PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, On the other hand, Municipal Ordinance No.
nicipal Ordinance No. 27, which was approved on October 28,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for
appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case
No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969, as
involving only pure questions of law, challenging the power of taxation delegated to
municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June
19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the Court of
First Instance of Leyte for that court to declare Section 2 of Republic Act No.
2264.1 otherwise known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of
1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein are practically the same, and
second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said
municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25,
1962, levies and collects "from soft drinks producers and manufacturers a tai of one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of
computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
1962, levies and collects "on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing soft drinks shall submit
to the Municipal Treasurer a monthly report of the total number of gallons produced or
manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing
the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264]
declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay
the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary
Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and
impose percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging
as a matter of right to every independent government, without being expressly conferred
by the people. 6 It is a power that is purely legislative and which the central legislative
body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does not apply. Legislative
powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to
tax. 9 Under the New Constitution, local governments are granted the autonomous
authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and vest in local governments the power of
local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated such measure of
power to impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the
State has not deemed wise to tax for more general purposes. 10 This is not to say though
that the constitutional injunction against deprivation of property without due process of
law may be passed over under the guise of the taxing power, except when the taking of
the property is in the lawful exercise of the taxing power, as when (1) the tax is for a
public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a
particular taxpayer, although the purpose of the tax will result in an injury rather than a
benefit to such taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax and the manner in which it shall be
apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation
may not be exercised. 13 The reason is that the State has exclusively reserved the same
for its own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and some states of the
Union.14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State and the other by the
city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance
No. 23, which was approved on September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and
still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27,
approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances
clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council
of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-
appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan,
Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows that only
Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of
Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend to
almost "everything, accepting those which are mentioned therein." As long as the text
levied under the authority of a city or municipal ordinance is not within the exceptions
and limitations in the law, the same comes within the ambit of the general rule, pursuant
to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition against municipalities and
municipal districts to impose "any percentage tax or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax except gasoline, under the
provisions of the National Internal Revenue Code." For purposes of this particular
limitation, a municipal ordinance which prescribes a set ratio between the amount of the
tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for
being outside the power of the municipality to enact. 20 But, the imposition of "a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft
drinks produced or manufactured under Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied
on the produce (whether sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for purposes of determining the
tax rate on the products, but there is not set ratio between the volume of sales and the
amount of the tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco
other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on
all softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per
case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would not
support the claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates of imposable taxes.
25 This is in line with the constutional policy of according the widest possible autonomy
to local governments in matters of local taxation, an aspect that is given expression in
the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as
to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if
the purpose of the law to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more
than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters
under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of
1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of
Ordinance No. 27. Municipalities are empowered to impose, not only municipal license
taxes upon persons engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes
within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
known as the Local Autonomy Act, as amended, is hereby upheld and Municipal
Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect.
Costs against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino
and Concepcion, Jr., JJ., concur.
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective
behalf and as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioners.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their
grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the
municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas,
Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the
lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia.
the parcels which they actually occupied. For its part, the Government, in consonance
with the constitutional mandate to acquire big landed estates and apportion them among
landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings.
Conferences were held with the farmers in the early part of 1948 and finally the Roxas
brothers agreed to sell 13,500 hectares to the Government for distribution to actual
occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision
expenses.
It turned out however that the Government did not have funds to cover the purchase
price, and so a special arrangement was made for the Rehabilitation Finance
Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral
for such loan were the lands proposed to be sold to the farmers. Under the arrangement,
Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment,
and contracted with the Rehabilitation Finance Corporation to pay its loan from the
proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of engaged in the business of real estate, hence, 100% of the profits derived therefrom was
P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax taxed.
purposes as gain on the sale of capital asset held for more than one year pursuant to
Section 34 of the Tax Code. The following deductions were disallowed:

RESIDENTIAL HOUSE
ROXAS Y CIA.:
During their bachelor days the Roxas brothers lived in the residential house at Wright St., 1953
Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo Tickets for Banquet in honor of P
got married, they resided somewhere else leaving only Jose in the old house. In fairness S. Osmeña 40.00
to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a
year. Gifts of San Miguel beer 28.00
Contributions to —
ASSESSMENTS
Philippine Air Force Chapel 100.00
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia
the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 Manila Police Trust Fund 150.00
compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952
plus P10.00 compromise penalty for late payment. The assessment for real estate Philippines Herald's fund for Manila's
dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose neediest families
Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a 100.00
real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or 1955
more is considered a real estate dealer and is liable to pay the corresponding fixed tax. Contributions to Contribution to
Our Lady of Fatima Chapel,
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers FEU 50.00
of securities against Roxas y Cia., on the fact that said partnership made profits from the
purchase and sale of securities. ANTONIO ROXAS:

1953
In the same assessment, the Commissioner assessed deficiency income taxes against Contributions to —
the Roxas Brothers for the years 1953 and 1955, as follows:
Pasay City Firemen Christmas Fund 25.00
1953 1955
Pasay City Police Dept. X'mas fund 50.00
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00 1955
Jose Roxas 6,323.00 5,588.00 Contributions to —
Baguio City Police Christmas fund 25.00
The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the
unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Pasay City Firemen Christmas fund
Nasugbu farm lands to the tenants, and the disallowance of deductions from gross 25.00
income of various business expenses and contributions claimed by Roxas y Cia. and the Pasay City Police Christmas fund
Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and 50.00
sold them to the farmers on installment, the Commissioner considered the partnership as
 EDUARDO ROXAS: (1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain,
hence 100% taxable?
1953
Contributions to — (2) Are the deductions for business expenses and contributions deductible?
Hijas de Jesus' Retiro de Manresa 450.00 (3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
Philippines Herald's fund for Manila's
neediest families The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered
100.00 a real estate dealer because it engaged in the business of selling real estate. The
business activity alluded to was the act of subdividing the Nasugbu farm lands and
1955
Contributions to Philippines selling them to the farmers-occupants on installment. To bolster his stand on the point,
Herald's fund for Manila's he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership,
neediest families 120.00 quoted below:

JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00
The Roxas brothers protested the assessment but inasmuch as said protest was denied,
they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court
heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment
except the demand for the payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the Philippine Air Force Chapel and
Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to
petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby
ordered to pay the respondent Commissioner of Internal Revenue the amounts of
P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income
taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest
as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to
the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real
estate dealer's tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The
Commissioner of Internal Revenue did not appeal.
The issues:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden
pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones,
estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben
conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of
Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its
peculiar circumstances in spite of the fact that there were hundreds of vendees. Although
they paid for their respective holdings in installment for a period of ten years, it would
nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year
amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers
who tilled them for generations was not only in consonance with, but more in obedience
to the request and pursuant to the policy of our Government to allocate lands to the
landless. It was the bounden duty of the Government to pay the agreed compensation
after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide
them among the farmers at very reasonable terms and prices. However, the Government
could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the
same way and under the same terms as would have been the case had the Government
done it itself. For this magnanimous act, the municipal council of Nasugbu passed a
resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the
golden egg". And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously. It does not conform
with Our sense of justice in the instant case for the Government to persuade the
taxpayer to lend it a helping hand and later on to penalize him for duly answering the
urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital
assets, and the gain derived from the sale thereof is capital gain, taxable only to the
extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a
banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts
to various persons. The deduction were claimed as representation expenses.
Representation expenses are deductible from gross income as expenditures incurred in
carrying on a trade or business under Section 30(a) of the Tax Code provided the
taxpayer proves that they are reasonable in amount, ordinary and necessary, and
incurred in connection with his business. In the case at bar, the evidence does not show
such link between the expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay
City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund,
Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at
Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen
and Baguio City Police are not deductible for the reason that the Christmas funds were
not spent for public purposes but as Christmas gifts to the families of the members of
said entities. Under Section 39(h), a contribution to a government entity is deductible
when used exclusively for public purposes. For this reason, the disallowance must be
sustained. On the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a government entity,
intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were
disallowed on the ground that the Philippines Herald is not a corporation or an
association contemplated in Section 30 (h) of the Tax Code. It should be noted however
that the contributions were not made to the Philippines Herald but to a group of civic
spirited citizens organized by the Philippines Herald solely for charitable purposes. There
is no question that the members of this group of citizens do not receive profits, for all the
funds they raised were for Manila's neediest families. Such a group of citizens may be
classified as an association organized exclusively for charitable purposes mentioned in
Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of
Fatima chapel at the Far Eastern University on the ground that the said university gives
dividends to its stockholders. Located within the premises of the university, the chapel in
question has not been shown to belong to the Catholic Church or any religious
organization. On the other hand, the lower court found that it belongs to the Far Eastern
University, contributions to which are not deductible under Section 30(h) of the Tax Code
for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it,
because although it earned a rental income of P8,000.00 per annum in 1952, said rental
income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in
considering as real estate dealers owners of real estate receiving rentals of at least
P3,000.00 a year, does not provide any qualification as to the persons paying the rentals.
The law, which states: 1äwphï1.ñët
. . . "Real estate dealer" includes any person engaged in the business of buying,
selling, exchanging, leasing or renting property on his own account as principal
and holding himself out as a full or part-time dealer in real estate or as an owner
of rental property or properties rented or offered to rent for an aggregate amount
of three thousand pesos or more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals
or, this point is sustained. 1äwphï1.ñët
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo
Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum
of P109.00, P91.00 and P49.00, respectively, computed as follows: *
ANTONIO ROXAS
Net income per return P315,476.59
Add: 1/3 share, profits in Roxas y
P 153,249.15
Cia.
Less amount declared 146,135.46
Amount understated P 7,113.69
Contributions disallowed 115.00
Net taxable income P299,592.47
P 7,228.69 Tax Due P147,250.00
Less 1/3 share of contributions Tax paid 147,159.00
amounting to P21,126.06 disallowed
from partnership but allowed to
partners 7,042.02 186.67 Deficiency P91.00
===========

Net income per review P315,663.26 JOSE ROXAS

Less: Exemptions 4,200.00 Net income per return P222,681.76

Add: 1/3 share, profits in Roxas y

P153,429.15
Net taxable income P311,463.26 Cia.

