass upon the constitutionality of the assailed laws, 11 the same pertaining to the Regional
Trial Court (RTC). Even assuming that it had concurrent jurisdiction with the RTC, the principle of
hierarchy of courts mandates that the case be commenced and heard by the lower court. 12 The CA
further ruled that the petitioner resorted to the wrong remedy as a petition for prohibition will not lie to
restrain the actions of the respondents for the simple reason that they do not exercise judicial, quasi-
judicial or ministerial duties relative to the issuance or implementation of the questioned provisions.
Also, the petition was wanting of the allegations of the specific acts committed by the respondents that
demonstrate the exercise of these powers which may be properly challenged in a petition for
prohibition.13

The petitioner filed its Motion for Reconsideration 14 of the Decision dated June 17, 2011 of the CA, but
the same was denied in a Resolution 15 dated November 25, 2011.

Unyielding, the petitioner filed the instant petition, raising the following assignment of errors, to wit:

THE CA SERIOUSLY ERRED WHEN IT RULED THAT A PETITION FOR PROHIBITION FILED WITH THE CA IS
AN IMPROPER REMEDY TO ASSAIL THE CONSTITUTIONALITY OF THE 20%, SALES DISCOUNT FOR
SENIOR CITIZENS AND PWDs;

II
THE CA SERIOUSLY ERRED WHEN IT HELD THAT THE SUPREME COURT'S RULING IN CARLOS
SUPERDRUG CONSTITUTES STARE DECISIS;

III

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE 20%, SALES
DISCOUNT FOR SENIOR CITIZENS AND PWDs IS A VALID EXERCISE OF POLICE POWER. ON THE
CONTRARY, IT IS AN INVALID EXERCISE OF THE POWER OF EMINENT DOMAIN BECAUSE IT FAILS TO
PROVIDE JUST COMPENSATION TO THE PETITIONER AND OTHER SIMILARLY SITUATED DRUGSTORES;

IV

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE 20/o SALES
DISCOUNT FOR SENIOR CITIZENS AND PWDs DOES NOT VIOLATE THE PETITIONER'S RIGHT TO EQUAL
PROTECTION OF THE LAW; and

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE DEFINITIONS OF
DISABILITIES AND PWDs ARE NOT VAGUE AND DO NOT VIOLATE THE PETITIONER'S RIGHT TO DUE
PROCESS OF LAW.16

Ruling of the Court

Prohibition may be filed to question


the constitutionality of a law

In the assailed decision, the CA noted that the action, although denominated as one for prohibition,
seeks the declaration of the unconstitutionality of Section 4(a) of R.A. No. 9257 and Section 32 of R.A.
No.9442. It held that in such a case, the proper remedy is not a special civil 1 action but a petition for
declaratory relief, which falls under the exclusive original jurisdiction of the RTC, in the first instance,
and of the Supreme Court, on appeal. 17

The Court clarifies.

Generally, the office of prohibition is to prevent the unlawful and oppressive exercise of authority and is
directed against proceedings that are done without or in excess of jurisdiction, or with grave abuse of
discretion, there being no appeal or other plain, speedy, and adequate remedy in the ordinary course of
law. It is the remedy to prevent inferior courts, corporations, boards, or persons from usurping or
exercising a jurisdiction or power with which they have not been vested by law. 18 This is, however, not
the lone office of an action for prohibition. In Diaz, et al. v. The Secretary of Finance, et al., 19 prohibition
was also recognized as a proper remedy to prohibit or nullify acts of executive officials that amount to
usurpation of legislative authority. 20 And, in a number of jurisprudence, prohibition was allowed as a
proper action to assail the constitutionality of a law or prohibit its implementation.
In Social Weather Stations, Inc. v. Commission on Elections,21therein petitioner filed a petition for
prohibition to assail the constitutionality of Section 5.4 of R.A. No. 9006, or the "Fair Elections
Act," which prohibited the publication of surveys within 15 days before an election for national
candidates, and seven days for local candidates. Included in the petition is a prayer to prohibit the
Commission on Elections from enforcing the said provision. The Court granted the Petition and struck
down the assailed provision for being unconstitutional. 22

In Social Justice Society (SJS) v. Dangerous Drugs Board, et al.,23 therein petitioner assailed the
constitutionality of paragraphs (c ), (d), (f) and (g) of Section 36 of R.A. No. 9165, otherwise known as
the "Comprehensive Dangerous Drugs Act of 2002," on the ground that they constitute undue
delegation of legislative power for granting unbridled discretion to schools and private employers in
determining the manner of drug 'testing of their employees, and that the law constitutes a violation of
the right against unreasonable searches and seizures. It also sought to enjoin the Dangerous Drugs
Board and the Philippine Drug Enforcement Agency from enforcing the challenged provision.24The Court
partially granted the petition by declaring Section 36(f) and (g) of R.A. No. 9165 unconstitutional, and
permanently enjoined the concerned agencies from implementing them. 25

In another instance, consolidated petitions for prohibitions26 questioning the constitutionality of the
Priority Development Assistance Fund were deliberated upon by this Court which ultimately granted the
same.

Clearly, prohibition has been found an appropriate remedy to challenge the constitutionality of various
laws, rules, and regulations.

There is also no question regarding the jurisdiction of the CA to hear and decide a petition for
prohibition. By express provision of the law, particularly Section 9(1) of Batas Pambansa Bilang
129,27 the CA was granted "original jurisdiction to issue writs of mandamus, prohibition, certiorari,
habeas corpus, and quo warranto, and auxiliary writs or I processes, whether or not in aid of its
appellate jurisdiction." This authority the CA enjoys concurrently with RTCs and this Court.

In the same manner, the supposed violation of the principle of the . hierarchy of courts does not pose
any hindrance to the full deliberation of the issues at hand. It is well to remember that "the judicial
hierarchy of courts is not an iron-clad rule. It generally applies to cases involving warring factual
allegations. For this reason, litigants are required to [refer] to the trial courts at the first instance to
determine the truth or falsity of these contending allegations on the basis of the evidence of the parties.
Cases which depend on disputed facts for decision cannot be brought immediately before appellate
courts as they are not triers of facts. Therefore, a strict application of the rule of hierarchy of courts is
not necessary when the cases brought before the appellate courts do not involve factual but legal
questions."28

Moreover, the principle of hierarchy of courts may be set aside for special and important reasons, such
as when dictated by public welfare and ' the advancement of public policy, or demanded by the broader
interest of justice.29Thus, when based on the good judgment of the court, the urgency and significance
of the issues presented calls for its intervention, it should not hesitate to exercise its duty to resolve.
The instant petition presents an exception to the principle as it basically raises a legal question on the
constitutionality of the mandatory discount and the breadth of its rightful beneficiaries. More
importantly, the resolution of the issues will redound to the benefit of the public as it will put to rest the
questions on the propriety of the granting of discounts to senior citizens and PWDs amid the fervent
insistence of affected establishments that the measure transgresses their property rights. The Court,
therefore, finds it to the best interest of justice that the instant petition be resolved.

The instant case is not barred by


stare decisis

The petitioner contends that the CA erred in holding that the ruling in Carlos Superdrug constitutes
as stare decisis or law of the case which bars the relitigation of the issues that had been resolved therein
and had been raised anew in the instant petition. It argues that there are substantial differences
between Carlos Superdrug and the circumstances in the instant case which take it out from the
operation of the doctrine of stare decisis. It cites that in Carlos Superdrug, the Court denied the petition
because the petitioner therein failed to prove the confiscatory effect of the tax deduction scheme as no
proof of actual loss was submitted. It believes that its submission of financial statements for the years
2006 and 2007 to prove the confiscatory effect of the law is a material fact that distinguishes the instant
case from that of Carlos Superdrug. 30

The Court agrees that the ruling in Carlos Superdrug does not constitute stare decisis to the instant case,
not because of the petitioner's submission of financial statements which were wanting in the first case,
but because it had the good sense of including questions that had not been raised or deliberated in the
former case of Carlos Superdrug, i.e., validity of the 20% discount granted to PWDs, the supposed
vagueness of the provisions of R.A. No. 9442 and violation of the equal protection clause.

Nonetheless, the Court finds nothing in the instant case that merits a reversal of the earlier ruling of the
Court in Carlos Superdrug. Contrary to the petitioner's claim, there is a very slim difference between the
issues in Carlos Superdrug and the instant case with respect to the nature of the senior citizen discount.
A perfunctory reading of the circumstances of the two cases easily discloses marked similarities in the
issues and the arguments raised by the petitioners in both cases that semantics nor careful play of
words can hardly obscure.

In both cases, it is apparent that what the petitioners are ultimately questioning is not the grant of the
senior citizen discount per se, but the manner by which they were allowed to recoup the said discount.
In particular, they are protesting the change in the tax treatment of the senior citizen discount from tax
credit to being merely a deduction from gross income which they claimed to have significantly reduced
their profits.

This question had been settled in Carlos Superdrug, where the Court ruled that the change in the tax
treatment of the discount was a valid exercise of police power, thus:
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of the
gross sales of the private establishments, were it not for R.A. No. 9257.

xxxx

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation.

Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a
government program.

The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-
building, and to grant benefits and privileges to them for their improvement and well-being as the State
considers them an integral part of our society.

The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus,
the Act provides:

SEC. 2. [R.A.] No. 7432 is hereby amended to read as follows:

SEC. 1. Declaration of Policies and Objectives.- Pursuant to Article XV, Section 4 of the Constitution, it is
the duty of the family to take care of its elderly members while the State may design programs of social
security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies
provides: "The State shall provide social justice in all phases of national development." Further, Article
XIII, Section 11, provides: "The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services available to
all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women and children." Consonant with these constitutional principles the following are the
declared policies of this Act:

xxxx

(f) To recognize the important role of the private sector in the improvement of the welfare of senior
citizens and to actively seek their partnership.

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical
and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert
halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic
land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants
and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens.
As a form of reimbursement, the law provides that business establishments extending the twenty
percent discount to senior citizens may claim the discount as a tax deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been purposely
veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough
room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest
benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of
powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by
the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes,
and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge
to be for the good and welfare of the commonwealth, and of the subjects of the same."

For this reason, when the conditions so demand as determined by the legislature, property rights must
bow to the primacy of police power because proper rights, though sheltered by due process, must yield
to general welfare. 31 (Citations omitted and emphasis in the original)

Verily, it is the bounden duty of the State to care for the elderly as they reach the point in their lives
when the vigor of their youth has diminished and resources have become scarce. Not much because of
choice, they become needing of support from the society for whom they presumably spent their
productive days and for whose betterment they' exhausted their energy, know-how and experience to
make our days better to live.

In the same way, providing aid for the disabled persons is an equally important State responsibility.
Thus, the State is obliged to give full support to the improvement of the total well-being of disabled
persons and their integration into the mainstream of society. 32This entails the creation of opportunities
for them and according them privileges if only to balance the playing field which had been unduly tilted
against them because of their limitations.

The duty to care for the elderly and the disabled lies not only upon the State, but also on the community
and even private entities. As to the State, the duty emanates from its role as parens patriae which holds
it under obligation to provide protection and look after the welfare of its people especially those who
cannot tend to themselves. Parens patriae means parent of his or her country, and refers to the State in
its role as "sovereign", or the State in its capacity as a provider of protection to those unable to care for
themselves. 33 In fulfilling this duty, the State may resort to the exercise of its inherent powers: police
power, eminent domain and power of taxation.

In Gerochi v. Department of Energy,34the Court passed upon one of the inherent powers of the state, the
police power, where it emphasized, thus:

[P]olice power is the power of the state to promote public welfare by restraining and regulating the use
of liberty and property. It is the most pervasive, the least limitable, and the most demanding of the
three fundamental powers of the State. The justification is found in the Latin maxim salus populi est
suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut alienum non laedas (so
use your property as not to injure the property of others). As an inherent attribute of sovereignty which
virtually extends to all public needs, police power grants a wide panoply of instruments through which
the State, as parens patriae, gives effect to a host of its regulatory powers. We have held that the power
to "regulate" means the power to protect, foster, promote, preserve, and control, with due regard for
the interests, first and foremost, of the public, then of the utility and of its patrons. 35 (Citations omitted)

It is in the exercise of its police power that the Congress enacted R.A. Nos. 9257 and 9442, the laws
mandating a 20% discount on purchases of medicines made by senior citizens and PWDs. It is also in
further exercise of this power that the legislature opted that the said discount be claimed as tax
deduction, rather than tax credit, by covered establishments.

The petitioner, however, claims that the change in the tax treatment of the discount is illegal as it
constitutes taking without just compensation. It even submitted financial statements for the years 2006
and 2007 to support its claim of declining profits when the change in the policy was implemented.