Tax due 154,169.00 Less amount reported 146,135.46

Tax paid 154,060.00

Amount understated 7,113.69

Deficiency P 109.00 Less 1/3 share of contributions

========== disallowed from partnership but
allowed as deductions to partners 7,042.02 71.67
EDUARDO ROXAS
P Net income per review P222,753.43
Net income per return
304,166.92
Less: Exemption 1,800.00
Add: 1/3 share, profits in Roxas y
P 153,249.15
Cia
Net income subject to tax P220,953.43
Less profits declared 146,052.58
Tax due P102,763.00

Amount understated P 7,196.57 Tax paid 102,714.00

Less 1/3 share in contributions

amounting to P21,126.06 disallowed Deficiency P 49.00
from partnership but allowed to ===========
partners 7,042.02 155.55
WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered
Net income per review P304,322.47 to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas,
Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00,
Less: Exemptions 4,800.00
P91.00 and P49.00 as their individual deficiency income tax all corresponding for the
year 1955. No costs. So ordered.
PLANTERS PRODUCTS, INC., petitioner,
vs.
FERTIPHIL CORPORATION, respondent.
DECISION
PUNO, J.:
Before us is a petition for review under Rule 45 assailing the Decision dated July 19,
20021 of the Court of Appeals in CA-G.R. SP No. 67434, and its Resolution dated
December 4, 2002 denying petitioner’s motion for reconsideration.
Petitioner Planters Products, Inc. ("PPI") and respondent Fertiphil Corporation
("Fertiphil") are domestic corporations engaged in the importation and distribution of
fertilizers, pesticides and agricultural chemicals. On the strength of Letter of Instruction
No. 1465 issued by then President Ferdinand E. Marcos on June 3, 1985, Fertiphil and
other domestic corporations engaged in the fertilizer business paid P10.00 for every bag
of fertilizer sold in the country to the Fertilizer and Pesticide Authority (FPA), the
government agency governing the fertilizer industry. FPA in turn remitted the amount to
PPI for its rehabilitation, according to the express mandate of LOI No. 1465.2
After the EDSA I revolution in 1986, the imposition of P10.00 by the FPA on every bag of
fertilizer sold was voluntarily stopped. Fertiphil demanded from PPI the refund of
P6,698,144.00 which it paid under LOI No. 1465. PPI refused. Hence, on September 14,
1987, Fertiphil filed a collection and damage suit against FPA and PPI before the
Regional Trial Court of Makati City docketed as Civil Case No. 17835 demanding refund
of the P6,698,144.00. Fertiphil contended that LOI No. 1465 was void and
unconstitutional for being a glaring example of crony capitalism as it favored PPI only.
PPI filed its answer but for failure to attend the pre-trial conference, it was declared in
default and Fertiphil was allowed to present evidence ex-parte.
On November 20, 1991, the RTC of Makati City, Branch 147, decided in favor of Fertiphil
declaring LOI No. 1465 void and unconstitutional. It ordered PPI to return the amount
which Fertiphil paid thereunder, with twelve percent (12%) interest from the time of
judicial demand. PPI’s motion for reconsideration was denied in an Order dated February
13, 1992. Hence, it filed notice of appeal on February 20, 1992. At the same time,
Fertiphil moved for execution of the decision pending appeal. The trial court granted the
motion and a writ of execution pending appeal was issued upon the posting of a surety
bond by Fertiphil in the amount of P6,698,000.00. PPI assailed the propriety of the
execution pending appeal before the Court of Appeals and, thereafter, to this Court. We
resolved the case in its favor in our Decision dated October 22, 1999 in G.R. No.
106052.3 Fertiphil was ordered to return all the properties of PPI taken in the course of
execution pending appeal or the value thereof, if return is no longer possible. After the
decision became final and executory, PPI moved for execution before the trial court and
Fertiphil’s bank deposits were accordingly garnished.
On January 5, 2001, Fertiphil moved to dismiss PPI’s appeal from the trial court’s
Decision dated November 20, 1991 citing as grounds the non-payment of the appellate
docket fee and alleged failure of PPI to prosecute the appeal within a reasonable time.
The trial court denied the motion in an Order dated April 3, 2001 ruling that the payment
of the appellate docket fee within the period for taking an appeal is a new requirement
under the 1997 Rules of Civil Procedure which was not yet applicable when PPI filed its
appeal in 1992. Moreover, the court found that PPI did not fail to prosecute the appeal
within a reasonable time.
On April 5, 2001, the court issued another order, upon PPI’s motion, directing Fertiphil’s
banks to deliver to the Deputy Sheriff the garnished deposits maintained with them and
for the levying upon of the surety bond posted by Fertiphil.
Fertiphil moved to reconsider the Orders dated April 3 and 5, 2001, to no avail. Hence,
on October 30, 2001, it filed a special civil action for certiorari with the Court of Appeals
imputing grave abuse of discretion on the part of the trial court in issuing the two
orders.4 The Court of Appeals partially granted the petition and set aside the Order dated
April 3, 2001. It ruled that although PPI filed its appeal in 1992, the 1997 Rules of Civil
Procedure should nevertheless be followed since it applies to actions pending and
undetermined at the time of its passage. Due to PPI’s failure to pay the appellate docket
fee for three (3) years from the time the 1997 Rules of Civil Procedure took effect on July
1, 1997 until Fertiphil moved to dismiss the appeal in 2001, the trial court’s decision
became final and executory. The Court of Appeals thus disposed of the petition, viz:
WHEREFORE, the instant petition is PARTIALLY GRANTED and the Order of 03 April
2001 of the Regional Trial Court of Makati City, Branch 147, is SET ASIDE. The decision
of 20 November 1991 of the said court is hereby declared final and executory.
The Clerk of Court is directed to return to the Regional Trial Court of Makati City, Branch
147, the record of Civil Case No. 17385 (sic) entitled "Fertiphil Corporation vs. Planters
Product(s) Inc., and Fertilizer and Pesticide Authority," for the computation of the amount
due the petitioner Fertiphil Corporation pursuant to the 20 November 1991 decision.
SO ORDERED.5
Hence, this petition by PPI.
As a general rule, rules of procedure apply to actions pending and undetermined at the
time of their passage, hence, retrospective in nature. However, the general rule is not
without an exception. Retrospective application is allowed if no vested rights are
impaired.6 Thus, in Land Bank of the Philippines v. de Leon7 our ruling that the
appropriate mode of review from decisions of Special Agrarian Courts is a petition for
review under Sec. 60 of R.A. No. 6657 and not an ordinary appeal as Sec. 61 thereof
seems to imply, was not given retroactive application. We held that to give our ruling a
retrospective application would prejudice petitioner’s pending appeals brought under said
Sec. 61 before the Court of Appeals at a time when there was yet no clear
pronouncement as to the proper interpretation of the seemingly conflicting Secs. 60 and
61. In fine, to apply the Court’s ruling retroactively would prejudice LBP’s right to appeal
because its pending appeals would then be dismissed outright on a mere technicality
thereby sacrificing the substantial merits of the cases.
In the instant case, at the time PPI filed its appeal in 1992, all that the rules required for
the perfection of its appeal was the filing of a notice of appeal with the court which
rendered the judgment or order appealed from, within fifteen (15) days from notice
thereof.8 PPI complied with this requirement when it filed a notice of appeal on February
20, 1992 with the RTC of Makati City, Branch 147, after receiving copy of its Order dated
February 13, 1992 denying its motion for reconsideration of the adverse Decision dated
November 20, 1991 rendered in Civil Case No. 17835. PPI’s appeal was therefore
already perfected at that time.
Thus, the 1997 Rules of Civil Procedure which took effect on July 1, 1997 and which
required that appellate docket and other lawful fees should be paid within the same
period for taking an appeal,9 can not affect PPI’s appeal which was already perfected in
1992. Much less could it be considered a ground for dismissal thereof since PPI’s period
for taking an appeal, likewise the period for payment of the appellate docket fee as now
required by the rules, has long lapsed in 1992. While the right to appeal is statutory, the
mode or manner by which this right may be exercised is a question of procedure which
may be altered and modified only when vested rights are not impaired.10 Thus, failure to
pay the appellate docket fee when the 1997 Rules of Procedure took effect cannot
operate to deprive PPI of its right, already perfected in 1992, to have its case reviewed
on appeal. In fact the Court of Appeals recognized such fact when it gave PPI a fresh
period to pay the appellate docket fee in an Order dated April 9, 2002 issued in UDK-CV-
No. 030411 directing it to pay the fee within fifteen (15) days from receipt thereof.
This is not all. We have also previously ruled that failure to pay the appellate docket fee
does not automatically result in the dismissal of an appeal, dismissal being discretionary
on the part of the appellate court.12 And in determining whether or not to dismiss an
appeal on such ground, courts have always been guided by the peculiar legal and
equitable circumstances attendant to each case. Thus, in Pedrosa v. Hill13 and Gegare v.
Court of Appeals,14 the appeals were dismissed because appellants failed to pay the
appellate docket fees despite timely notice given them by the Court of Appeals and
despite its admonitions that the appeals would be dismissed in case of non-compliance.
On the other hand, the appeal in Mactan Cebu International Airport Authority v.
Mangubat15 was not dismissed because we took into account the fact that the 1997
Rules of Civil Procedure had only been in effect for fourteen (14) days when the Office of
the Solicitor General appealed from the decision of the RTC of Lapu-Lapu City on July
14, 1997 without paying the appellate court docket fees as required by the new rules.
Considering the recency of the changes and appellant’s immediate payment of the fees
when required to do so, the appeal was not dismissed. We can do no less in the instant
case where PPI was not even required under the rules in 1992 to pay the appellate
docket fees at the time it filed its appeal. We note moreover that PPI, like the appellant in
Mactan, promptly paid the fees when required to do so for the first time by the RTC of
Makati in its Order dated April 3, 2001, and informed the Court of Appeals of such
compliance when it in turn notified PPI that the fees were due, in an Order dated April 9,
2002. The remedy of appeal being an essential part of our judicial system, caution must
always be observed so that every party-litigant is not deprived of its right to appeal, but
rather, given amplest opportunity for the proper and just disposition of his cause, freed
from the constraints of technicalities.16
Having so ruled, we shall refrain from delving into the merits of petitioner’s other
contentions, discussion of one being the proper subject of the appeal before the Court of
Appeals,17 and the other, being premature at this point.18
IN VIEW WHEREOF, the petition is GRANTED. The questioned Decision dated July 19,
2002 of the Court of Appeals in CA-G.R. SP No. 67434 and its Resolution dated
December 4, 2002 denying petitioner’s motion for reconsideration are SET ASIDE.
The Order dated April 3, 2001 of the Regional Trial Court of Makati City, Branch 147, in
Civil Case No. 17835 is reinstated, and the Court of Appeals is ordered to proceed with
the resolution of petitioner’s appeal docketed as CA-G.R. CV No. 75501 entitled
"Fertiphil Corporation v. Planters Products, Inc."
SO ORDERED.
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to Fernandez over the parcel of land including the
set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square
meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's name. improvements thereon, subject to whatever
encumbrances appearing at the back of TCT No. 4739
The antecedent facts are as follows: (37795) and ordering the same TCT No. 4739 (37795)
cancelled.
Engracio Francia is the registered owner of a residential lot and a two-story house built
upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. (b) The plaintiff to pay defendant Ho Fernandez the sum
The lot, with an area of about 328 square meters, is described and covered by Transfer of P1,000.00 as attorney's fees. (p. 30, Record on
Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City. Appeal)