The Court is not swayed.

To begin with, the issue of just compensation finds no relevance in the instant case as it had already
been made clear in Carlos Superdrug that the power being exercised by the State in the imposition of
senior citizen discount was its police power. Unlike in the exercise of the power of eminent domain, just
compensation is not required in wielding police power. This is precisely because there is no taking
involved, but only an imposition of burden.

In Manila Memorial Park, Inc., et al. v. Secretary of the DSWD, et al., 36 the Court ruled that by examining
the nature and the effects of R.A. No. 9257, it becomes apparent that the challenged governmental act
was an exercise of police power. It was held, thus:

[W]e now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of
police power or eminent domain.

The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely
to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in
purchasing basic commodities. It may not be amiss to mention also that the discount serves to honor
senior citizens who presumably spent the productive years of their lives on contributing to the
development and progress of the nation. This distinct cultural Filipino practice of honoring the elderly is
an integral part of this law.

As to its nature and effects, the 20% discount is a regulation affecting the ability of private
establishments to price their products and services relative to a special class of individuals, senior
citizens, for which the Constitution affords preferential concern. In turn, this affects the amount of
profits or income/gross sales that a private establishment can derive from senior citizens. In other
words, the subject regulation affects the pricing, and, hence, the profitability of a private establishment.
However, it does not purport to appropriate or burden specific properties, used in the operation or
conduct of the business of private establishments, for the use or benefit of the public, or senior citizens
for that matter, but merely regulates the pricing of goods and services relative to, and the amount of
profits or income/gross sales that such private establishments may derive from, senior citizens.

The subject regulation may be said to be similar to, but with substantial distinctions from, price control
or rate of 'return on investment control laws which are traditionally regarded as police power measures.
x x x.37 (Citations omitted)

In the exercise of police power, "property rights of private individuals are subjected to restraints and
burdens in order to secure the general comfort, health, and prosperity of the State."38 Even then, the
State's claim of police power cannot be arbitrary or unreasonable. After all, the overriding purpose of
the exercise of the power is to promote general welfare, public health and safety, among others. It is a
measure, which by sheer necessity, the State exercises, even to the point of interfering with personal
liberties or property rights in order to advance common good. To warrant such interference, two
requisites must concur: (a) the interests of the public generally, as distinguished from those of a
particular class, require the interference of the! State; and (b) the means employed are reasonably
necessary to the: attainment of the object sought to be accomplished and not unduly oppressive upon
individuals. In other words, the proper exercise of the police power requires the concurrence of a lawful
subject and a lawful method.39

The subjects of R.A. Nos. 9257 and 9442, i.e., senior citizens and PWDs, are individuals whose well-being
is a recognized public duty. As a public duty, the responsibility for their care devolves upon the
concerted efforts of the State, the family and the community. In Article XIII, Section 1 of the
Constitution, the State is mandated to give highest priority to the enactment of measures that protect
and enhance the right of all the people to human dignity, reduce social, economic, and political
inequalities, and remove cultural inequities by equitably diffusing wealth and political power1 for the
common good. The more apparent manifestation of these social inequities is the unequal distribution or
access to healthcare services. To: abet in alleviating this concern, the State is committed to adopt an
integrated! and comprehensive approach to health development which shall endeavor to make essential
goods, health and other social services available to all the people at affordable cost, with priority for the
needs of the underprivileged sick, elderly, disabled, women, and children.40

In the same manner, the family and the community have equally significant duties to perform in
reducing social inequality. The family as the basic social institution has the foremost duty to care for its
elderly members.41 On the other hand, the community, which include the private sector, is recognized as
an active partner of the State in pursuing greater causes. The private sector, being recipients of the
privilege to engage business in our land, utilize our goods as well as the services of our people for
proprietary purposes, it is only fitting to expect their support in measures that contribute to common
good. Moreover, their right to own, establish and operate economic enterprises is always subject to the
duty of the State to promote distributive justice and to intervene when the common good so
demands.42

The Court also entertains no doubt on the legality of the method taken by the legislature to implement
the declared policies of the subject laws, that is, to impose discounts on the medical services and
purchases of senior citizens and PWDs and to treat the said discounts as tax deduction rather than tax
credit. The measure is fair and reasonable and no credible proof was presented to prove the claim that it
was confiscatory. To be considered confiscatory, there must be taking of property without just
compensation.

Illuminating on this point is the discussion of the Court on the concept of taking in City of Manila v. Hon.
Laguio, Jr.,43viz.:

There are two different types of taking that can be identified. A "possessory" taking occurs when the
government confiscates or physically occupies property. A "regulatory" taking occurs when the
government's regulation leaves no reasonable economically viable use of the property.

xxxx

No formula or rule can be devised to answer the questions of what is too far and when regulation
becomes a taking. In Mahon, Justice Holmes recognized that it was "a question of degree and therefore
cannot be disposed of by general propositions." On many other occasions as well, the U.S. Supreme
Court has said that the issue of when regulation constitutes a taking is a matter of considering the facts
in each case. x x x.

What is crucial in judicial consideration of regulatory takings is that government regulation is a taking if
it leaves no reasonable economically viable use of property in a manner that interferes with reasonable
expectations for use. A regulation that permanently denies all economically beneficial or productive use
of land is, from the owner's point of view, equivalent to a "taking" unless principles of nuisance or
property law that existed when the owner acquired the land make the use prohibitable. When the
owner of real property has been called upon to sacrifice all economically beneficial uses in the name of
the common good, that is, to leave his property economically idle, he has suffered a taking.

xxxx

A restriction on use of property may also constitute a "taking" if not reasonably necessary to the
effectuation of a substantial public purpose or if it has an unduly harsh impact on the distinct
investment-backed expectations of the owner.44 (Citations omitted)

The petitioner herein attempts to prove its claim that the pertinent provisions of R.A. Nos. 9257 and
9442 amount to taking by presenting financial statements purportedly showing financial losses incurred
by them due to the adoption of the tax deduction scheme.

For the petitioner's clarification, the presentation of the financial statement is not of compelling
significance in justifying its claim for just compensation. What is imperative is for it to establish that
there was taking in the constitutional sense or that, in the imposition of the mandatory discount, the
power exercised by the state was eminent domain.

According to Republic of the Philippines v. Vda. de Castellvi,45five circumstances must be present in order
to qualify "taking" as an exercise of eminent domain. First, the expropriator must enter a private
property. Second, the entrance into private property must be for more than a momentary
period. Third, the entry into the property should be under warrant or color of legal authority. Fourth, the
property must be devoted to a public use or otherwise informally appropriated or injuriously
affected. Fifth, the utilization of the property for public use must be in such a way as to oust the owner
and deprive him of all beneficial enjoyment of the property. 46

The first requirement speaks of entry into a private property which clearly does not obtain in this case.
There is no private property that is; invaded or appropriated by the State. As it is, the petitioner
precipitately deemed future profits as private property and then proceeded to argue that the State took
it away without full compensation. This seemed preposterous considering that the subject of what the
petitioner supposed as taking was not even earned profits but merely an expectation of profits, which
may not even occur. For obvious reasons, there cannot be taking of a contingency or of a mere
possibility because it lacks physical existence that is necessary before there could be any taking. Further,
it is impossible to quantify the compensation for the loss of supposed profits before it is earned.

The supposed taking also lacked the characteristics of permanence 47 and consistency.1wphi1 The
presence of these characteristics is significant because they can establish that the effect of the
questioned provisions is the same on all establishments and those losses are indeed its unavoidable
consequence. But apparently these indications are wanting in this case. The reason is that the impact on
the establishments varies depending on their response to the changes brought about by the subject
provisions. To be clear, establishments, are not prevented from adjusting their prices to accommodate
the effects of the granting of the discount and retain their profitability while being fully compliant to the
laws. It follows that losses are not inevitable because establishments are free to take business measures
to accommodate the contingency. Lacking in permanence and consistency, there can be no taking in the
constitutional sense. There cannot be taking in one establishment and none in another, such that the
former can claim compensation but the other may not. Simply told, there is no taking to justify
compensation; there is only poor business decision to blame.

There is also no ousting of the owner or deprivation of ownership. Establishments are neither divested
of ownership of any of their properties nor is anything forcibly taken from them. They remain the owner
of their goods and their profit or loss still depends on the performance of their sales.

Apart from the foregoing, covered establishments are also provided with a mechanism to recoup the
amount of discounts they grant the senior citizens and PWDs. It is provided in Section 4(a) of R.A. No.
9257 and Section 32 of R.A. No. 9442 that establishments may claim the discounts as "tax deduction
based on the net cost of the goods sold or services rendered." Basically, whatever amount was given as
discount, covered establishments may claim an equal amount as an expense or tax deduction. The
trouble is that the petitioner, in protesting the change in the tax treatment of the discounts, apparently
seeks tax incentive and not merely a return of the amount given as discounts. It premised its
interpretation of financial losses in terms of the effect of the change in the tax treatment of the discount
on its tax liability; hence, the claim that the measure was confiscatory. However, as mentioned earlier in
the discussion, loss of profits is not the inevitable result of the change in tax treatment of the discounts;
it is more appropriately a consequence of poor business decision.
It bears emphasizing that the law does not place a cap on the amount of mark up that covered
establishments may impose on their items. This rests on the discretion of the establishment which, of
course, is expected to put in the price of the overhead costs, expectation of profits and other
considerations into the selling price of an item. In a simple illustration, here is Drug A, with acquisition
cost of 8.00, and selling price of 10.00. Then comes a law that imposes 20% on senior citizens and
PWDs, which affected Establishments 1, 2 and 3. Let us suppose that the approximate number of
patrons who purchases Drug A is 100, half of which are senior citizens and PWDs. Before the passage of
the law, all of the establishments are earning the same amount from profit from the sale of Drug A, viz.:

Before the passage of the law:

Drug A

Acquisition cost 8.00


Selling price 10.00

Number of patrons 100

Sales:

100 x 10.00 = 1,000.00

Profit: 200

After the passage of the law, the three establishments reacted differently. Establishment 1 was passive
and maintained the price of Drug A at 8.00 which understandably resulted in diminution of profits.

Establishment 1

Drug A

Acquisition cost 8.00


Selling price ;10.00

Number of patrons 100


Senior Citizens/PWD 50

Sales
100 x 10.00 = 1,000.00

Deduction: 100.00

Profit: 100.00

On the other hand, Establishment 2, mindful that the new law will affect the profitability of the business,
made a calculated decision by increasing the mark up of Drug A to 3.20, instead of only 2.00. This
brought a positive result to the earnings of the company.

Establishment 2

Drug A

Acquisition cost ;8.00


Selling price 11.20

Number of patron 100


Senior Citizens/PWDs 50

Sales

100 x 10.00 = 1,000.00

Deduction: 112.00

Profit: 208.00

For its part, Establishment 3 raised the mark up on Drug A to only 3.00 just to even out the effect of
the law. This measure left a negligible effect on its profit, but Establishment 3 took it as a social duty: to
share in the cause being promoted by the government while still maintaining profitability.

Establishment 3

Drug A

Acquisition cost 8.00


Selling price 11.20
Number of patrons 100
Senior Citizens/PWD 50

Sales

100 x 10.00 = 1,000.00

Deduction: 110.00

Profit: 190.00

The foregoing demonstrates that it is not the law per se which occasioned the losses in the covered
establishments but bad business I judgment. One of the main considerations in making business
decisions is the law because its effect is widespread and inevitable. Literally, anything can be a subject of
legislation. It is therefore incumbent upon business managers to cover this contingency and consider it
in making business strategies. As shown in the illustration, the better responses were exemplified by
Establishments 2 and 3 which promptly put in the additional costs brought about by the law into the
price of Drug A. In doing so, they were able to maintain the profitability of the business, even earning
some more, while at the same time being fully compliant with the law. This is not to mention that the
illustration is even too simplistic and not' the most ideal since it dealt only with a single drug being
purchased by both regular patrons and senior citizens and PWDs. It did not consider the accumulated
profits from the other medical and non-medical products being sold by the establishments which are
expected to further curb the effect of the granting of the discounts in the business.

It is therefore unthinkable how the petitioner could have suffered losses due to the mandated discounts
in R.A. Nos. 9257 and 9442, when a fractional increase in the prices of items could bring the business
standing at a balance even with the introduction of the subject laws. A level adjustment in the pricing of
items is a reasonable business measure to take in order to adapt to the contingency. This could even
make establishments earn more, as shown in the illustration, since every fractional increase in the price
of covered items translates to a wider cushion to taper off the effect of the granting of discounts and
ultimately results to additional profits gained from the purchases of the same items by regular patrons
who are not entitled to the discount. Clearly, the effect of the subject laws in the financial standing of
covered companies depends largely on how they respond and forge a balance between profitability and
their sense of social responsibility. The adaptation is entirely up to them and they are not powerless to
make adjustments to accommodate the subject legislations.