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated The Intermediate Appellate Court affirmed the decision of the lower court in toto.
by the Republic of the Philippines for the sum of P4,116.00 representing the estimated
amount equivalent to the assessed value of the aforesaid portion. Hence, this petition for review.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on Francia prefaced his arguments with the following assignments of grave errors of law:
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real I
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was
the highest bidder for the property. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE
ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00
Francia was not present during the auction sale since he was in Iligan City at that time FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF
helping his uncle ship bananas. P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: II
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE
The auction sale and the final bill of sale were both annotated at the back of TCT No. PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF
4739 (37795) by the Register of Deeds. P2,400.00.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later III
amended his complaint on January 24, 1980.
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT
reads: THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS
GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO
WHEREFORE, in view of the foregoing, judgment is hereby rendered FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW,
dismissing the amended complaint and ordering: AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17,
20-21, Rollo)
(a) The Register of Deeds of Pasay City to issue a new
Transfer Certificate of Title in favor of the defendant Ho
We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and that the
price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems
raised in his petition upon himself. While we commiserate with him at the loss of his
property, the law and the facts militate against the grant of his petition. We are
constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his
land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off
by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at
the same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated
that:
A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action
or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction
sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for
taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of
contracts between the party and party but grow out of duty to, and are the
positive acts of the government to the making and enforcing of which, the
personal consent of individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated
that: "... internal revenue taxes can not be the subject of compensation: Reason:
government and taxpayer are not mutually creditors and debtors of each other' under
Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due
to the city government while the expropriation was effected by the national government.
Moreover, the amount of P4,116.00 paid by the national government for the 125 square
meter portion of his lot was deposited with the Philippine National Bank long before the
sale at public auction of his remaining property. Notice of the deposit dated September
28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted
in his testimony that he knew about the P4,116.00 deposited with the bank but he did not
withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit
so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown
later, he claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with
the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for tax
delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this
issue, the burden of proof therefore rests upon him to show that plaintiff was duly and
properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with all the prescribed
requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be
established by proof and the general rule is that the purchaser of a tax
title is bound to take upon himself the burden of showing the regularity of
all proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in
depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil.
437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the
rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites
have been complied with, the petitioner can not, however, deny that he did receive the
notice for the auction sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he
was not properly notified of the auction sale. Surprisingly, however, he
admitted in his testimony that he received the letter dated November 21,
1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He
claimed further that he was not present on December 5, 1977 the date of
the auction sale because he went to Iligan City. As long as there was
substantial compliance with the requirements of the notice, the validity of
the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for
Ho Fernandez notified you that the property in question
shall be sold at public auction to the highest bidder on
December 5, 1977 pursuant to Sec. 74 of PD 464. Will
you tell the Court whether you received the original of this
letter?
A. I just signed it because I was not able to read the
same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I
and you signed upon receipt thereof but you did not read
the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part
when he ignored such notice. By his very own admission that he received the notice, his
now coming to court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon
v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917
Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held
that "alleged gross inadequacy of price is not material when the law gives the owner the
right to redeem as when a sale is made at public auction, upon the theory that the lesser
the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5
SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands
were sold are unconscionable considering the wide divergence between
their assessed values and the amounts for which they had been actually
sold. However, while in ordinary sales for reasons of equity a transaction
may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks one's conscience as to justify the courts to interfere,
such does not follow when the law gives to the owner the right to redeem,
as when a sale is made at public auction, upon the theory that the lesser
the price the easier it is for the owner to effect the redemption. And so it
was aptly said: "When there is the right to redeem, inadequacy of price
should not be material, because the judgment debtor may reacquire the
property or also sell his right to redeem and thus recover the loss he
claims to have suffered by reason of the price obtained at the auction
sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De
Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for
taxes, the collection of taxes in this manner would be greatly
embarrassed, if not rendered altogether impracticable. In Black on Tax
Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is
sold for taxes, the inadequacy of the price given is not a valid objection to
the sale." This rule arises from necessity, for, if a fair price for the land
 were essential to the sale, it would be useless to offer the property.
Indeed, it is notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land. (Rothchild
Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et
al. (267 P. 555):
Like most cases of this character there is here a certain element of
hardship from which we would be glad to relieve, but do so would
unsettle long-established rules and lead to uncertainty and difficulty in the
collection of taxes which are the life blood of the state. We are convinced
that the present rules are just, and that they bring hardship only to those
who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have
gone up in the area. However, the price quoted by the petitioner for a 203 square meter
lot appears quite exaggerated. At any rate, the foregoing reasons which answer the
petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds,
there are no strong considerations of substantial justice in his favor. Mr. Francia failed to
pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to
have pocketed the notice of sale without reading it which, if true, is still an act of
inexplicable negligence. He did not withdraw from the expropriation payment deposited
with the Philippine National Bank an amount sufficient to pay for the back taxes. The
petitioner did not pay attention to another notice sent by the City Treasurer on November
3, 1978, during the period of redemption, regarding his tax delinquency. There is
furthermore no showing of bad faith or collusion in the purchase of the property by Mr.
Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the
property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED.
The decision of the respondent court is affirmed.
SO ORDERED.
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter
Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of
the court and for an order in this Court directing the respondent court below to execute
the judgment in favor of the Government against the estate of Walter Scott Price for
internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment
by the estate of the estate and inheritance taxes, charges and penalties, amounting to
P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14
entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to
enforce the claims against the estate the fiscal presented a petition dated June 21, 1961,
to the court below for the execution of the judgment. The petition was, however, denied
by the court which held that the execution is not justifiable as the Government is indebted
to the estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director
Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra, legal adviser in
Malacañang to Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2,
1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by
the administratrix Simeona K. Price, as directed in the above note of the
President. Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue
as ordered paid by this Court on July 5, 1960 in accordance with the order of the
Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted
 from the amount of P262,200.00 due and payable to the Administratrix Simeona
K. Price, in this estate, the balance to be paid by the Government to her without
further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it
orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair
for the Government, as a debtor, to its accounts to its citizens-creditors before it
can insist in the prompt payment of the latter's account to it, specially taking into
consideration that the amount due to the Government draws interests while the
credit due to the present state does not accrue any interest. (Order of September
28, 1960)
The petition to set aside the above orders of the court below and for the execution of the
claim of the Government against the estate must be denied for lack of merit. The
ordinary procedure by which to settle claims of indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to present a claim before the
probate court so that said court may order the administrator to pay the amount thereof.
To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First
Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court
for the payment of debts and expenses of administration. The proper procedure
is for the court to order the sale of personal estate or the sale or mortgage of real
property of the deceased and all debts or expenses of administrator and with the
written notice to all the heirs legatees and devisees residing in the Philippines,
according to Rule 89, section 3, and Rule 90, section 2. And when sale or
mortgage of real estate is to be made, the regulations contained in Rule 90,
section 7, should be complied with. 1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order for that purpose, after hearing,
settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances
require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to the
estate are under the jurisdiction of the court and such jurisdiction continues until said
properties have been distributed among the heirs entitled thereto. During the pendency
of the proceedings all the estate is in custodia legis and the proper procedure is not to
allow the sheriff, in case of the court judgment, to seize the properties but to ask the
court for an order to require the administrator to pay the amount due from the estate and
required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court
having jurisdiction of the estate had found that the claim of the estate against the
Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the
above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes place by operation
of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and
both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts to
the concurrent amount, eventhough the creditors and debtors are not aware of
the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for
taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the
remedy.
The petition is, therefore, dismissed, without costs.
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and
UBALDO CARBONELL, in his capacity as National Treasurer, defendants-
appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
This question has been brought before this Court in the past. The parties are, in effect,
asking for a re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court of
Appeals in a case where the then Court of First Instance of Rizal dismissed the portion-
about complaint for refund of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F.
Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land
Transportation and Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the laws of
the Philippines and engaged in the air transportation business under a legislative
franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its
franchise, PAL is exempt from the payment of taxes. The pertinent provision of the
franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby granted,
the grantee shall pay to the National Government during the life of this
franchise a tax of two per cent of the gross revenue or gross earning
derived by the grantee from its operations under this franchise. Such tax
shall be due and payable quarterly and shall be in lieu of all taxes of any
kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the
audit of the accounts of the grantee by the Commissioner of Internal
Revenue, a deficiency tax is shown to be due, the deficiency tax shall be
payable within the ten days from the receipt of the assessment. The
grantee shall pay the tax on its real property in conformity with existing
law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956)
PAL has, since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a
regulation requiring all tax exempt entities, among them PAL to pay motor vehicle
registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant
thus paid, under protest, the amount of P19,529.75 as registration fees of its motor
vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling
in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt by virtue of
its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic
v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that
motor vehicle registration fees are regulatory exceptional. and not revenue measures
and, therefore, do not come within the exemption granted to PAL? under its franchise.
Hence, PAL filed the complaint against Land Transportation Commissioner Romeo F.
Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal,
Branch 18 where it was docketed as Civil Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in
his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint
states no cause of action. In support of the motion to dismiss, defendants repatriation the
ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of
motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise
of the police power of the state. They contended that while Act 4271 exempts PAL from
the payment of any tax except two per cent on its gross revenue or earnings, it does not
exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees.
The resolution of the motion to dismiss was deferred by the Court until after trial on the
merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint
"moved by the later ruling laid down by the Supreme Court in the case or Republic v.
Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the
Court of Appeals which certified the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc.
(supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main
points of contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed
by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587
[1950]). Its heading speaks of "registration fees." The term is repeated
four times in the body thereof. Equally so, mention is made of the "fee for
registration." (Ibid., Subsection G) A subsection starts with a categorical
statement "No fees shall be charged." (lbid.,Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act
requires the payment not of a tax but of a registration fee under the police
power. Hence the incipient, of the section relied upon by defendant-
appellee under the Back Pay Law, It is not held liable for a tax but for a
registration fee. It therefore cannot make use of a backpay certificate to
meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion
should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof
as to the imposition of additional tax on privately-owned passenger
automobiles, motorcycles and scooters was amended by Republic Act
No. 5470 which is (sic) approved on May 30, 1969.) A special science
fund was thereby created and its title expressly sets forth that a tax on
privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which
clearly specifies the" Philippine tax."(Cooley to be paid as distinguished
from the registration fee under the Motor Vehicle Act. There cannot be
any clearer expression therefore of the legislative will, even on the
assumption that the earlier legislation could by subdivision the point be
susceptible of the interpretation that a tax rather than a fee was levied.
What is thus most apparent is that where the legislative body relies on its
authority to tax it expressly so states, and where it is enacting a
regulatory measure, it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the
other hand, held:
The charges prescribed by the Revised Motor Vehicle Law for the
registration of motor vehicles are in section 8 of that law called "fees". But
the appellation is no impediment to their being considered taxes if taxes
they really are. For not the name but the object of the charge determines
whether it is a tax or a fee. Geveia speaking, taxes are for revenue,
whereas fees are exceptional. for purposes of regulation and inspection
and are for that reason limited in amount to what is necessary to cover
the cost of the services rendered in that connection. Hence, a charge
fixed by statute for the service to be person,-When by an officer, where
the charge has no relation to the value of the services performed and
where the amount collected eventually finds its way into the treasury of
the branch of the government whose officer or officers collected the
chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)
From the data submitted in the court below, it appears that the
expenditures of the Motor Vehicle Office are but a small portion—about 5
per centum—of the total collections from motor vehicle registration fees.
And as proof that the money collected is not intended for the
expenditures of that office, the law itself provides that all such money
shall accrue to the funds for the construction and maintenance of public
roads, streets and bridges. It is thus obvious that the fees are not
collected for regulatory purposes, that is to say, as an incident to the
enforcement of regulations governing the operation of motor vehicles on
public highways, for their express object is to provide revenue with which
the Government is to discharge one of its principal functions—the
construction and maintenance of public highways for everybody's use.
They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards
those fees as taxes, for it provides that "no other taxes or fees than those
prescribed in this Act shall be imposed," thus implying that the charges
therein imposed—though called fees—are of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as
amended by section 17 of Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in
this Act shall be imposed for the registration or operation
or on the ownership of any motor vehicle, or for the
exercise of the profession of chauffeur, by any municipal
corporation, the provisions of any city charter to the
contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or
other competent authority may exact and collect such
reasonable and equitable toll fees for the use of such
bridges and ferries, within their respective jurisdiction, as
may be authorized and approved by the Secretary of
Public Works and Communications, and also for the use
 of such public roads, as may be authorized by the
President of the Philippines upon the recommendation of
the Secretary of Public Works and Communications, but
in none of these cases, shall any toll fee." be charged or
collected until and unless the approved schedule of tolls
shall have been posted levied, in a conspicuous place at
such toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised Motor
Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic
Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382,
843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and
remained unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.—Twenty per centum of the
money collected under the provisions of this Act shall accrue to the road
and bridge funds of the different provinces and chartered cities in
proportion to the centum shall during the next previous year and the
remaining eighty per centum shall be deposited in the Philippine Treasury
to create a special fund for the construction and maintenance of national
and provincial roads and bridges. as well as the streets and bridges in
the chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public
Works in the different provinces and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. Collected—Monies collected under the
provisions of this Act shall be deposited in a special trust account in the
National Treasury to constitute the Highway Special Fund, which shall be
apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount
necessary to maintain and equip the Land Transportation Commission
but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved
August 6, 1971).
It appears clear from the above provisions that the legislative intent and purpose behind
the law requiring owners of vehicles to pay for their registration is mainly to raise funds
for the construction and maintenance of highways and to a much lesser degree, pay for
the operating expenses of the administering agency. On the other hand, the Philippine
Rabbit case mentions a presumption arising from the use of the term "fees," which
appears to have been favored by the legislature to distinguish fees from other taxes such
as those mentioned in Section 13 of Rep. Act 4136 which reads:
Sec. 13. Payment of taxes upon registration.—No original registration of
motor vehicles subject to payment of taxes, customs s duties or other
charges shall be accepted unless proof of payment of the taxes due
thereon has been presented to the Commission.
referring to taxes other than those imposed on the registration, operation or ownership of
a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument
of regulation, As stated by a former presiding judge of the Court of Tax Appeals and
writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation. License
fees are changes. looked to as a source of revenue as well as a means
of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of
automobile license fees. Isabela such case, the fees may properly be
regarded as taxes even though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then the exaction is properly
called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz
v. Araneta 98 Phil. 198.) These exactions are sometimes called
regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and
4881, U.S. Internal Revenue Code of 1954, which classify taxes on
tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation,
1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the
case of motor vehicle registration fees. The conclusions become inescapable in view of
Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears
as Section 591-593). in the Land Transportation code. It is patent therefrom that the
legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or fee." Though nowhere
in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-
593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of
any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent
to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents,
speak of an "additional" tax," where the law could have referred to an original tax and not
one in addition to the tax already imposed on the registration, operation, or ownership of
a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136
were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional"
tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain
types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11).
These are not to be understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes
like the motor vehicle registration fee and chauffers' license fee. Such fees are to go into
the expenditures of the Land Transportation Commission as provided for in the last
proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple exceptional.
intended only for rigidly purposes in the exercise of the State's police powers. Over the
years, however, as vehicular traffic exploded in number and motor vehicles became
absolute necessities without which modem life as we know it would stand still, Congress
found the registration of vehicles a very convenient way of raising much needed
revenues. Without changing the earlier deputy. of registration payments as "fees," their
nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at present
exacted pursuant to the Land Transportation and Traffic Code are actually taxes
intended for additional revenues. of government even if one fifth or less of the amount
collected is set aside for the operating expenses of the agency administering the
program.
May the respondent administrative agency be required to refund the amounts stated in
the complaint of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear from the records
as to what payments were made in succeeding years. We have ruled that Section 24 of
Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate
taxpayers found in legislative franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R.
No. 615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957,
petitioner Radio Communications of the Philippines, Inc., was subject to
both the franchise tax and income tax. In 1964, however, petitioner's
franchise was amended by Republic Act No. 41-42). to the effect that its
franchise tax of one and one-half percentum (1-1/2%) of all gross
receipts was provided as "in lieu of any and all taxes of any kind, nature,
or description levied, established, or collected by any authority
whatsoever, municipal, provincial, or national from which taxes the
grantee is hereby expressly exempted." The issue raised to this Court
now is the validity of the respondent court's decision which ruled that the
exemption under Republic Act No. 41-42). was repealed by Section 24 of
Republic Act No. 5448 dated June 27, 1968 which reads:
"(d) The provisions of existing special or general laws to
the contrary notwithstanding, all corporate taxpayers not
specifically exempt under Sections 24 (c) (1) of this Code
shall pay the rates provided in this section. All
corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government
Service Insurance System and the Social Security
System but excluding educational institutions, shall pay
such rate of tax upon their taxable net income as are
imposed by this section upon associations or corporations
engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly
that the law intended all corporate taxpayers to pay income tax as
provided by the statute. There can be no doubt as to the power of
Congress to repeal the earlier exemption it granted. Article XIV, Section 8
of the 1935 Constitution and Article XIV, Section 5 of the Constitution as
amended in 1973 expressly provide that no franchise shall be granted to
any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when
the public interest so requires. There is no question as to the public
interest involved. The country needs increased revenues. The repealing
clause is clear and unambiguous. There is a listing of entities entitled to
tax exemption. The petitioner is not covered by the provision.
Considering the foregoing, the Court Resolved to DENY the petition for
lack of merit. The decision of the respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly
imposed because the tax exemption in the franchise of PAL was repealed during the
period. However, an amended franchise was given to PAL in 1979. Section 13 of
Presidential Decree No. 1590, now provides:
In consideration of the franchise and rights hereby granted, the grantee
shall pay to the Philippine Government during the lifetime of this
franchise whichever of subsections (a) and (b) hereunder will result in a
lower taxes.)
(a) The basic corporate income tax based on the
grantee's annual net taxable income computed in
accordance with the provisions of the Internal Revenue
Code; or
(b) A franchise tax of two per cent (2%) of the gross
revenues. derived by the grantees from all specific.
without distinction as to transport or nontransport
corporations; provided that with respect to international
airtransport service, only the gross passengers, mail, and
freight revenues. from its outgoing flights shall be subject
to this law.
The tax paid by the grantee under either of the above alternatives shall
be in lieu of all other taxes, duties, royalties, registration, license and
other fees and charges of any kind, nature or description imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or
national authority or government, agency, now or in the future, including
but not limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license,
acquisition, and transfer of airtransport equipment, motor vehicles, and all
other personal or real property of the gravitates (Pres. Decree 1590, 75
OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the
earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the
registration and licensing of motor vehicles. Such payments are already included in the
basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590,
and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation Franchising and
Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other
charge on the registration and licensing of the petitioner's motor vehicles from April 9,
1979 as provided in Presidential Decree No. 1590.
SO ORDERED.
NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals
dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power
Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under
Commonwealth Act No. 120, as amended.4 It is tasked to undertake the "development of
hydroelectric generations of power and the production of electricity from nuclear,
geothermal and other sources, as well as, the transmission of electric power on a
nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others, the
power to construct, operate and maintain power plants, auxiliary plants, power stations
and substations for the purpose of developing hydraulic power and supplying such power
to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City,
posting a gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of
Ordinance No. 165-92,8 the respondent assessed the petitioner a franchise tax
amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for the
preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no
authority to impose tax on government entities. Petitioner also contended that as a non-
profit organization, it is exempted from the payment of all forms of taxes, charges, duties
or fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes,
Duties, Fees, Imposts and Other Charges by Government and Governmental
Instrumentalities.- The Corporation shall be non-profit and shall devote all its
return from its capital investment, as well as excess revenues from its operation,
 for expansion. To enable the Corporation to pay its indebtedness and obligations
and in furtherance and effective implementation of the policy enunciated in
Section one of this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and
service fees in any court or administrative proceedings in which it may be a party,
restrictions and duties to the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other government
agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operations and projects;
and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the
Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by
the Corporation in the generation, transmission, utilization, and sale of electric
power."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City,
demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25%
of the amount of tax, and 2% monthly interest.13Respondent alleged that petitioner's
exemption from local taxes has been repealed by section 193 of Rep. Act No.
7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided
in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that
the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act
No. 7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may
not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act
No. 7160 is in the nature of an implied repeal which is not favored; and (3) local
governments have no power to tax instrumentalities of the national government.
Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a
subsequent law is a matter of legislative intent. The lawmakers may expressly
repeal a law by incorporating therein repealing provisions which expressly and
specifically cite(s) the particular law or laws, and portions thereof, that are
intended to be repealed. A declaration in a statute, usually in its repealing clause,
that a particular and specific law, identified by its number or title is repealed is an
express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an
implied repealing clause because it fails to identify the act or acts that are
intended to be repealed. It is a well-settled rule of statutory construction that
repeals of statutes by implication are not favored. The presumption is against
inconsistency and repugnancy for the legislative is presumed to know the
existing laws on the subject and not to have enacted inconsistent or conflicting
statutes. It is also a well-settled rule that, generally, general law does not repeal
a special law unless it clearly appears that the legislative has intended by the
latter general act to modify or repeal the earlier special law. Thus, despite the
passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was
based, the tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme
Court in the case of Basco vs. Philippine Amusement and Gaming Corporation,
197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation
with an original charter, PD 1869. All of its shares of stocks are owned by
the National Government. xxx Being an instrumentality of the
government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to
control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with
an original charter and its shares of stocks owned by the National Government, is
beyond the taxing power of the Local Government. Corollary to this, it should be
noted here that in the NPC Charter's declaration of Policy, Congress declared
that: 'xxx (2) the total electrification of the Philippines through the development of
power from all services to meet the needs of industrial development and
dispersal and needs of rural electrification are primary objectives of the nations
which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.' (underscoring
supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to
impede the avowed goal of this government instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its
taxing power is limited to that which is provided for in its charter or other statute.
 Any grant of taxing power is to be construed strictly, with doubts resolved against
its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear
that the plaintiff could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that
section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the
exemptions granted to the petitioner.18 It ordered the petitioner to pay the respondent city
government the following: (a) the sum of P808,606.41 representing the franchise tax due
based on gross receipts for the year 1992, (b) the tax due every year thereafter based in
the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax
due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of
Appeal's Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments
reiterated therein that the taxing power of the province under Art. 137 (sic) of the
Local Government Code refers merely to private persons or corporations in
which category it (NPC) does not belong, and that the LGC (RA 7160) which is a
general law may not impliedly repeal the NPC Charter which is a special law—
finds the answer in Section 193 of the LGC to the effect that 'tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations except local
water districts xxx are hereby withdrawn.' The repeal is direct and unequivocal,
not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A
PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE
TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF THE LOCAL
GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO
PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S
EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE
PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT OF
A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE
CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING
THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION
SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue
Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise,"
pursuant to section 151 in relation to section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law
or other special law, the province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the
gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth
(1/20) of one percent (1%) of the capital investment. In the succeeding calendar
year, regardless of when the business started to operate, the tax shall be based
on the gross receipts for the preceding calendar year, or any fraction thereof, as
provided herein." (emphasis supplied)
x x x
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code,
the city, may levy the taxes, fees, and charges which the province or municipality
may impose: Provided, however, That the taxes, fees and charges levied and
collected by highly urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed
for the province or municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the
respondent city government. It contends that sections 137 and 151 of the LGC in relation
to section 131, limit the taxing power of the respondent city government to private entities
that are engaged in trade or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with
public interest which is conferred upon private persons or corporations, under such terms
and conditions as the government and its political subdivisions may impose in the
interest of the public welfare, security and safety." From the phraseology of this
provision, the petitioner claims that the word "private" modifies the terms "persons" and
"corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it
should refer specifically to franchises granted to private natural persons and to private
corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of
imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or
commercial activity regularly engaged in as means of livelihood or with a view to profit."
Petitioner claims that it is not engaged in an activity for profit, in as much as its charter
specifically provides that it is a "non-profit organization." In any case, petitioner argues
that the accumulation of profit is merely incidental to its operation; all these profits are
required by law to be channeled for expansion and improvement of its facilities and
services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as
such, may not be taxed by the respondent city government. It cites the doctrine in Basco
vs. Philippine Amusement and Gaming Corporation26where this Court held that local
governments have no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National
Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter
role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the Government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its
operation might be burdened, impeded or subjected to control by a mere local
government.
'The states have no power by taxation or otherwise, to retard, impede,
burden or in any manner control the operation of constitutional laws
enacted by Congress to carry into execution the powers vested in the
federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over
local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to
prevent it from consummating its federal responsibilities, or even
seriously burden it from accomplishment of them.' (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities
or enterprise using the power to tax as ' a tool regulation' (U.S. v. Sanchez, 340
US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy'
(Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges
of government-owned or controlled corporations, is in the nature of an implied repeal. A
special law, its charter cannot be amended or modified impliedly by the local government
code which is a general law. Consequently, petitioner claims that its exemption from all
taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored and as much as possible, effect must be given to all
enactments of the legislature. Moreover, it has to be conceded that the charter of
the NPC constitutes a special law. Republic Act No. 7160, is a general law. It is a
basic rule in statutory construction that the enactment of a later legislation which
is a general law cannot be construed to have repealed a special law. Where
there is a conflict between a general law and a special statute, the special statute
should prevail since it evinces the legislative intent more clearly than the general
statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police
power, should prevail over the LGC. It alleges that the power of the local government to
impose franchise tax is subordinate to petitioner's exemption from taxation; "police power
being the most pervasive, the least limitable and most demanding of all powers, including
the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can
neither exist nor endure. A principal attribute of sovereignty,31 the exercise of taxing
power derives its source from the very existence of the state whose social contract with
its citizens obliges it to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity;32 without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of
state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as
public welfare and similar objectives.33 Taxation assumes even greater significance with
the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy
taxes, fees and other charges34 pursuant to Article X, section 5 of the 1987
Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own
sources of revenue, to levy taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees and charges shall accrue exclusively to the
Local Governments."
This paradigm shift results from the realization that genuine development can be
achieved only by strengthening local autonomy and promoting decentralization of
governance. For a long time, the country's highly centralized government structure has
bred a culture of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and imaginative
resilience in matters of local development on the part of local government leaders."35 The
only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, section 3 of Article X of the 1987
Constitution mandates Congress to enact a local government code that will, consistent
with the basic policy of local autonomy, set the guidelines and limitations to this grant of
taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization with effective mechanisms of
recall, initiative, and referendum, allocate among the different local government
units their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to the
organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959,37 the Local Autonomy Act of
1959,38 the Decentralization Act of 196739 and the Local Government Code of
1983.40 Despite these initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same problems that
hamper their capabilities to participate effectively in the national development efforts,
among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources
of income, (c) limited authority to prioritize and approve development projects, (d) heavy
dependence on external sources of income, and (e) limited supervisory control over
personnel of national line agencies.41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of
LGUs to include taxes which were prohibited by previous laws such as the imposition of
taxes on forest products, forest concessionaires, mineral products, mining operations,
and the like. The LGC likewise provides enough flexibility to impose tax rates in
accordance with their needs and capabilities. It does not prescribe graduated fixed rates
but merely specifies the minimum and maximum tax rates and leaves the determination
of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion
of instrumentalities and agencies of the national government from the coverage of local
taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any
kind on the National Government, its agencies and instrumentalities, this rule now admits
an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose
taxes, fees or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local
Government Units.- Unless otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
x x x
(o) Taxes, fees, or charges of any kind on the National Government, its agencies
and instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation44 relied upon by the petitioner to support its claim
no longer applies. To emphasize, the Basco case was decided prior to the effectivity of
the LGC, when no law empowering the local government units to tax instrumentalities of
the National Government was in effect. However, as this Court ruled in the case
of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents
Congress from decreeing that even instrumentalities or agencies of the government
performing governmental functions may be subject to tax.46 In enacting the LGC,
Congress exercised its prerogative to tax instrumentalities and agencies of government
as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that
MCIAA, although an instrumentality of the national government, was subject to real
property tax, viz:
 "Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that
as a general rule, as laid down in section 133, the taxing power of local
governments cannot extend to the levy of inter alia, 'taxes, fees and charges of
any kind on the national government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces, cities and
municipalities in the Metropolitan Manila Area may impose the real property tax
except on, inter alia, 'real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use thereof has been
granted for consideration or otherwise, to a taxable person as provided in the
item (a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority,
which does not belong to citizens of the country generally as a matter of common
right.48 In its specific sense, a franchise may refer to a general or primary franchise, or to
a special or secondary franchise. The former relates to the right to exist as a corporation,
by virtue of duly approved articles of incorporation, or a charter pursuant to a special law
creating the corporation.49 The right under a primary or general franchise is vested in the
individuals who compose the corporation and not in the corporation itself.50 On the other
hand, the latter refers to the right or privileges conferred upon an existing corporation
such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or
string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power
granted to a corporation to dispose of its property, except such special or secondary
franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense
of a secondary or special franchise. This is to avoid any confusion when the word
franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax
on the privilege of transacting business in the state and exercising corporate franchises
granted by the state."53 It is not levied on the corporation simply for existing as a
corporation, upon its property54 or its income,55 but on its exercise of the rights or
privileges granted to it by the government. Hence, a corporation need not pay franchise
tax from the time it ceased to do business and exercise its franchise.56 It is within this
context that the phrase "tax on businesses enjoying a franchise" in section 137 of the
LGC should be interpreted and understood. Verily, to determine whether the petitioner is
covered by the franchise tax in question, the following requisites should concur: (1) that
petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that
it is exercising its rights or privileges under this franchise within the territory of the
respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act
No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the
petitioner's charter, defining its composition, capitalization, the appointment and the
specific duties of its corporate officers, and its corporate life span.57 As its secondary
franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following
powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power in
any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in
the Philippines, for the purposes specified in this Act; to intercept and divert the
flow of waters from lands of riparian owners and from persons owning or
interested in waters which are or may be necessary for said purposes, upon
payment of just compensation therefor; to alter, straighten, obstruct or increase
the flow of water in streams or water channels intersecting or connecting
therewith or contiguous to its works or any part thereof: Provided, That just
compensation shall be paid to any person or persons whose property is, directly
or indirectly, adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams,
reservoirs, pipes, mains, transmission lines, power stations and substations, and
other works for the purpose of developing hydraulic power from any river, creek,
lake, spring and waterfall in the Philippines and supplying such power to the
inhabitants thereof; to acquire, construct, install, maintain, operate, and improve
gas, oil, or steam engines, and/or other prime movers, generators and machinery
in plants and/or auxiliary plants for the production of electric power; to establish,
develop, operate, maintain and administer power and lighting systems for the
transmission and utilization of its power generation; to sell electric power in bulk
to (1) industrial enterprises, (2) city, municipal or provincial systems and other
government institutions, (3) electric cooperatives, (4) franchise holders, and (5)
real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and
otherwise dispose of property incident to, or necessary, convenient or proper to
carry out the purposes for which the Corporation was created: Provided, That in
case a right of way is necessary for its transmission lines, easement of right of
way shall only be sought: Provided, however, That in case the property itself
shall be acquired by purchase, the cost thereof shall be the fair market value at
the time of the taking of such property;
 (i) To construct works across, or otherwise, any stream, watercourse, canal,
ditch, flume, street, avenue, highway or railway of private and public ownership,
as the location of said works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the
manner provided by law for instituting condemnation proceedings by the national,
provincial and municipal governments;
x x x necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree
(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding
the reservoirs of plants and/or projects constructed or proposed to be
constructed by the Corporation. Upon determination by the Corporation of the
areas required for watersheds for a specific project, the Bureau of Forestry, the
Reforestation Administration and the Bureau of Lands shall, upon written advice
by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas
embraced within the watersheds, subject to existing private rights, the needs of
waterworks systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall
adopt measures to prevent environmental pollution and promote the
conservation, development and maximum utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and
distribution of electricity. This monopoly was strengthened with the issuance of Pres.
Decree No. 40,59 nationalizing the electric power industry. Although Exec. Order No.
21560 thereafter allowed private sector participation in the generation of electricity, the
transmission of electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city
government's territorial jurisdiction pursuant to the powers granted to it by
Commonwealth Act No. 120, as amended. From its operations in the City of
Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling
both requisites, petitioner is, and ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax
simply because its stocks are wholly owned by the National Government, and its charter
characterized it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by
the corporation of a privilege to do business. The taxable entity is the corporation which
exercises the franchise, and not the individual stockholders. By virtue of its charter,
petitioner was created as a separate and distinct entity from the National Government. It
can sue and be sued under its own name,61 and can exercise all the powers of a
corporation under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital stock does not
No. 202963 classifies government-owned or controlled corporations (GOCCs) into those
performing governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions, which
is directly chartered by special law or if organized under the general corporation
law is owned or controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at least a majority of
its outstanding voting capital stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as
such, are treated as absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way of advancing the general
interest of society, and are merely optional on the government.64 Included in the class of
GOCCs performing proprietary functions are "business-like" entities such as the National
Steel Corporation (NSC), the National Development Corporation (NDC), the Social
Security System (SSS), the Government Service Insurance System (GSIS), and the
National Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of
power and the production of electricity from nuclear, geothermal and other sources, as
well as the transmission of electric power on a nationwide basis."66 Pursuant to this
mandate, petitioner generates power and sells electricity in bulk. Certainly, these
activities do not partake of the sovereign functions of the government. They are purely
private and commercial undertakings, albeit imbued with public interest. The public
interest involved in its activities, however, does not distract from the true nature of the
petitioner as a commercial enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water supply and irrigation
companies, gas, coal or light companies, power plants, ice plant among others; all of
which are declared by this Court as ministrant or proprietary functions of government
aimed at advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a "business," although it limits petitioner's profits to twelve
percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or
necessary for the proper transaction of its business or to carry out the purposes
for which it was organized, to contract indebtedness and issue bonds subject to
approval of the President upon recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably
necessary to carry out the business and purposes for which it was organized, or
which, from time to time, may be declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent
(60%) of its electricity requirement from the petitioner are likewise imposed the cap of
twelve percent (12%) on profits.69 The main difference is that the petitioner is mandated
to devote "all its returns from its capital investment, as well as excess revenues from its
operation, for expansion"70 while other franchise holders have the option to distribute
their profits to its stockholders by declaring dividends. We do not see why this fact can
be a source of difference in tax treatment. In both instances, the taxable entity is the
corporation, which exercises the franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its
charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must
be shown to exist clearly and categorically, and supported by clear legal provisions.71 In
the case at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting
from, among others, "all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other government agencies
and instrumentalities." However, section 193 of the LGC withdrew, subject to limited
exceptions, the sweeping tax privileges previously enjoyed by private and public
corporations. Contrary to the contention of petitioner, section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions from local
taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided
in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one person,
thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius.73 Not being a local water district, a
cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or
educational institution, petitioner clearly does not belong to the exception. It is therefore
incumbent upon the petitioner to point to some provisions of the LGC that expressly
grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the
LGUs can impose franchise tax "notwithstanding any exemption granted by any law or
other special law." This particular provision of the LGC does not admit any exception.
In City Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the
payment of franchise taxes was brought as an issue before this Court. The same issue
was involved in the subsequent case of Manila Electric Company v. Province of
Laguna.75 Ruling in favor of the local government in both instances, we ruled that the
franchise tax in question is imposable despite any exemption enjoyed by MERALCO
under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193
of the LGC to support their position that MERALCO's tax exemption has been
withdrawn. The explicit language of section 137 which authorizes the province to
impose franchise tax 'notwithstanding any exemption granted by any law or other
special law' is all-encompassing and clear. The franchise tax is imposable
despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By
stating that unless otherwise provided in this Code, tax exemptions or incentives
granted to or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations except (1) local water
districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and
non-profit hospitals and educational institutions, are withdrawn upon the
effectivity of this code, the obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory construction that the
express mention of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius. In the
absence of any provision of the Code to the contrary, and we find no other
provision in point, any existing tax exemption or incentive enjoyed by MERALCO
under existing law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the
LGC the local government unit may now impose a local tax at a rate not
exceeding 50% of 1% of the gross annual receipts for the preceding calendar
based on the incoming receipts realized within its territorial jurisdiction. The
legislative purpose to withdraw tax privileges enjoyed under existing law or
 charter is clearly manifested by the language used on (sic) Sections 137 and 193
categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to
enumerate all the existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general, withdrawal of such
exemptions or privileges. No more unequivocal language could have been
used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through
ordinances duly approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting
section 37 of Ordinance No. 165-92 which imposes an annual franchise tax
"notwithstanding any exemption granted by law or other special law," the respondent city
government clearly did not intend to exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of the local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. As this Court observed in
the Mactan case, "the original reasons for the withdrawal of tax exemption privileges
granted to government-owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions
in the tax treatment of similarly situated enterprises."78 With the added burden of
devolution, it is even more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying taxes or other charges due
from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and
Resolution of the Court of Appeals dated March 12, 2001 and July 10, 2001,
respectively, are hereby AFFIRMED.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand,
such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself.
It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the
appeal of the private respondent from the decision of the Collector of Internal Revenue
was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic
corporation engaged in engineering, construction and other allied activities, received a
letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency
income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp received on the same day
in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the protest in the
dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7,
1965, Atty. Guevara was finally informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of distraint and levy earlier
sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for
review of the decision of the Commissioner of Internal Revenue with the Court of Tax
Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep.
Act No. 1125, the appeal may be made within thirty days after receipt of the decision or
ruling challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the
finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being
"tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents
application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's
notice of assessment, it filed its letter of protest. This was apparently not taken into
account before the warrant of distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR
a copy of the protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent
was not pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period which
started on the date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served on
it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business expense.
The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the
said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the
Payees for their work in the creation of the Vegetable Oil Investment Corporation of the
Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion.13 In fact, as the said court found,
the amount was earned through the joint efforts of the persons among whom it was
distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation
of the Vegetable Oil Investment Corporation, inducing other persons to invest in
it.14 Ultimately, after its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties.15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon.17 The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was
involved.18
The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made
as to how such payments were made, whether by check or in cash, and there is not
enough substantiation of such payments. In short, the petitioner suggests a tax dodge,
an attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up the
total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement
was understandable, however, in view of the close relationship among the persons in the
family corporation.
We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co. to
the private respondent was P125,000.00. 21After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there
shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its
practical application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary
paid by a corporation may be a distribution of a dividend on stock. This is
 likely to occur in the case of a corporation having few stockholders, ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in
Practically all of whom draw salaries. If in such a case the salaries are in toto, without costs.
excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of SO ORDERED.
the officers of employees, it would seem likely that the salaries are not
paid wholly for services rendered, but the excessive payments are a
distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, HON. REMIGIO M. ESCALADA, JR.,
30 O.G. No. 18, 325.) Presiding Judge of the Regional Trial
Court of Bataan, Branch 3, and Promulgated:
It is worth noting at this point that most of the payees were not in the regular employ of
Algue nor were they its controlling stockholders. 23
PETRON CORPORATION,
Respondents. June 27, 2008
The Solicitor General is correct when he says that the burden is on the taxpayer to prove x --------------------------------------------------------------------------------------
the validity of the claimed deduction. In the present case, however, we find that the onus -- x
has been discharged satisfactorily. The private respondent has proved that the payment
of the fees was necessary and reasonable in the light of the efforts exerted by the
payees in inducing investors and prominent businessmen to venture in an experimental DECISION
enterprise and involve themselves in a new business requiring millions of pesos. This
was no mean feat and should be, as it was, sufficiently recompensed.
YNARES-SANTIAGO, J.:
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part of one's hard earned income to
the taxing authorities, every person who is able to must contribute his share in the The instant petition for certiorari under Rule 65 of the Rules of Court
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
assails the November 5, 2007 Order[1] of the Regional Trial Court of
enhance their moral and material values. This symbiotic relationship is the rationale of Bataan, Branch 3, in Civil Case No. 8801, granting the petition for the
taxation and should dispel the erroneous notion that it is an arbitrary method of exaction
by those in the seat of power.
issuance of a writ of preliminary injunction filed by private respondent
Petron Corporation (Petron) thereby enjoining petitioner Emerlinda S.
But even as we concede the inevitability and indispensability of taxation, it is a Talento, Provincial Treasurer of Bataan, and her representatives from
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 proceeding with the public auction of Petrons machineries and pieces of
the courts will then come to his succor. For all the awesome power of the tax collector, equipment during the pendency of the latters appeal from the revised
he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that
the law has not been observed. assessment of its properties.
We hold that the appeal of the private respondent from the decision of the petitioner was
filed on time with the respondent court in accordance with Rep. Act No. 1125. And we The facts of the case are as follows:
also find that the claimed deduction by the private respondent was permitted under the
Internal Revenue Code and should therefore not have been disallowed by the petitioner.
On June 18, 2007, Petron received from the Provincial Assessors
Office of Bataan a notice of revised assessment over its machineries and
pieces of equipment in Lamao, Limay, Bataan. Petron was given a period
of 60 days within which to file an appeal with the Local Board of
Assessment Appeals (LBAA).[2] Based on said revised assessment,
petitioner Provincial Treasurer of Bataan issued a notice informing
Petron that as of June 30, 2007, its total liability is
P1,731,025,403.06,[3] representing deficiency real property tax due from
1994 up to the first and second quarters of 2007.
On August 17, 2007, Petron filed a petition[4] with the LBAA
(docketed as LBAA Case No. 2007-01) contesting the revised assessment
on the grounds that the subject assessment pertained to properties that
have been previously declared; and that the assessment covered periods
of more than 10 years which is not allowed under the Local Government
Code (LGC). According to Petron, the possible valid assessment pursuant
to Section 222 of the LGC could only be for the years 1997 to
2006. Petron further contended that the fair market value or replacement
cost used by petitioner included items which should be properly
excluded; that prompt payment of discounts were not considered in
determining the fair market value; and that the subject assessment should
take effect a year after or on January 1, 2008. In the same petition, Petron
sought the approval of a surety bond in the amount of
P1,286,057,899.54.[5]
On August 22, 2007, Petron received from petitioner a final notice
of delinquent real property tax with a warning that the subject properties
would be levied and auctioned should Petron fail to settle the revised
assessment due.[6]
[7]
Consequently, Petron sent a letter to petitioner stating that in
view of the pendency of its appeal[8] with the LBAA, any action by the
Treasurers Office on the subject properties would be
premature. However, petitioner replied that only Petrons payment under
protest shall bar the collection of the realty taxes due,[9] pursuant to
Sections 231 and 252 of the LGC.
With the issuance of a Warrant of Levy[10] against its machineries
and pieces of equipment, Petron filed on September 24, 2007, an urgent
motion to lift the final notice of delinquent real property tax and warrant
of levy with the LBAA. It argued that the issuance of the notice and
warrant is premature because an appeal has been filed with the LBAA,
where it posted a surety bond in the amount of P1,286,057,899.54.[11]
On October 3, 2007, Petron received a notice of sale of its
properties scheduled on October 17, 2007.[12] Consequently, on October
8, 2007, Petron withdrew its motion to lift the final notice of delinquent
real property tax and warrant of levy with the LBAA.[13] On even date,
Petron filed with the Regional Trial Court of Bataan the instantcase
(docketed as Civil Case No. 8801) for prohibition with prayer for the
issuance of a temporary restraining order (TRO) and preliminary
injunction.[14]
On October 15, 2007, the trial court issued a TRO for 20 days enjoining
petitioner from proceeding with the public auction of Petrons
properties.[15] Petitioner thereafter filed an urgent motion for the
immediate dissolution of the TRO, followed by a motion to dismiss
Petrons petition for prohibition.
On November 5, 2007, the trial court issued the assailed Order
granting Petrons petition for issuance of writ of preliminary injunction,
subject to Petrons posting of a P444,967,503.52 bond in addition to its
previously posted surety bond of P1,286,057,899.54, to complete the
total amount equivalent to the revised assessment of
P1,731,025,403.06. The trial court held that in scheduling the sale of the
properties despite the pendency of Petrons appeal and posting of the
surety bond with the LBAA, petitioner deprived Petron of the right to
appeal. The dispositive portion thereof, reads:
WHEREFORE, the writ of preliminary injunction
prayed for by plaintiff is hereby GRANTED and ISSUED,
enjoining defendant Treasurer, her agents, representatives, or
anybody acting in her behalf from proceeding with the
scheduled public auction of plaintiffs real properties, or any
disposition thereof, pending the determination of the merits of
the main action, to be effective upon posting by plaintiff to the
Court of an injunction bond in the amount of Four Hundred
Forty Four Million Nine Hundred Sixty Seven Thousand Five
Hundred Three and 52/100 Pesos (P444,967,503.52) and the
approval thereof by the Court.
Defendants Urgent Motion for the Immediate Dissolution of
the Temporary Restraining Order dated October 23, 2007 is
hereby DENIED.
SO ORDERED.[16]
From the said Order of the trial court, petitioner went directly to
this Court via the instant petition for certiorari under Rule 65 of the Rules
of Court.
The question posed in this petition, i.e., whether the collection of
taxes may be suspended by reason of the filing of an appeal and posting
of a surety bond, is undoubtedly a pure question of law. Section 2(c) of
Rule 41 of the Rules of Court provides:
SEC. 2. Modes of Appeal.
(c) Appeal by certiorari. In all cases when only
questions of law are raised or involved, the appeal shall be to
the Supreme Court by petition for review on certiorari
under Rule 45. (Emphasis supplied)
Thus, petitioner resorted to the erroneous remedy when she filed a
petition for certiorari under Rule 65, when the proper mode should have
been a petition for review on certiorari under Rule 45. Moreover, under
Section 2, Rule 45 of the same Rules, the period to file a petition for
review is 15 days from notice of the order appealed from. In the instant
case, petitioner received the questioned order of the trial court
on November 6, 2007, hence, she had only up to November 21, 2007 to
file the petition. However, the same was filed only on January 4, 2008, or
43 days late. Consequently, petitioners failure to file an appeal within the
reglementary period rendered the order of the trial court final and
executory.
The perfection of an appeal in the manner and within the period
prescribed by law is mandatory. Failure to conform to the rules regarding
appeal will render the judgment final and executory and beyond the
power of the Courts review. Jurisprudence mandates that when a decision
becomes final and executory, it becomes valid and binding upon the
parties and their successors in interest. Such decision or order can no
longer be disturbed or reopened no matter how erroneous it may have
been.[17]
Petitioners resort to a petition under Rule 65 is obviously a play to make
up for the loss of the right to file an appeal via a petition under Rule
45. However, a special civil action under Rule 65 can not cure petitioners
failure to timely file a petition for review on certiorari under Rule 45 of
the Rules of Court. Rule 65 is an independent action that cannot be
availed of as a substitute for the lost remedy of an ordinary appeal,
including that under Rule 45, especially if such loss or lapse was
occasioned by ones own neglect or error in the choice of remedies.[18]
Moreover, even if we assume that a petition under Rule 65 is the
proper remedy, the petition is still dismissible.
We note that no motion for reconsideration of the November 5,
2007 order of the trial court was filed prior to the filing of the instant
petition. The settled rule is that a motion for reconsideration is a sine qua
non condition for the filing of a petition for certiorari. The purpose is to
grant the public respondent an opportunity to correct any actual or
perceived error attributed to it by the re-examination of the legal and
factual circumstances of the case. Petitioners failure to file a motion for
reconsideration deprived the trial court of the opportunity to rectify an
error unwittingly committed or to vindicate itself of an act unfairly
imputed. Besides, a motion for reconsideration under the present
circumstances is the plain, speedy and adequate remedy to the adverse
judgment of the trial court.[19]
Petitioner also blatantly disregarded the rule on hierarchy of
courts. Although the Supreme Court, Regional Trial Courts, and the
Court of Appeals have concurrent jurisdiction to issue writs of certiorari,
prohibition, mandamus, quo warranto, habeas corpus and injunction, such
concurrence does not give the petitioner unrestricted freedom of choice
of court forum. Recourse should have been made first with the Court of
Appeals and not directly to this Court.[20]
True, litigation is not a game of technicalities. It is equally true,
however, that every case must be presented in accordance with the
prescribed procedure to ensure an orderly and speedy administration of
justice.[21] The failure therefore of petitioner to comply with the settled
procedural rules justifies the dismissal of the present petition.
Finally, we find that the trial court correctly granted respondents
petition for issuance of a writ of preliminary injunction. Section 3, Rule
58, of the Rules of Court, provides:
SEC. 3. Grounds for issuance of preliminary injunction.
A preliminary injunction may be granted by the court when it
is established:
(a) That the applicant is entitled to the relief demanded,
and the whole or part of such relief consists in restraining the
commission or continuance of the acts complained of, or in the
performance of an act or acts, either for a limited period or
perpetually;
(b) That the commission, continuance or non-
performance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or
(c) That a party, court, or agency or a person is doing,
threatening, or attempting to do, or is procuring or suffering to
be done, some act or acts probably in violation of the rights of
the applicant respecting the subject of the action or proceeding,
and tending to render the judgment ineffectual.
 The requisites for the issuance of a writ of preliminary injunction
are: (1) the existence of a clear and unmistakable right that must be
protected; and (2) an urgent and paramount necessity for the writ to
prevent serious damage.[22]
The urgency and paramount necessity for the issuance of a writ of
injunction becomes relevant in the instant case considering that what is
being enjoined is the sale by public auction of the properties of Petron
amounting to at least P1.7 billion and which properties are vital to its
business operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations of Petron
merit the issuance of a writ of preliminary injunction in its favor.
We are not unaware of the doctrine that taxes are the lifeblood of
the government, without which it can not properly perform its functions;
and that appeal shall not suspend the collection of realty taxes. However,
there is an exception to the foregoing rule, i.e., where the taxpayer has
shown a clear and unmistakable right to refuse or to hold in abeyance the
payment of taxes. In the instant case, we note that respondent contested
the revised assessment on the following grounds: that the subject
assessment pertained to properties that have been previously declared;
that the assessment covered periods of more than 10 years which is not
allowed under the LGC; that the fair market value or replacement cost
used by petitioner included items which should be properly excluded;
that prompt payment of discounts were not considered in determining the
fair market value; and that the subject assessment should take effect a
year after or on January 1, 2008. To our mind, the resolution of these
issues would have a direct bearing on the assessment made by
petitioner. Hence, it is necessary that the issues must first be passed upon
before the properties of respondent is sold in public auction.
In addition to the fact that the issues raised by the respondent
would have a direct impact on the validity of the assessment made by the
petitioner, we also note that respondent has posted a surety bond
equivalent to the amount of the assessment due. The Rules of Procedure
of the LBAA, particularly Section 7, Rule V thereof, provides:
Section 7. Effect of Appeal on Collection of Taxes. An
appeal shall not suspend the collection of the corresponding
realty taxes on the real property subject of the appeal as
assessed by the Provincial, City or Municipal Assessor,
without prejudice to the subsequent adjustment depending
upon the outcome of the appeal. An appeal may be entertained
but the hearing thereof shall be deferred until the
corresponding taxes due on the real property subject of the
appeal shall have been paid under protest or the petitioner shall
have given a surety bond, subject to the following conditions:
(1) the amount of the bond must not be less than the
total realty taxes and penalties due as assessed by the assessor
nor more than double said amount;
(2) the bond must be accompanied by a certification
from the Insurance Commissioner (a) that the surety is duly
authorized to issue such bond; (a) that the surety bond is
approved by and registered with said Commission; and (c) that
the amount covered by the surety bond is within the writing
capacity of the surety company; and
(3) the amount of the bond in excess of the surety
companys writing capacity, if any, must be covered by
Reinsurance Binder, in which case, a certification to this effect
must likewise accompany the surety bond.