Still, the petitioner argues that the law is confiscatory in the sense that the State takes away a portion of
its supposed profits which could have gone into its coffers and utilizes it for public purpose. The
petitioner claims that the action of the State amounts to taking for which it should be compensated.
To reiterate, the subject provisions only affect the petitioner's right to profit, and not earned profits.
Unfortunately for the petitioner, the right to profit is not a vested right or an entitlement that has
accrued on the person or entity such that its invasion or deprivation warrants compensation. Vested
rights are "fixed, unalterable, or irrevocable."48 More extensively, they are depicted as follows:

Rights which have so completely and definitely accrued to or settled in a person that they are not
subject to be defeated or cancelled by the act of any other private person, and which it is right and
equitable that the government should recognize and protect, as being lawful in themselves, and settled
according to the then current rules of law, and of which the individual could not be deprived arbitrarily
without injustice, or of which he could not justly be deprived otherwise than by the established methods
of procedure and for the public welfare. x x x A right is not 'vested' unless it is more than a mere
expectation based on the anticipated continuance of present laws; it must be an established interest in
property, not open to doubt. x x x To be vested in its accurate legal sense, a right must be complete and
consummated, and one of which the person to whom it belongs cannot be divested without his
consent.x x x.49 (Emphasis ours)

Right to profits does not give the petitioner the cause of action to ask for just compensation, it being
only an inchoate right or one that has not fully developed50 and therefore cannot be claimed as one's
own. An inchoate right is a mere expectation, which may or may not come into existence. It is
contingent as it only comes "into existence on an event or condition which may not happen or be
performed until some other event may prevent their vesting."51Certainly, the petitioner cannot claim
confiscation or taking of something that has yet to exist. It cannot claim deprivation of profit before the
consummation of a sale and the purchase by a senior citizen or PWD.

Right to profit is not an accrued right; it is not fixed, absolute nor indefeasible. It does not come into
being until the occurrence or realization of a condition precedent. It is a mere "contingency that might
never eventuate into a right. It stands for a mere possibility of profit but nothing might ever be payable
under it."52

The inchoate nature of the right to profit precludes the possibility of compensation because it lacks the
quality or characteristic which is necessary before any act of taking or expropriation can be effected.
Moreover, there is no yardstick fitting to quantify a contingency or to determine compensation for a
mere possibility. Certainly, "taking" presupposes the existence of a subject that has a quantifiable or
determinable value, characteristics which a mere contingency does not possess.

Anent the question regarding the shift from tax credit to tax deduction, suffice it is to say that it is within
the province of Congress to do so in the exercise of its legislative power. It has the authority to choose
the subject of legislation, outline the effective measures to achieve its declared policies and even
impose penalties in case of non-compliance. It has the sole discretion to decide which policies to pursue
and devise means to achieve them, and courts often do not interfere in this exercise for as long as it
does not transcend constitutional limitations. "In performing this duty, the legislature has no guide but
its judgment and discretion and the wisdom of experience."53 In Carter v. Carter Coal Co.,54legislative
discretion has been described as follows:
Legislative congressional discretion begins with the choice of means, and ends with the adoption of
methods and details to carry the delegated powers into effect. x x x [W]hile the powers are rigidly
limited to the enumerations of the Constitution, the means which may be employed to carry the powers
into effect are not restricted, save that they must be appropriate, plainly adapted to the end, and not
prohibited by, but consistent with, the letter and spirit of the Constitution. x x x. 55 (Emphasis ours)

Corollary, whether to treat the discount as a tax deduction or tax credit is a matter addressed to the
wisdom of the legislature. After all, it is within its prerogative to enact laws which it deems sufficient to
address a specific public concern. And, in the process of legislation, a bill goes through rigorous tests of
validity, necessity and sufficiency in both houses of Congress before enrolment. It undergoes close
scrutiny of the members of Congress and necessarily had to surpass the arguments hurled against its
passage. Thus, the presumption of validity that goes with every law as a form of deference to the
process it had gone through and also to the legislature's exercise of discretion. Thus, in lchong, etc., et
al. v. Hernandez) etc., and Sarmiento,56the Court emphasized, thus:

It must not be overlooked, in the first place, that the legislature, which is the constitutional repository of
police power and exercises the prerogative of determining the policy of the State, is by force of
circumstances primarily the judge of necessity, adequacy or reasonableness and wisdom, of any law
promulgated in the exercise of the police power, or of the measures adopted to implement the public
policy or to achieve public interest.x x x.57 (Emphasis ours)

The legislature may also grant rights and impose additional burdens: It may also regulate industries, in
the exercise of police power, for the protection of the public. R.A. Nos. 9257 and 9442 are akin to
regulatory laws, the issuance of which is within the ambit of police power. The minimum wage law,
zoning ordinances, price control laws, laws regulating the operation of motels and hotels, laws limiting
the working hours to eight, and the like fall under this category. 58

Indeed, regulatory laws are within the category of police power measures from which affected persons
or entities cannot claim exclusion or compensation. For instance, private establishments cannot protest
that the imposition of the minimum wage is confiscatory since it eats up a considerable chunk of its
profits or that the mandated remuneration is not commensurate for the work done. The compulsory
nature of the provision for minimum wages underlies the effort of the State; as R.A. No.
672759 expresses it, to promote productivity-improvement and gain-sharing measures to ensure a
decent standard of living for the workers and their families; to guarantee the rights of labor to its just
share in the fruits of production; to enhance employment generation in the countryside through
industry dispersal; and to allow business and industry reasonable returns on investment, expansion and
growth, and as the Constitution expresses it, to affirm labor as a primary social economic force. 60

Similarly, the imposition of price control on staple goods in R.A. No. 758161 is likewise a valid exercise of
police power and affected establishments cannot argue that the law was depriving them of supposed
gains. The law seeks to ensure the availability of basic necessities and prime commodities at reasonable
prices at all times without denying legitimate business a fair return on investment. It likewise aims to
provide effective and sufficient protection to consumers against hoarding, profiteering and cartels with
respect to the supply, distribution, marketing and pricing of said goods, especially during periods of
calamity, emergency, widespread illegal price manipulation and other similar situations.62

More relevantly, in Manila Memorial Park, Inc.,63it was ruled that it is within the bounds of the police
power of the state to impose burden on private entities, even if it may affect their profits, such as in the
imposition of price control measures. There is no compensable taking but only a recognition of the fact
that they are subject to the regulation of the State and that all personal or private interests must bow
down to the more paramount interest of the State.

This notwithstanding, the regulatory power of the State does not authorize the destruction of the
business. While a business may be regulated, such regulation must be within the bounds of
reason, i.e., the regulatory ordinance must be reasonable, and its provision cannot be oppressive
amounting to an arbitrary interference with the business or calling subject of regulation. A lawful
business or calling may not, under the guise of regulation, be unreasonably interfered with even by the
exercise of police power. 64 After all, regulation only signifies control or restraint, it does not mean
suppression or absolute prohibition. Thus, in Philippine Communications Satellite
Corporation v. Alcuaz, 65the Court emphasized:

The power to regulate is not the power to destroy useful and harmless enterprises, but is the power to
protect, foster, promote, preserve, and control with due regard for the interest, first and foremost, of
the public, then of the utility and of its patrons. Any regulation, therefore, which operates as an
effective confiscation of private property or constitutes an arbitrary or unreasonable infringement of
property rights is void, because it is repugnant to the constitutional guaranties of due process and equal
protection of the laws. 66 (Citation omitted)

Here, the petitioner failed to show that R.A. Nos. 9257 and 9442, under the guise of regulation, allow
undue interference in an otherwise legitimate business.1avvphi1 On the contrary, it was shown that the
questioned laws do not meddle in the business or take anything from it but only regulate its realization
of profits.

The subject laws do not violate the


equal protection clause

The petitioner argues that R.A. Nos. 9257 and 9442 are violative of the equal protection clause in that it
failed to distinguish between those who have the capacity to pay and those who do not, in granting the
20% discount. R.A. No. 9257, in particular, removed the income qualification in R.A. No. 7432
of'60,000.00 per annum before a senior citizen may be entitled to the 20o/o discount.

The contention lacks merit.

The petitioner's argument is dismissive of the reasonable qualification on which the subject laws were
based. In City of Manila v. Hon. Laguio, Jr., 67 the Court emphasized:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to
rights conferred and responsibilities imposed. Similar subjects, in other words, should not be treated
differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee
means that no person or class of persons shall be denied the same protection of laws which is enjoyed
by other persons or other classes in like circumstances.68 (Citations omitted)

"The equal protection clause is not infringed by legislation which applies only to those persons falling
within a specified class. If the groupings are characterized by substantial distinctions that make real
differences, one class may be treated and regulated differently from another."69 For a classification to be
valid, (1) it must be based upon substantial distinctions, (2) it must be germane to the purposes of the
law, (3) it must not be limited to existing conditions only, and (4) it must apply equally to all members of
the same class. 70

To recognize all senior citizens as a group, without distinction as to income, is a valid classification. The
Constitution itself considered the elderly as a class of their own and deemed it a priority to address their
needs. When the Constitution declared its intention to prioritize the predicament of the underprivileged
sick, elderly, disabled, women, and children,71 it did not make any reservation as to income, race,
religion or any other personal circumstances. It was a blanket privilege afforded the group of citizens in
the enumeration in view of the vulnerability of their class.

R.A. No. 9257 is an implementation of the avowed policy of the Constitution to enact measures that
protect and enhance the right of all the people to human dignity, reduce social, economic, and political
inequalities. 72 Specifically, it caters to the welfare of all senior citizens. The classification is based on
age and therefore qualifies all who have attained the age of 60. Senior citizens are a class of their own,
who are in need and should be entitled to government support, and the fact that they may still be
earning for their own sustenance should not disqualify them from the privilege.

It is well to consider that our senior citizens have already reached the age when work opportunities have
dwindled concurrently as their physical health.1wphi1 They are no longer expected to work, but there
are still those who continue to work and contribute what they can to the country. Thus, to single them
out and take them out of the privileges of the law for continuing to strive and earn income to fend for
themselves is inimical to a welfare state that the Constitution envisions. It is tantamount to penalizing
them for their persistence. It is commending indolence rather than rewarding diligence. It encourages
them to become wards of the State rather than productive partners.

Our senior citizens were the laborers, professionals and overseas contract workers of the past. While
some may be well to do or may have the capacity to support their sustenance, the discretion to avail of
the privileges of the law is up to them. But to instantly tag them. as undeserving of the privilege would
be the height of ingratitude; it is an outright discrimination.

The same ratiocination may be said of the recognition of PWDs as a class in R.A. No. 9442 and in
granting them discounts.1wphi1 It needs no further explanation that PWDs have special needs which,
for most,' last their entire lifetime. They constitute a class of their own, equally deserving of government
support as our elderlies. While some of them maybe willing to work and earn income for themselves,
their disability deters them from living their full potential. Thus, the need for assistance from the
government to augment the reduced income or productivity brought about by their physical or
intellectual limitations.

There is also no question that the grant of mandatory discount is germane to the purpose of R.A. Nos.
9257 and 9442, that is, to adopt an integrated and comprehensive approach to health development and
make essential goods and other social services available to all the people at affordable cost, with special
priority given to the elderlies and the disabled, among others. The privileges granted by the laws ease
their concerns and allow them to live more comfortably.

The subject laws also address a continuing concern of the government for the welfare of the senior
citizens and PWDs. It is not some random predicament but an actual, continuing and pressing concern
that requires preferential attention. Also, the laws apply to all senior citizens and PWDs, respectively,
without further distinction or reservation. Without a doubt, all the elements for a valid classification
were met.

The definitions of "disabilities" and


"PWDs" are clear and unequivocal

Undeterred, the petitioner claims that R.A. No. 9442 is ambiguous particularly in defining the terms
"disability" and "PWDs," such that it lack comprehensible standards that men of common intelligence
must guess at its meaning. It likewise bewails the futility of the given safeguards to prevent abuse since
government officials who are neither experts nor practitioners of medicine are given the authority to
issue identification cards that authorizes the granting of the privileges under the law.

The Court disagrees.

Section 4(a) of R.A. No. 7277, the precursor of R.A. No. 94421 defines "disabled persons" as follows:

(a) Disabled persons are those suffering from restriction or different abilities, as a result of a mental,
physical or sensory impairment, to perform an activity in the manner or within the range considered
normal for a human being[.]

On the other hand, the term "PWDs" is defined in Section 5.1 of the IRR of R.A. No. 9442 as follows:

5.1. PersonswithDisability are those individuals defined under Section 4 of [R.A. No.] 7277 [or] An Act
Providing for the Rehabilitation, Self-Development and Self-Reliance of Persons with Disability as
amended and their integration into the Mainstream of Society and for Other Purposes. This is defined as
a person suffering from restriction or different abilities, as a result of a mental, physical or sensory
impairment, to perform an activity in a manner or within the range considered normal for human being.
Disability shall mean (1) a physical 1or mental impairment that substantially limits one or more
psychological, physiological or anatomical function of an individual or activities of such individual; (2) a
record of such an impairment; or (3) being regarded as having such an impairment.

The foregoing definitions have a striking conformity with the definition of "PWDs" in Article 1 of
the United Nations Convention on the Rights of Persons with Disabilities which reads:
Persons with disabilities include those who have long-term physical, mental, intellectual or sensory
impairments which in interaction with various barriers may hinder their full and effective participation in
society on an equal basis with others. (Emphasis and italics ours)

The seemingly broad definition of the terms was not without good reasons. It recognizes that "disability
is an evolving concept"73 and appreciates the "diversity of PWDs."74 The terms were given
comprehensive definitions so as to accommodate the various forms of disabilities, and not confine it to
a particular case as this would effectively exclude other forms of physical, intellectual or psychological
impairments.

Moreover, in Estrada v. Sandiganbayan, 75 it was declared, thus:

A statute is not rendered uncertain and void merely because general terms are used therein, or because
of the employment of terms without defining them; much less do we have to define every word we use.
Besides, there is no positive constitutional or statutory command requiring the legislature to define each
and every word in an enactment. Congress is not restricted in the form of expression of its will, and its
inability to so define the words employed in a statute will not necessarily result in the vagueness or
ambiguity of the law so long as the legislative will is clear, or at least, can be gathered from the whole
act x x x.76 (Citation omitted)

At any rate, the Court gathers no ambiguity in the provisions of R.A. No. 9442. As regards the
petitioner's claim that the law lacked reasonable standards in determining the persons entitled to the
discount, Section 32 thereof is on point as it identifies who may avail of the privilege and the manner of
its availment. It states:

Sec. 32. x x x

The abovementioned privileges are available only to persons with disability who are Filipino citizens
upon submission of any of the following as proof of his/her entitlement thereto:

(I) An identification card issued by the city or municipal mayor or the barangay captain of the place
where the persons with disability resides;

(II) The passport of the persons with disability concerned; or

(III) Transportation discount fare Identification Card (ID) issued by the National Council for the Welfare
of Disabled Persons (NCWDP).

It is, however, the petitioner's contention that the foregoing authorizes government officials who had no
medical background to exercise discretion in issuing identification cards to those claiming to be PWDs. It
argues that the provision lends to the indiscriminate availment of the privileges even by those who are
not qualified.

The petitioner's apprehension demonstrates a superficial understanding of the law and its implementing
rules. To be clear, the issuance of identification cards to PWDs does not depend on the authority of the
city or municipal mayor, the DSWD or officials of the NCDA (formerly NCWDP). It is well to remember
that what entitles a person to the privileges of the law is his disability, the fact of which he must prove
to qualify. Thus, in NCDA Administrative Order (A.O.) No. 001, series of 2008, 77 it is required that the
person claiming disability must submit the following requirements before he shall be issued a PWD
Identification Card:

1. Two "1 x l" recent ID pictures with the names, and signatures or thumb marks at the back of the
picture.

2. One (1) Valid ID

3. Document to confirm the medical or disability condition 78

To confirm his disability, the person must obtain a medical certificate or assessment, as the case maybe,
issued by a licensed private or government physician, licensed teacher or head of a business
establishment attesting to his impairment. The issuing entity depends on whether the disability is
apparent or non-apparent. NCDAA.O. No. 001 further provides:79

DISABILITY DOCUMENT ISSUING ENTITY

Apparent Medical Licensed Private or


Disability Certificate Government Physician

School Licensed Teacher duly


Assessment signed by the School
Principal

Certificate of Head of the Business


Disability

Establishment

Head of Non-
Government
Organization

Non-Apparent Medical Licensed Private or


Disability Certificate Government Physician
To provide further safeguard, the Department of Health issued A.O. No. 2009-0011, providing guidelines
for the availment of the 20% discount on the purchase of medicines by PWDs. In making a purchase, the
individual must present the documents enumerated in Section VI(4)(b ), to wit:

i. PWD identification card x x x

ii. Doctor's prescription stating the name of the PWD, age, sex, address, date, generic name of the
medicine, dosage form, dosage strength, quantity, signature over printed name of physician, physician's
address, contact number of physician or dentist, professional license number, professional tax receipt
number and narcotic license number, if applicable. To safeguard the health of PWDs and to prevent
abuse of [R.A. No.] 9257, a doctor's prescription is required in the purchase of over-the-counter
medicines. x x x.

iii. Purchase booklet issued by the local social/health office to PWDs for free containing the following
basic information:

a) PWD ID number

b) Booklet control number

c) Name of PWD

d) Sex

e) Address

f) Date of Birth

g) Picture

h) Signature of PWD

i) Information of medicine purchased:

i.1 Name of medicine

i.2 Quantity

i.3 Attending Physician

i.4 License Number

i.5 Servicing drug store name

i.6 Name of dispensing pharmacist

j) Authorization letter of the PWD x x x in case the medicine is bought by the representative or caregiver
of the PWD.
The PWD identification card also has a validity period of only three years which facilitate in the
monitoring of those who may need continued support and who have been relieved of their disability,
and therefore may be taken out of the coverage of the law.

At any rate, the law has penal provisions which give concerned establishments the option to file a case
against those abusing the privilege Section 46(b) of R.A. No. 9442 provides that "[a]ny person who
abuses the privileges granted herein shall be punished with imprisonment of not less than six months or
a fine of not less than Five Thousand pesos (5,000.00), but not more than Fifty Thousand pesos
(50,000.00), or both, at the discretion of the court." Thus, concerned establishments, together with the
proper government agencies, must actively participate in monitoring compliance with the law so that
only the intended beneficiaries of the law can avail of the privileges.

Indubitably, the law is clear and unequivocal, and the petitioner claim of vagueness to cast uncertainty
in the validity of the law does not stand.

WHEREFORE, in view of the foregoing disquisition, Section 4(a) of Republic Act No. 9257 and Section 32
of Republic Act No. 9442 are hereby declared CONSTITUTIONAL.

<<page>>

SO ORDERED.
SPECIAL SECOND DIVISION

G.R. No. 171586 January 25, 2010

NATIONAL POWER CORPORATION, Petitioner,


vs.
PROVINCE OF QUEZON and MUNICIPALITY OF PAGBILAO, Respondent.

RESOLUTION

BRION, J.:

The petitioner National Power Corporation (Napocor) filed the present motion for reconsideration1 of
the Courts Decision of July 15, 2009, in which we denied Napocors claimed real property tax
exemptions. For the resolution of the motion, we deem it proper to provide first a background of the
case.

BACKGROUND FACTS

The Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) for unpaid real property taxes in
the amount of 1.5 Billion for the machineries located in its power plant in Pagbilao, Quezon. Napocor,
which entered into a Build-Operate-Transfer (BOT) Agreement (entitled Energy Conversion Agreement)
with Mirant, was furnished a copy of the tax assessment.

Napocor (nota bene, not Mirant) protested the assessment before the Local Board of Assessment
Appeals (LBAA), claiming entitlement to the tax exemptions provided under Section 234 of the Local
Government Code (LGC), which states:

Section 234. Exemptions from Real Property Tax. The following are exempted from payment of the
real property tax:

xxxx

(c) All machineries and equipment that are actually, directly, and exclusively used by local water districts
and government-owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;

xxxx

(e) Machinery and equipment used for pollution control and environmental protection.

xxxx

Assuming that it cannot claim the above tax exemptions, Napocor argued that it is entitled to certain tax
privileges, namely:
a. the lower assessment level of 10% under Section 218(d) of the LGC for government-owned and
controlled corporations engaged in the generation and transmission of electric power, instead of the
80% assessment level for commercial properties imposed in the assessment letter; and

b. an allowance for depreciation of the subject machineries under Section 225 of the LGC.

In the Courts Decision of July 15, 2009, we ruled that Napocor is not entitled to any of these claimed tax
exemptions and privileges on the basis primarily of the defective protest filed by the Napocor. We found
that Napocor did not file a valid protest against the realty tax assessment because it did not possess the
requisite legal standing. When a taxpayer fails to question the assessment before the LBAA, the
assessment becomes final, executory, and demandable, precluding the taxpayer from questioning the
correctness of the assessment or from invoking any defense that would reopen the question of its
liability on the merits.2

Under Section 226 of the LGC,3 any owner or person having legal interest in the property may appeal an
assessment for real property taxes to the LBAA. Since Section 250 adopts the same language in
enumerating who may pay the tax, we equated those who are liable to pay the tax to the same entities
who may protest the tax assessment. A person legally burdened with the obligation to pay for the tax
imposed on the property has the legal interest in the property and the personality to protest the tax
assessment.

To prove that it had legal interest in the taxed machineries, Napocor relied on:.

1. the stipulation in the BOT Agreement that authorized the transfer of ownership to Napocor after 25
years;

2. its authority to control and supervise the construction and operation of the power plant; and

3. its obligation to pay for all taxes that may be incurred, as provided in the BOT Agreement.

Napocor posited that these indicated that Mirant only possessed naked title to the machineries.

We denied the first argument by ruling that legal interest should be one that is actual and material,
direct and immediate, not simply contingent or expectant.4 We disproved Napocors claim of control
and supervision under the second argument after reading the full terms of the BOT Agreement, which,
contrary to Napocors claims, granted Mirant substantial power in the control and supervision of the
power plants construction and operation.5

For the third argument, we relied on the Courts rulings in Baguio v. Busuego6 and Lim v. Manila.7 In
these cases, the Court essentially declared that contractual assumption of tax liability alone is
insufficient to make one liable for taxes. The contractual assumption of tax liability must be
supplemented by an interest that the party assuming the liability had on the property; the person from
whom payment is sought must have also acquired the beneficial use of the property taxed. In other
words, he must have the use and possession of the property an element that was missing in Napocors
case.
We further stated that the tax liability must be a liability that arises from law, which the local
government unit can rightfully and successfully enforce, not the contractual liability that is enforceable
only between the parties to the contract. In the present case, the Province of Quezon is a third party to
the BOT Agreement and could thus not exact payment from Napocor without violating the principle of
relativity of contracts.8 Corollarily, for reasons of fairness, the local government units cannot be
compelled to recognize the protest of a tax assessment from Napocor, an entity against whom it cannot
enforce the tax liability.

At any rate, even if the Court were to brush aside the issue of legal interest to protest, Napocor could
still not successfully claim exemption under Section 234 (c) of the LGC because to be entitled to the
exemption under that provision, there must be actual, direct, and exclusive use of machineries. Napocor
failed to satisfy these requirements.

THE MOTION FOR RECONSIDERATION

Although Napocor insists that it is entitled to the tax exemptions and privileges claimed, the primary
issue for the Court to resolve, however, is to determine whether Napocor has sufficient legal interest to
protest the tax assessment because without the requisite interest, the tax assessment stands, and no
claim of exemption or privilege can prevail.

Section 226 of the LGC, as mentioned, limits the right to appeal the local assessors action to the owner
or the person having legal interest in the property. Napocor posits that it is the beneficial owner of the
subject machineries, with Mirant retaining merely a naked title to secure certain obligations. Thus, it
argues that the BOT Agreement is a mere financing agreement and is similar to the arrangement
authorized under Article 1503 of the Civil Code, which declares:

Art. 1503. When there is a contract of sale of specific goods, the seller may, by the terms of the contract,
reserve the right of possession or ownership in the goods until certain conditions have been fulfilled.
The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to
the buyer or to a carrier or other bailee for the purpose of transmission to the buyer.

Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or
to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if
except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of
the goods, the seller's property in the goods shall be deemed to be only for the purpose of securing
performance by the buyer of his obligations under the contract.

xxxx

Pursuant to this arrangement, Mirants ownership over the subject machineries is merely a security
interest, given only for the purpose of ensuring the performance of Napocors obligations.

Napocor additionally contends that its contractual assumption liability (through the BOT Agreement) for
all taxes vests it with sufficient legal interest because it is actually, directly, and materially affected by
the assessment.
While its motion for reconsideration was pending, Napocor filed a Motion to Refer the Case to the Court
En Banc considering that "the issues raised have far-reaching consequences in the power industry, the
countrys economy and the daily lives of the Filipino people, and since it involves the application of real
property tax provision of the LGC against Napocor, an exempt government instrumentality."9

Also, the Philippine Independent Power Producers Association, Inc. (PIPPA) filed a Motion for Leave to
Intervene and a Motion for Reconsideration-in-Intervention. PIPPA is a non-stock corporation
comprising of privately-owned power generating companies which includes TeaM Energy Corporation
(TeaM Energy), successor of Mirant. PIPPA is claiming interest in the case since any decision here will
affect the other members of PIPPA, all of which have executed similar BOT agreements with Napocor.

THE COURTS RULING

At the outset, we resolve to deny the referral of the case to the Court en banc. We do not find the
reasons raised by Napocor meritorious enough to warrant the attention of the members of the Court en
banc, as they are merely reiterations of the arguments it raised in the petition for review on certiorari
that it earlier filed with the Court.10

Who may appeal a real property tax assessment

Legal interest is defined as interest in property or a claim cognizable at law, equivalent to that of a legal
owner who has legal title to the property.11 Given this definition, Napocor is clearly not vested with the
requisite interest to protest the tax assessment, as it is not an entity having the legal title over the
machineries. It has absolutely no solid claim of ownership or even of use and possession of the
machineries, as our July 15, 2009 Decision explained.

A BOT agreement is not a mere financing arrangement. In Napocor v. CBAA12 a case strikingly similar to
the one before us, we discussed the nature of BOT agreements in the following manner:

The underlying concept behind a BOT agreement is defined and described in the BOT law as follows:

Build-operate-and-transfer A contractual arrangement whereby the project proponent undertakes the


construction, including financing, of a given infrastructure facility, and the operation and maintenance
thereof. The project proponent operates the facility over a fixed term during which it is allowed to
charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid
or as negotiated and incorporated in the contract to enable the project proponent to recover its
investment, and operating and maintenance expenses in the project. The project proponent transfers
the facility to the government agency or local government unit concerned at the end of the fixed term
which shall not exceed fifty (50) years x x x x.

Under this concept, it is the project proponent who constructs the project at its own cost and
subsequently operates and manages it. The proponent secures the return on its investments from those
using the projects facilities through appropriate tolls, fees, rentals, and charges not exceeding those
proposed in its bid or as negotiated. At the end of the fixed term agreed upon, the project proponent
transfers the ownership of the facility to the government agency. Thus, the government is able to put up
projects and provide immediate services without the burden of the heavy expenditures that a project
start up requires.1avvphi1

A reading of the provisions of the parties BOT Agreement shows that it fully conforms to this
concept. By its express terms, BPPC has complete ownership both legal and beneficial of the
project, including the machineries and equipment used, subject only to the transfer of these
properties without cost to NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC
provided the funds for the construction of the power plant, including the machineries and equipment
needed for power generation; thereafter, it actually operated and still operates the power plant, uses its
machineries and equipment, and receives payment for these activities and the electricity generated
under a defined compensation scheme. Notably, BPPC as owner-user is responsible for any defect in
the machineries and equipment.

xxxx

That some kind of "financing" arrangement is contemplated in the sense that the private sector
proponent shall initially shoulder the heavy cost of constructing the projects buildings and structures
and of purchasing the needed machineries and equipment is undeniable. The arrangement, however,
goes beyond the simple provision of funds, since the private sector proponent not only constructs and
buys the necessary assets to put up the project, but operates and manages it as well during an agreed
period that would allow it to recover its basic costs and earn profits. In other words, the private sector
proponent goes into business for itself, assuming risks and incurring costs for its account. If it receives
support from the government at all during the agreed period, these are pre-agreed items of assistance
geared to ensure that the BOT agreements objectives both for the project proponent and for the
government are achieved. In this sense, a BOT arrangement is sui generis and is different from the
usual financing arrangements where funds are advanced to a borrower who uses the funds to establish
a project that it owns, subject only to a collateral security arrangement to guard against the
nonpayment of the loan. It is different, too, from an arrangement where a government agency borrows
funds to put a project from a private sector-lender who is thereafter commissioned to run the project
for the government agency. In the latter case, the government agency is the owner of the project from
the beginning, and the lender-operator is merely its agent in running the project.

If the BOT Agreement under consideration departs at all from the concept of a BOT project as defined by
law, it is only in the way BPPCs cost recovery is achieved; instead of selling to facility users or to the
general public at large, the generated electricity is purchased by NAPOCOR which then resells it to
power distribution companies. This deviation, however, is dictated, more than anything else, by the
structure and usages of the power industry and does not change the BOT nature of the transaction
between the parties.

Consistent with the BOT concept and as implemented, BPPC the owner-manager-operator of the
project is the actual user of its machineries and equipment. BPPCs ownership and use of the
machineries and equipment are actual, direct, and immediate, while NAPOCORs is contingent and, at
this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA
committed no reversible error in denying NAPOCORs claim for tax exemption. [Emphasis supplied.]

Given the special nature of a BOT agreement as discussed in the cited case, we find Article 1503
inapplicable to define the contract between Napocor and Mirant, as it refers only to ordinary contracts
of sale. We thus declared in Tatad v. Garcia13 that under BOT agreements, the private
corporations/investors are the owners of the facility or machinery concerned. Apparently, even Napocor
and Mirant recognize this principle; Article 2.12 of their BOT Agreement provides that "until the Transfer
Date, [Mirant] shall, directly or indirectly, own the Power Station and all the fixtures, fitting, machinery
and equipment on the Site x x x. [Mirant] shall operate, manage, and maintain the Power Station for the
purpose of converting fuel of Napocor into electricity."

Moreover, if Napocor truly believed that it was the owner of the subject machineries, it should have
complied with Sections 202 and 206 of the LGC which obligates owners of real property to:

a. file a sworn statement declaring the true value of the real property, whether taxable or exempt;14 and

b. file sufficient documentary evidence supporting its claim for tax exemption.15

While a real property owners failure to comply with Sections 202 and 206 does not necessarily negate
its tax obligation nor invalidate its legitimate claim for tax exemption, Napocors omission to do so in
this case can be construed as contradictory to its claim of ownership of the subject machineries. That it
assumed liability for the taxes that may be imposed on the subject machineries similarly does not clothe
it with legal title over the same. We do not believe that the phrase "person having legal interest in the
property" in Section 226 of the LGC can include an entity that assumes another persons tax liability by
contract.

A review of the provisions of the LGC on real property taxation shows that the phrase has been
repeatedly adopted and used to define an entity:

a. in whose name the real property shall be listed, valued, and assessed;16

b. who may be summoned by the local assessor to gather information on which to base the market
value of the real property;17

c. who may protest the tax assessment before the LBAA18 and may appeal the latters decision to the
CBAA;19

d. who may be liable for the idle land tax,20 as well as who may be exempt from the same;21

e. who shall be notified of any proposed ordinance imposing a special levy,22 as well as who may object
the proposed ordinance;23

f. who may pay the real property tax;24

g. who is entitled to be notified of the warrant of levy and against whom it may be enforced;25
h. who may stay the public auction upon payment of the delinquent tax, penalties and surcharge;26 and

i. who may redeem the property after it was sold at the public auction for delinquent taxes.27

For the Court to consider an entity assuming another persons tax liability by contract as a person having
legal interest in the real property would extend to it the privileges and responsibilities enumerated
above. The framers of the LGC certainly did not contemplate that the listing, valuation, and assessment
of real property can be made in the name of such entity; nor did they intend to make the warrant of levy
enforceable against it. Insofar as the provisions of the LGC are concerned, this entity is a party foreign to
the operation of real property tax laws and could not be clothed with any legal interest over the
property apart from its assumed liability for tax. The rights and obligations arising from the BOT
Agreement between Napocor and Mirant were of no legal interest to the tax collector the Province of
Quezon which is charged with the performance of independent duties under the LGC.28

Some authorities consider a person whose pecuniary interests is or may be adversely affected by the tax
assessment as one who has legal interest in the property (hence, possessed of the requisite standing to
protest it), citing Cooleys Law on Taxation.29 The reference to this foreign material, however, is
misplaced. The tax laws of the United States deem it sufficient that a persons pecuniary interests are
affected by the tax assessment to consider him as a person aggrieved and who may thus avail of the
judicial or administrative remedies against it. As opposed to our LGC, mere pecuniary interest is not
sufficient; our law has required legal interest in the property taxed before any administrative or judicial
remedy can be availed. The right to appeal a tax assessment is a purely statutory right; whether a
person challenging an assessment bears such a relation to the real property being assessed as to entitle
him the right to appeal is determined by the applicable statute in this case, our own LGC, not US
federal or state tax laws.

In light of our ruling above, PIPPAs motion to intervene and motion for reconsideration-in-intervention
is already mooted. PIPPA as an organization of independent power producers is not an interested party
insofar as this case is concerned. Even if TeaM Energy, as Mirants successor, is included as one of its
members, the motion to intervene and motion for reconsideration-in-intervention can no longer be
entertained, as it amounts to a protest against the tax assessment that was filed without the complying
with Section 252 of the LGC, a matter that we shall discuss below. Most importantly, our Decision has
not touched or affected at all the contractual stipulations between Napocor and its BOT partners for the
formers assumption of the tax liabilities of the latter.

Payment under protest is required before an appeal to the LBAA can be made

Apart from Napocors failure to prove that it has sufficient legal interest, a further review of the records
revealed another basis for disregarding Napocors protest against the assessment.

The LBAA dismissed Napocors petition for exemption for its failure to comply with Section 252 of the
LGC30requiring payment of the assailed tax before any protest can be made. Although the CBAA
ultimately dismissed Napocors appeal for failure to meet the requirements for tax exemption, it agreed
with Napocors position that "the protest contemplated in Section 252 (a) is applicable only when the
taxpayer is questioning the reasonableness or excessiveness of an assessment. It presupposes that the
taxpayer is subject to the tax but is disputing the correctness of the amount assessed. It does not apply
where, as in this case, the legality of the assessment is put in issue on account of the taxpayers claim
that it is exempt from tax." The CTA en banc agreed with the CBAAs discussion, relying mainly on the
cases of Ty v. Trampe31 and Olivarez v. Marquez.32

We disagree. The cases of Ty and Olivarez must be placed in their proper perspective.

The petitioner in Ty v. Trampe questioned before the trial court the increased real estate taxes imposed
by and being collected in Pasig City effective from the year 1994, premised on the legal question of
whether or not Presidential Decree No. 921 (PD 921) was repealed by the LGC. PD 921 required that the
schedule of values of real properties in the Metropolitan Manila area shall be prepared jointly by the
city assessors in the districts created therein; while Section 212 of the LGC stated that the schedule shall
be prepared by the provincial, city or municipal assessors of the municipalities within the Metropolitan
Manila Area for the different classes of real property situated in their respective local government units
for enactment by ordinance of the Sanggunian concerned. The private respondents assailed Tys act of
filing a prohibition petition before the trial court contending that Ty should have availed first the
administrative remedies provided in the LGC, particularly Sections 252 (on payment under protest
before the local treasurer) and 226 (on appeals to the LBAA).

The Court, through former Chief Justice Artemio Panganiban, declared that Ty correctly filed a petition
for prohibition before the trial court against the assailed act of the city assessor and treasurer. The
administrative protest proceedings provided in Section 252 and 226 will not apply. The protest
contemplated under Section 252 is required where there is a question as to the reasonableness or
correctness of the amount assessed. Hence, if a taxpayer disputes the reasonableness of an increase in a
real property tax assessment, he is required to "first pay the tax" under protest. Otherwise, the city or
municipal treasurer will not act on his protest. Ty however was questioning the very authority and
power of the assessor, acting solely and independently, to impose the assessment and of the treasurer
to collect the tax. These were not questions merely of amounts of the increase in the tax but attacks on
the very validity of any increase. Moreover, Ty was raising a legal question that is properly cognizable by
the trial court; no issues of fact were involved. In enumerating the power of the LBAA, Section 229
declares that "the proceedings of the Board shall be conducted solely for the purpose of ascertaining the
facts x x x." Appeals to the LBAA (under Section 226) are therefore fruitful only where questions of fact
are involved.

Olivarez v. Marquez, on the other hand, involved a petition for certiorari, mandamus, and prohibition
questioning the assessment and levy made by the City of Paraaque. Olivarez was seeking the
annulment of his realty tax delinquency assessment. Marquez assailed Olivarez failure to first exhaust
administrative remedies, particularly the requirement of payment under protest. Olivarez replied that
his petition was filed to question the assessors authority to assess and collect realty taxes and
therefore, as held in Ty v. Trampe, the exhaustion of administrative remedies was not required. The
Court however did not agree with Olivarezs argument. It found that there was nothing in his petition
that supported his claim regarding the assessors alleged lack of authority. What Olivarez raised were
the following grounds: "(1) some of the taxes being collected have already prescribed and may no longer
be collected as provided in Section 194 of the Local Government Code of 1991; (2) some properties have
been doubly taxed/assessed; (3) some properties being taxed are no longer existent; (4) some
properties are exempt from taxation as they are being used exclusively for educational purposes; and (5)
some errors are made in the assessment and collection of taxes due on petitioners properties, and that
respondents committed grave abuse of discretion in making the improper, excessive and unlawful the
collection of taxes against the petitioner." The Olivarez petition filed before the trial court primarily
involved the correctness of the assessments, which is a question of fact that is not allowed in a petition
for certiorari, prohibition, and mandamus. Hence, we declared that the petition should have been
brought, at the very first instance, to the LBAA, not the trial court.

Like Olivarez, Napocor, by claiming exemption from realty taxation, is simply raising a question of the
correctness of the assessment. A claim for tax exemption, whether full or partial, does not question the
authority of local assessor to assess real property tax. This may be inferred from Section 206 which
states that:

SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom real
property is declared, who shall claim tax exemption for such property under this Title shall file with the
provincial, city or municipal assessor within thirty (30) days from the date of the declaration of real
property sufficient documentary evidence in support of such claim including corporate charters, title of
ownership, articles of incorporation, bylaws, contracts, affidavits, certifications and mortgage deeds,
and similar documents. If the required evidence is not submitted within the period herein prescribed,
the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to
be tax exempt, the same shall be dropped from the assessment roll. [Emphasis provided]

By providing that real property not declared and proved as tax-exempt shall be included in the
assessment roll, the above-quoted provision implies that the local assessor has the authority to assess
the property for realty taxes, and any subsequent claim for exemption shall be allowed only when
sufficient proof has been adduced supporting the claim. Since Napocor was simply questioning the
correctness of the assessment, it should have first complied with Section 252, particularly the
requirement of payment under protest. Napocors failure to prove that this requirement has been
complied with thus renders its administrative protest under Section 226 of the LGC without any effect.
No protest shall be entertained unless the taxpayer first pays the tax.

It was an ill-advised move for Napocor to directly file an appeal with the LBAA under Section 226
without first paying the tax as required under Section 252. Sections 252 and 226 provide successive
administrative remedies to a taxpayer who questions the correctness of an assessment. Section 226, in
declaring that "any owner or person having legal interest in the property who is not satisfied with the
action of the provincial, city, or municipal assessor in the assessment of his property may x x x appeal to
the Board of Assessment Appeals x x x," should be read in conjunction with Section 252 (d), which states
that "in the event that the protest is denied x x x, the taxpayer may avail of the remedies as provided for
in Chapter 3, Title II, Book II of the LGC [Chapter 3 refers to Assessment Appeals, which includes Sections
226 to 231]. The "action" referred to in Section 226 (in relation to a protest of real property tax
assessment) thus refers to the local assessors act of denying the protest filed pursuant to Section 252.
Without the action of the local assessor, the appellate authority of the LBAA cannot be invoked.
Napocors action before the LBAA was thus prematurely filed.

For the foregoing reasons, we DENY the petitioners motion for reconsideration.

SO ORDERED.
THIRD DIVISION

G.R. No. 177279 October 13, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
HON. RAUL M. GONZALEZ, Secretary of Justice, L. M. CAMUS ENGINEERING CORPORATION
(represented by LUIS M. CAMUS and LINO D. MENDOZA), Respondents.

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
assailing the Decision1 dated October 31, 2006 and Resolution2 dated March 6, 2007 of the Court of
Appeals (CA) in CA-G.R. SP No. 93387 which affirmed the Resolution3 dated December 13, 2005 of
respondent Secretary of Justice in I.S. No. 2003-774 for violation of Sections 254 and 255 of the National
Internal Revenue Code of 1997 (NIRC).

The facts as culled from the records:

Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then Commissioner
of Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C. Advincula, Jr.,
Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora supervised by Section Chief
Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National Office, conducted a fraud investigation for all
internal revenue taxes to ascertain/determine the tax liabilities of respondent L. M. Camus Engineering
Corporation (LMCEC) for the taxable years 1997, 1998 and 1999.4 The audit and investigation against
LMCEC was precipitated by the information provided by an "informer" that LMCEC had substantial
underdeclared income for the said period. For failure to comply with the subpoena duces tecum issued
in connection with the tax fraud investigation, a criminal complaint was instituted by the Bureau of
Internal Revenue (BIR) against LMCEC on January 19, 2001 for violation of Section 266 of the NIRC (I.S.
No. 00-956 of the Office of the City Prosecutor of Quezon City).5

Based on data obtained from an "informer" and various clients of LMCEC,6 it was discovered that LMCEC
filed fraudulent tax returns with substantial underdeclarations of taxable income for the years 1997,
1998 and 1999. Petitioner thus assessed the company of total deficiency taxes amounting to
430,958,005.90 (income tax - 318,606,380.19 and value-added tax [VAT] - 112,351,625.71) covering
the said period. The Preliminary Assessment Notice (PAN) was received by LMCEC on February 22,
2001.7

LMCECs alleged underdeclared income was summarized by petitioner as follows:

Year Income Income Undeclared Percentage of


Per ITR Per Investigation Income Underdeclaration
1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%

1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%

1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%8

In view of the above findings, assessment notices together with a formal letter of demand dated August
7, 2002 were sent to LMCEC through personal service on October 1, 2002.9 Since the company and its
representatives refused to receive the said notices and demand letter, the revenue officers resorted to
constructive service10 in accordance with Section 3, Revenue Regulations (RR) No. 12-9911.

On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to the
Secretary of Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus and Lino D.
Mendoza, the latter two were sued in their capacities as President and Comptroller, respectively. The
case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the revenue officers who
conducted the tax fraud investigation, it was alleged that despite the receipt of the final assessment
notice and formal demand letter on October 1, 2002, LMCEC failed and refused to pay the deficiency tax
assessment in the total amount of 630,164,631.61, inclusive of increments, which had become final
and executory as a result of the said taxpayers failure to file a protest thereon within the thirty (30)-day
reglementary period.12

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable
whatsoever for the alleged tax deficiency which had become due and demandable. Considering that the
complaint and its annexes all showed that the suit is a simple civil action for collection and not a tax
evasion case, the Department of Justice (DOJ) is not the proper forum for BIRs complaint. They also
assail as invalid the assessment notices which bear no serial numbers and should be shown to have been
validly served by an Affidavit of Constructive Service executed and sworn to by the revenue officers who
served the same. As stated in LMCECs letter-protest dated December 12, 2002 addressed to Revenue
District Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the company had already
undergone a series of routine examinations for the years 1997, 1998 and 1999; under the NIRC, only one
examination of the books of accounts is allowed per taxable year.13

LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic Recovery
Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998 and 1999;
for 1997, its tax liability was terminated and closed under Letter of Termination14 dated June 1, 1999
issued by petitioner and signed by the Chief of the Assessment Division.15 LMCEC claimed it made
payments of income tax, VAT and expanded withholding tax (EWT), as follows:

YEAR AMOUNT OF TAXES


PAID
1997 Termination Letter Under Letter of Authority No. EWT - P 6,000.00
174600 Dated November 4, 1998 VAT - 540,605.02
IT - 3,000.00

1998 ERAP Program pursuant WC - 38,404.55


to RR #2-99 VAT - 61,635.40

1999 VAP Program pursuant IT - 878,495.28


to RR #8-2001 VAT - 1,324,317.0016

LMCEC argued that petitioner is now estopped from further taking any action against it and its corporate
officers concerning the taxable years 1997 to 1999. With the grant of immunity from audit from the
companys availment of ERAP and VAP, which have a feature of a tax amnesty, the element of fraud is
negated the moment the Bureau accepts the offer of compromise or payment of taxes by the taxpayer.
The act of the revenue officers in finding justification under Section 6(B) of the NIRC (Best Evidence
Obtainable) is misplaced and unavailing because they were not able to open the books of the company
for the second time, after the routine examination, issuance of termination letter and the availment of
ERAP and VAP. LMCEC thus maintained that unless there is a prior determination of fraud supported by
documents not yet incorporated in the docket of the case, petitioner cannot just issue LAs without first
terminating those previously issued. It emphasized the fact that the BIR officers who filed and signed the
Affidavit-Complaint in this case were the same ones who appeared as complainants in an earlier case
filed against Camus for his alleged "failure to obey summons in violation of Section 5 punishable under
Section 266 of the NIRC of 1997" (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City).
After preliminary investigation, said case was dismissed for lack of probable cause in a Resolution issued
by the Investigating Prosecutor on May 2, 2001.17

LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner for
having no basis in fact and law. However, until now the said protest remains unresolved. As to the
alleged informant who purportedly supplied the "confidential information," LMCEC believes that such
person is fictitious and his true identity and personality could not be produced. Hence, this case is
another form of harassment against the company as what had been found by the Office of the City
Prosecutor of Quezon City in I.S. No. 00-956. Said case and the present case both have something to do
with the audit/examination of LMCEC for taxable years 1997, 1998 and 1999 pursuant to LA No.
00009361.18

In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed with the
contention of LMCEC that the complaint filed is not criminal in nature, pointing out that LMCEC and its
officers Camus and Mendoza were being charged for the criminal offenses defined and penalized under
Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the NIRC. This finds
support in Section 205 of the same Code which provides for administrative (distraint, levy, fine,
forfeiture, lien, etc.) and judicial (criminal or civil action) remedies in order to enforce collection of taxes.
Both remedies may be pursued either independently or simultaneously. In this case, the BIR decided to
simultaneously pursue both remedies and thus aside from this criminal action, the Bureau also initiated
administrative proceedings against LMCEC.19

On the lack of control number in the assessment notice, petitioner explained that such is a mere office
requirement in the Assessment Service for the purpose of internal control and monitoring; hence, the
unnumbered assessment notices should not be interpreted as irregular or anomalous. Petitioner
stressed that LMCEC already lost its right to file a protest letter after the lapse of the thirty (30)-day
reglementary period. LMCECs protest-letter dated December 12, 2002 to RDO Clavelina S. Nacar, RD
No. 40, Cubao, Quezon City was actually filed only on December 16, 2002, which was disregarded by the
petitioner for being filed out of time. Even assuming for the sake of argument that the assessment
notices were invalid, petitioner contended that such could not affect the present criminal action,20 citing
the ruling in the landmark case of Ungab v. Cusi, Jr.21

As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division, Revenue
Region No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that the undated
Certification issued by RDO Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City stated that the
report of the 1997 Internal Revenue taxes of LMCEC had already been submitted for review and
approval of higher authorities. LMCEC also cannot claim as excuse from the reopening of its books of
accounts the previous investigations and examinations. Under Section 235 (a), an exception was
provided in the rule on once a year audit examination in case of "fraud, irregularity or mistakes, as
determined by the Commissioner". Petitioner explained that the distinction between a Regular Audit
Examination and Tax Fraud Audit Examination lies in the fact that the former is conducted by the district
offices of the Bureaus Regional Offices, the authority emanating from the Regional Director, while the
latter is conducted by the TFD of the National Office only when instances of fraud had been determined
by the petitioner.22

Petitioner further asserted that LMCECs claim that it was granted immunity from audit when it availed
of the VAP and ERAP programs is misleading. LMCEC failed to state that its availment of ERAP under RR
No. 2-99 is not a grant of absolute immunity from audit and investigation, aside from the fact that said
program was only for income tax and did not cover VAT and withholding tax for the taxable year 1998.
As for LMCECS availment of VAP in 1999 under RR No. 8-2001 dated August 1, 2001 as amended by RR
No. 10-2001 dated September 3, 2001, the company failed to state that it covers only income tax and
VAT, and did not include withholding tax. However, LMCEC is not actually entitled to the benefits of VAP
under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle of estoppel invoked by LMCEC,
estoppel clearly does not lie against the BIR as this involved the exercise of an inherent power by the
government to collect taxes.23

Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956 is misleading
because said case involves another violation and offense (Sections 5 and 266 of the NIRC). Said case was
filed by petitioner due to the failure of LMCEC to submit or present its books of accounts and other
accounting records for examination despite the issuance of subpoena duces tecum against Camus in his
capacity as President of LMCEC. While indeed a Resolution was issued by Asst. City Prosecutor Titus C.
Borlas on May 2, 2001 dismissing the complaint, the same is still on appeal and pending resolution by
the DOJ. The determination of probable cause in said case is confined to the issue of whether there was
already a violation of the NIRC by Camus in not complying with the subpoena duces tecum issued by the
BIR.24

Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by the
Commissioner is because the latter agreed with the findings of the investigating revenue officers that
fraud exists in this case. In the conduct of their investigation, the revenue officers observed the proper
procedure under Revenue Memorandum Order (RMO) No. 49-2000 wherein it is required that before
the issuance of a Letter of Authority against a particular taxpayer, a preliminary investigation should first
be conducted to determine if a prima facie case for tax fraud exists. As to the allegedly unresolved
protest filed on April 20, 2001 by LMCEC over the PAN, this has been disregarded by the Bureau for
being pro forma and having been filed beyond the 15-day reglementary period. A subsequent letter
dated April 20, 2001 was filed with the TFD and signed by a certain Juan Ventigan. However, this was
disregarded and considered a mere scrap of paper since the said signatory had not shown any prior
authorization to represent LMCEC. Even assuming said protest letter was validly filed on behalf of the
company, the issuance of a Formal Demand Letter and Assessment Notice through constructive service
on October 1, 2002 is deemed an implied denial of the said protest. Lastly, the details regarding the
"informer" being confidential, such information is entitled to some degree of protection, including the
identity of the informant against LMCEC.25

In their Joint Rejoinder-Affidavit,26 Camus and Mendoza reiterated their argument that the identity of
the alleged informant is crucial to determine if he/she is qualified under Section 282 of the NIRC.
Moreover, there was no assessment that has already become final, the validity of its issuance and
service has been put in issue being anomalous, irregular and oppressive. It is contended that for criminal
prosecution to proceed before assessment, there must be a prima facie showing of a willful attempt to
evade taxes. As to LMCECs availment of the VAP and ERAP programs, the certificate of immunity from
audit issued to it by the BIR is plain and simple, but petitioner is now saying it has the right to renege
with impunity from its undertaking. Though petitioner deems LMCEC not qualified to avail of the
benefits of VAP, it must be noted that if it is true that at the time the petitioner filed I.S. No. 00-956
sometime in January 2001 it had already in its custody that "Confidential Information No. 29-2000 dated
July 7, 2000", these revenue officers could have rightly filed the instant case and would not resort to
filing said criminal complaint for refusal to comply with a subpoena duces tecum.

On September 22, 2003, the Chief State Prosecutor issued a Resolution27 finding no sufficient evidence
to establish probable cause against respondents LMCEC, Camus and Mendoza. It was held that since the
payments were made by LMCEC under ERAP and VAP pursuant to the provisions of RR Nos. 2-99 and 8-
2001 which were offered to taxpayers by the BIR itself, the latter is now in estoppel to insist on the
criminal prosecution of the respondent taxpayer. The voluntary payments made thereunder are in the
nature of a tax amnesty. The unnumbered assessment notices were found highly irregular and thus their
validity is suspect; if the amounts indicated therein were collected, it is uncertain how these will be
accounted for and if it would go to the coffers of the government or elsewhere. On the required prior
determination of fraud, the Chief State Prosecutor declared that the Office of the City Prosecutor in I.S.
No. 00-956 has already squarely ruled that (1) there was no prior determination of fraud, (2) there was
indiscriminate issuance of LAs, and (3) the complaint was more of harassment. In view of such findings,
any ensuing LA is thus defective and allowing the collection on the assailed assessment notices would
already be in the context of a "fishing expedition" or "witch-hunting." Consequently, there is nothing to
speak of regarding the finality of assessment notices in the aggregate amount of 630,164,631.61.

Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor.28

Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review under
Resolution dated December 13, 2005.29

The Secretary of Justice found that petitioners claim that there is yet no finality as to LMCECs payment
of its 1997 taxes since the audit report was still pending review by higher authorities, is unsubstantiated
and misplaced. It was noted that the Termination Letter issued by the Commissioner on June 1, 1999 is
explicit that the matter is considered closed. As for taxable year 1998, respondent Secretary stated that
the record shows that LMCEC paid VAT and withholding tax in the amount of 61,635.40 and
38,404.55, respectively. This eventually gave rise to the issuance of a certificate of immunity from audit
for 1998 by the Office of the Commissioner of Internal Revenue. For taxable year 1999, respondent
Secretary found that pursuant to earlier LA No. 38633 dated July 4, 2000, LMCECs 1999 tax liabilities
were still pending investigation for which reason LMCEC assailed the subsequent issuance of LA No.
00009361 dated August 25, 2000 calling for a similar investigation of its alleged 1999 tax deficiencies
when no final determination has yet been arrived on the earlier LA No. 38633.30

On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the existence of
the following circumstances indicating fraud in the settlement of LMCECs tax liabilities: (1) there must
be intentional and substantial understatement of tax liability by the taxpayer; (2) there must be
intentional and substantial overstatement of deductions or exemptions; and (3) recurrence of the
foregoing circumstances. First, petitioner miserably failed to explain why the assessment notices were
unnumbered; second, the claim that the tax fraud investigation was precipitated by an alleged
"informant" has not been corroborated nor was it clearly established, hence there is no other conclusion
but that the Bureau engaged in a "fishing expedition"; and furthermore, petitioners course of action is
contrary to Section 235 of the NIRC allowing only once in a given taxable year such examination and
inspection of the taxpayers books of accounts and other accounting records. There was no convincing
proof presented by petitioner to show that the case of LMCEC falls under the exceptions provided in
Section 235. Respondent Secretary duly considered the issuance of Certificate of Immunity from Audit
and Letter of Termination dated June 1, 1999 issued to LMCEC.31

Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice found
petitioner to have engaged in forum shopping in view of the fact that while there is still pending an
appeal from the Resolution of the City Prosecutor of Quezon City in said case, petitioner hurriedly filed
the instant case, which not only involved the same parties but also similar substantial issues (the joint
complaint-affidavit also alleged the issuance of LA No. 00009361 dated August 25, 2000). Clearly, the
evidence of litis pendentia is present. Finally, respondent Secretary noted that if indeed LMCEC
committed fraud in the settlement of its tax liabilities, then at the outset, it should have been
discovered by the agents of petitioner, and consequently petitioner should not have issued the Letter of
Termination and the Certificate of Immunity From Audit. Petitioner thus should have been more
circumspect in the issuance of said documents.32

Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent
Secretary via a certiorari petition in the CA.

On October 31, 2006, the CA rendered the assailed decision33 denying the petition and concurred with
the findings and conclusions of respondent Secretary. Petitioners motion for reconsideration was
likewise denied by the appellate court.34 It appears that entry of judgment was issued by the CA stating
that its October 31, 2006 Decision attained finality on March 25, 2007.35 However, the said entry of
judgment was set aside upon manifestation by the petitioner that it has filed a petition for review
before this Court subsequent to its receipt of the Resolution dated March 6, 2007 denying petitioners
motion for reconsideration on March 20, 2007.36

The petition is anchored on the following grounds:

I.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by dismissing the complaint based on grounds which are not even
elements of the offenses charged.

II.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by dismissing petitioners evidence, contrary to law.

III.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by inquiring into the validity of a Final Assessment Notice which has
become final, executory and demandable pursuant to Section 228 of the Tax Code of 1997 for failure of
private respondent to file a protest against the same.37

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for
violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and
Accurate Information and Pay Tax).

Petitioner filed the criminal complaint against the private respondents for violation of the following
provisions of the NIRC, as amended:

SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in any manner to evade
or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties
provided by law, upon conviction thereof, be punished by a fine of not less than Thirty thousand pesos
(P30,000) but not more than One hundred thousand pesos (P100,000) and suffer imprisonment of not
less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal
obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit
Tax and Refund Excess Taxes Withheld on Compensation. Any person required under this Code or by
rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply
any correct and accurate information, who willfully fails to pay such tax, make such return, keep such
record, or supply such correct and accurate information, or withhold or remit taxes withheld, or refund
excess taxes withheld on compensations at the time or times required by law or rules and regulations
shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of
not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but
not more than ten (10) years.

x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is insufficient
evidence to establish probable cause to charge private respondents under the above provisions, based
on the following findings: (1) the tax deficiencies of LMCEC for taxable years 1997, 1998 and 1999 have
all been settled or terminated, as in fact LMCEC was issued a Certificate of Immunity and Letter of
Termination, and availed of the ERAP and VAP programs; (2) there was no prior determination of the
existence of fraud; (3) the assessment notices are unnumbered, hence irregular and suspect; (4) the
books of accounts and other accounting records may be subject to audit examination only once in a
given taxable year and there is no proof that the case falls under the exceptions provided in Section 235
of the NIRC; and (5) petitioner committed forum shopping when it filed the instant case even as the
earlier criminal complaint (I.S. No. 00-956) dismissed by the City Prosecutor of Quezon City was still
pending appeal.

Petitioner argues that with the finality of the assessment due to failure of the private respondents to
challenge the same in accordance with Section 228 of the NIRC, respondent Secretary has no jurisdiction
and authority to inquire into its validity. Respondent taxpayer is thereby allowed to do indirectly what it
cannot do directly to raise a collateral attack on the assessment when even a direct challenge of the
same is legally barred. The rationale for dismissing the complaint on the ground of lack of control
number in the assessment notice likewise betrays a lack of awareness of tax laws and jurisprudence,
such circumstance not being an element of the offense. Worse, the final, conclusive and undisputable
evidence detailing a crime under our taxation laws is swept under the rug so easily on mere conspiracy
theories imputed on persons who are not even the subject of the complaint.

We grant the petition.

There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax fraud
investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax
returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99,38 a PAN was sent to and received by LMCEC
on February 22, 2001 wherein it was notified of the proposed assessment of deficiency taxes amounting
to 430,958,005.90 (income tax - 318,606,380.19 and VAT - 112,351,625.71) covering taxable years
1997, 1998 and 1999.39 In response to said PAN, LMCEC sent a letter-protest to the TFD, which denied
the same on April 12, 2001 for lack of legal and factual basis and also for having been filed beyond the
15-day reglementary period.40

As mentioned in the PAN, the revenue officers were not given the opportunity to examine LMCECs
books of accounts and other accounting records because its officers failed to comply with the subpoena
duces tecum earlier issued, to verify its alleged underdeclarations of income reported by the Bureaus
informant under Section 282 of the NIRC. Hence, a criminal complaint was filed by the Bureau against
private respondents for violation of Section 266 which provides:

SEC. 266. Failure to Obey Summons. Any person who, being duly summoned to appear to testify, or to
appear and produce books of accounts, records, memoranda, or other papers, or to furnish information
as required under the pertinent provisions of this Code, neglects to appear or to produce such books of
accounts, records, memoranda, or other papers, or to furnish such information, shall, upon conviction,
be punished by a fine of not less than Five thousand pesos (P5,000) but not more than Ten thousand
pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than two (2) years.

It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present
considering that the outcome of I.S. No. 00-956 is not determinative of the issue as to whether probable
cause exists to charge the private respondents with the crimes of attempt to evade or defeat tax and
willful failure to supply correct and accurate information and pay tax defined and penalized under
Sections 254 and 255, respectively. For the crime of tax evasion in particular, compliance by the
taxpayer with such subpoena, if any had been issued, is irrelevant. As we held in Ungab v. Cusi,
Jr.,41 "[t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a] fraudulent
[return] with intent to evade and defeat x x x the tax." Thus, respondent Secretary erred in holding that
petitioner committed forum shopping when it filed the present criminal complaint during the pendency
of its appeal from the City Prosecutors dismissal of I.S. No. 00-956 involving the act of disobedience to
the summons in the course of the preliminary investigation on LMCECs correct tax liabilities for taxable
years 1997, 1998 and 1999.

In the Details of Discrepancies attached as Annex B of the PAN,42 private respondents were already
notified that inasmuch as the revenue officers were not given the opportunity to examine LMCECs
books of accounts, accounting records and other documents, said revenue officers gathered information
from third parties. Such procedure is authorized under Section 5 of the NIRC, which provides:

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take
Testimony of Persons. In ascertaining the correctness of any return, or in making a return when none
has been made, or in determining the liability of any person for any internal revenue tax, or in collecting
any such liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record or other data which may be relevant or material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose internal revenue tax
liability is subject to audit or investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and
government-owned or -controlled corporations, any information such as, but not limited to, costs and
volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and
financial statements of corporations, mutual fund companies, insurance companies, regional operating
headquarters of multinational companies, joint accounts, associations, joint ventures or consortia and
registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or employee of such
person, or any person having possession, custody, or care of the books of accounts and other accounting
records containing entries relating to the business of the person liable for tax, or any other person, to
appear before the Commissioner or his duly authorized representative at a time and place specified in
the summons and to produce such books, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or material to such
inquiry; x x x

x x x x (Emphasis supplied.)

Private respondents assertions regarding the qualifications of the "informer" of the Bureau deserve
scant consideration. We have held that the lack of consent of the taxpayer under investigation does not
imply that the BIR obtained the information from third parties illegally or that the information received
is false or malicious. Nor does the lack of consent preclude the BIR from assessing deficiency taxes on
the taxpayer based on the documents.43 In the same vein, herein private respondents cannot be allowed
to escape criminal prosecution under Sections 254 and 255 of the NIRC by mere imputation of a
"fictitious" or disqualified informant under Section 282 simply because other than disclosure of the
official registry number of the third party "informer," the Bureau insisted on maintaining the
confidentiality of the identity and personal circumstances of said "informer."

Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No. 12-99,
assessment notice and formal demand informing the said taxpayer of the law and the facts on which the
assessment is made, as required by Section 228 of the NIRC. Respondent Secretary, however, fully
concurred with private respondents contention that the assessment notices were invalid for being
unnumbered and the tax liabilities therein stated have already been settled and/or terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be without
merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of
investigation submitted by the Revenue Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the
fact, the law, rules and regulations or jurisprudence on which the assessment is based, otherwise the
formal letter of demand and the notice of assessment shall be void.44

As it is, the formality of a control number in the assessment notice is not a requirement for its validity
but rather the contents thereof which should inform the taxpayer of the declaration of deficiency tax
against said taxpayer. Both the formal letter of demand and the notice of assessment shall be void if the
former failed to state the fact, the law, rules and regulations or jurisprudence on which the assessment
is based, which is a mandatory requirement under Section 228 of the NIRC.

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts
on which the assessment is made. Otherwise, the assessment is void. To implement the provisions of
Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:

3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand
calling for payment of the taxpayers deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of
demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered
mail or by personal delivery. x x x.45 (Emphasis supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCECs
tax deficiencies but also details of the specified discrepancies, explaining the legal and factual bases of
the assessment. It also reiterated that in the absence of accounting records and other documents
necessary for the proper determination of the companys internal revenue tax liabilities, the
investigating revenue officers resorted to the "Best Evidence Obtainable" as provided in Section 6(B) of
the NIRC (third party information) and in accordance with the procedure laid down in RMC No. 23-2000
dated November 27, 2000. Annex "A" of the Formal Letter of Demand thus stated:

Thus, to verify the validity of the information previously provided by the informant, the assigned
revenue officers resorted to third party information. Pursuant to Section 5(B) of the NIRC of 1997,
access letters requesting for information and the submission of certain documents (i.e., Certificate of
Income Tax Withheld at Source and/or Alphabetical List showing the income payments made to L.M.
Camus Engineering Corporation for the taxable years 1997 to 1999) were sent to the various clients of
the subject corporation, including but not limited to the following:

1. Ayala Land Inc.

2. Filinvest Alabang Inc.

3. D.M. Consunji, Inc.

4. SM Prime Holdings, Inc.

5. Alabang Commercial Corporation


6. Philam Properties Corporation

7. SM Investments, Inc.

8. Shoemart, Inc.

9. Philippine Securities Corporation

10. Makati Development Corporation

From the documents gathered and the data obtained therein, the substantial underdeclaration as
defined under Section 248(B) of the NIRC of 1997 by your corporation of its income had been confirmed.
x x x x46 (Emphasis supplied.)

In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that the
estimated tax liabilities arising from LMCECs underdeclaration amounted to 186,773,600.84 in 1997,
150,069,323.81 in 1998 and 163,220,111.13 in 1999. These figures confirmed that the non-
declaration by LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding 30%
income47 declared in its return is considered a substantial underdeclaration of income, which
constituted prima facie evidence of false or fraudulent return under Section 248(B)48 of the NIRC, as
amended.49

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent Secretary
found the latters claim as meritorious on the basis of the Certificate of Immunity From Audit issued on
December 6, 1999 pursuant to RR No. 2-99 and Letter of Termination dated June 1, 1999 issued by
Revenue Region No. 7 Chief of Assessment Division Ruth Vivian G. Gandia. Petitioner, however, clarified
that the certificate of immunity from audit covered only income tax for the year 1997 and does not
include VAT and withholding taxes, while the Letter of Termination involved tax liabilities for taxable
year 1997 (EWT, VAT and income taxes) but which was submitted for review of higher authorities as per
the Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr.50 For 1999, private respondents
supposedly availed of the VAP pursuant to RR No. 8-2001.

RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering the scarcity of
financial and human resources as well as the time constraints within which the Bureau has to "clean the
Bureaus backlog of unaudited tax returns in order to keep updated and be focused with the most
current accounts" in preparation for the full implementation of a computerized tax administration, the
said revenue regulation was issued "providing for last priority in audit and investigation of tax returns"
to accomplish the said objective "without, however, compromising the revenue collection that would
have been generated from audit and enforcement activities." The program named as "Economic
Recovery Assistance Payment (ERAP) Program" granted immunity from audit and investigation of
income tax, VAT and percentage tax returns for 1998. It expressly excluded withholding tax returns
(whether for income, VAT, or percentage tax purposes). Since such immunity from audit and
investigation does not preclude the collection of revenues generated from audit and enforcement
activities, it follows that the Bureau is likewise not barred from collecting any tax deficiency discovered
as a result of tax fraud investigations. Respondent Secretarys opinion that RR No. 2-99 contains the
feature of a tax amnesty is thus misplaced.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the
government a chance to collect uncollected tax from tax evaders without having to go through the
tedious process of a tax case.51Even assuming arguendo that the issuance of RR No. 2-99 is in the nature
of tax amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by statute, 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.52

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-
2001, through payment supposedly made in October 29, 2001 before the said program ended on
October 31, 2001, did not amount to settlement of its assessed tax deficiencies for the period 1997 to
1999, nor immunity from prosecution for filing fraudulent return and attempt to evade or defeat tax. As
correctly asserted by petitioner, from the express terms of the aforesaid revenue regulations, LMCEC is
not qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit and
investigation of all internal revenue taxes for the taxable year 2000 and all prior years under certain
conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was the
subject of investigation as a result of verified information filed by a Tax Informer under Section 282 of
the NIRC duly recorded in the BIR Official Registry as Confidential Information (CI) No. 29-200053 even
prior to the issuance of the PAN.

Section 1 of RR No. 8-2001 provides:

SECTION 1. COVERAGE. x x x

Any person, natural or juridical, including estates and trusts, liable to pay any of the above-cited internal
revenue taxes for the above specified period/s who, due to inadvertence or otherwise, erroneously paid
his internal revenue tax liabilities or failed to file tax return/pay taxes may avail of the Voluntary
Assessment Program (VAP), except those falling under any of the following instances:

1.1 Those covered by a Preliminary Assessment Notice (PAN), Final Assessment Notice (FAN), or
Collection Letter issued on or before July 31, 2001; or

1.2 Persons under investigation as a result of verified information filed by a Tax Informer under Section
282 of the Tax Code of 1997, duly processed and recorded in the BIR Official Registry Book on or before
July 31, 2001;

1.3 Tax fraud cases already filed and pending in courts for adjudication; and

x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any subsequent
audit of its account books and other accounting records in view of the strong finding of
underdeclaration in LMCECs payment of correct income tax liability by more than 30% as supported by
the written report of the TFD detailing the facts and the law on which such finding is based, pursuant to
the tax fraud investigation authorized by petitioner under LA No. 00009361. This conclusion finds
support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001 provides:

SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A taxpayer who has availed of the VAP
shall not be audited except upon authorization and approval of the Commissioner of Internal Revenue
when there is strong evidence or finding of understatement in the payment of taxpayers correct tax
liability by more than thirty percent (30%) as supported by a written report of the appropriate office
detailing the facts and the law on which such finding is based: Provided, however, that any VAP payment
should be allowed as tax credit against the deficiency tax due, if any, in case the concerned taxpayer has
been subjected to tax audit.

xxxx

Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-2001 and
RR No. 10-2001, we hold that respondent Secretary gravely erred in declaring that petitioner is now
estopped from assessing any tax deficiency against LMCEC after issuance of the aforementioned
documents of immunity from audit/investigation and settlement of tax liabilities. It is axiomatic that the
State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of
certain administrative officers should never be allowed to jeopardize the governments financial
position.54

Respondent Secretarys other ground for assailing the course of action taken by petitioner in proceeding
with the audit and investigation of LMCEC -- the alleged violation of the general rule in Section 235 of
the NIRC allowing the examination and inspection of taxpayers books of accounts and other accounting
records only once in a taxable year -- is likewise untenable. As correctly pointed out by petitioner, the
discovery of substantial underdeclarations of income by LMCEC for taxable years 1997, 1998 and 1999
upon verified information provided by an "informer" under Section 282 of the NIRC, as well as the
necessity of obtaining information from third parties to ascertain the correctness of the return filed or
evaluation of tax compliance in collecting taxes (as a result of the disobedience to the summons issued
by the Bureau against the private respondents), are circumstances warranting exception from the
general rule in Section 235.55

As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997, 1998
and 1999 in amounts equivalent to more than 30% (the computation in the final assessment notice
showed underdeclarations of almost 200%) constitutes prima facie evidence of fraudulent return under
Section 248(B) of the NIRC. Prior to the issuance of the preliminary and final notices of assessment, the
revenue officers conducted a preliminary investigation on the information and documents showing
substantial understatement of LMCECs tax liabilities which were provided by the Informer, following
the procedure under RMO No. 15-95.56 Based on the prima facie finding of the existence of fraud,
petitioner issued LA No. 00009361 for the TFD to conduct a formal fraud investigation of
LMCEC.57 Consequently, respondent Secretarys ruling that the filing of criminal complaint for violation
of Sections 254 and 255 of the NIRC cannot prosper because of lack of prior determination of the
existence of fraud, is bereft of factual basis and contradicted by the evidence on record.

Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions
are in favor of the correctness of a tax assessment unless proven otherwise.58 We have held that a
taxpayers failure to file a petition for review with the Court of Tax Appeals within the statutory period
rendered the disputed assessment final, executory and demandable, thereby precluding it from
interposing the defenses of legality or validity of the assessment and prescription of the Governments
right to assess.59 Indeed, any objection against the assessment should have been pursued following the
avenue paved in Section 229 (now Section 228) of the NIRC on protests on assessments of internal
revenue taxes.60

Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002 were
duly served on LMCEC on October 1, 2002. Private respondents did not file a motion for reconsideration
of the said assessment notice and formal demand; neither did they appeal to the Court of Tax Appeals.
Section 228 of the NIRC61 provides the remedy to dispute a tax assessment within a certain period of
time. It states that an assessment may be protested by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the assessment by the taxpayer. No such administrative
protest was filed by private respondents seeking reconsideration of the August 7, 2002 assessment
notice and formal letter of demand. Private respondents cannot belatedly assail the said assessment,
which they allowed to lapse into finality, by raising issues as to its validity and correctness during the
preliminary investigation after the BIR has referred the matter for prosecution under Sections 254 and
255 of the NIRC.

As we held in Marcos II v. Court of Appeals62:

It is not the Department of Justice which is the government agency tasked to determine the amount of
taxes due upon the subject estate, but the Bureau of Internal Revenue, whose determinations and
assessments are presumed correct and made in good faith. The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful
where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon
the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error
in the assessment will justify the judicial affirmance of said assessment. x x x.

Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of
Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext
of grave abuse of discretion. The course of action taken by the petitioner reflects his disregard or even
repugnance of the established institutions for governance in the scheme of a well-ordered society. The
subject tax assessments having become final, executory and enforceable, the same can no longer be
contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a
lost appeal or remedy. This judicial policy becomes more pronounced in view of the absence of
sufficient attack against the actuations of government. (Emphasis supplied.)

The determination of probable cause is part of the discretion granted to the investigating prosecutor
and ultimately, the Secretary of Justice. However, this Court and the CA possess the power to review
findings of prosecutors in preliminary investigations. Although policy considerations call for the widest
latitude of deference to the prosecutors findings, courts should never shirk from exercising their power,
when the circumstances warrant, to determine whether the prosecutors findings are supported by the
facts, or by the law. In so doing, courts do not act as prosecutors but as organs of the judiciary,
exercising their mandate under the Constitution, relevant statutes, and remedial rules to settle cases
and controversies.63 Clearly, the power of the Secretary of Justice to review does not preclude this Court
and the CA from intervening and exercising our own powers of review with respect to the DOJs findings,
such as in the exceptional case in which grave abuse of discretion is committed, as when a clear
sufficiency or insufficiency of evidence to support a finding of probable cause is ignored.64

WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution dated
March 6, 2007 of the Court of Appeals in CA-G.R. SP No. 93387 are hereby REVERSED and SET ASIDE. The
Secretary of Justice is hereby DIRECTED to order the Chief State Prosecutor to file before the Regional
Trial Court of Quezon City, National Capital Judicial Region, the corresponding Information against L. M.
Camus Engineering Corporation, represented by its President Luis M. Camus and Comptroller Lino D.
Mendoza, for Violation of Sections 254 and 255 of the National Internal Revenue Code of 1997.

No costs.

SO ORDERED.