[23]
Corollarily, Section 11 of Republic Act No. 9282, which
amended Republic Act No. 1125 (The Law Creating the Court of Tax
Appeals) provides:
Section 11. Who may Appeal; Mode of Appeal; Effect of
Appeal; -
xxxx
No appeal taken to the Court of Appeals from the Collector of
Internal Revenue x x x shall suspend the payment, levy,
distraint, and/or sale of any property for the satisfaction of his
tax liability as provided by existing law. Provided, however,
That when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court at
any stage of the processing may suspend the collection and
require the taxpayer either to deposit the amount claimed or to
file a surety bond for not more than double the amount with
the Court.
WHEREFORE, in view of all the foregoing, the instant petition
is DISMISSED.
SO ORDERED.
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not doing
business in the Philippines namely: Imperio Compañia de Seguros, La Union y El Fenix
Español, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza,
Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance
it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts
were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers
outside the Philippines, except the contract with Swiss Reinsurance Company, which
was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability
simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance.
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks
ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers. A proportionate amount of taxes on insurance premiums not recovered from
the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers
further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5%
of the reinsurance premiums. Conflicts and/or differences between the parties under the
reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company stipulated that their contract shall be construed by the laws
of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income
when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or
pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of
Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the
ceded reinsurance premiums, thus:
1953
Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum
of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner
of Internal Revenue's assessment for withholding tax on the reinsurance premiums
ceded in 1953 and 1954 to the foreign reinsurers.

Gross premium per investigation . . . . . . . . . .
Withholding tax due thereon at 24% . . . . . . . .
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
1954
Gross premium per investigation . . . . . . . . . .
Withholding tax due thereon at 24% . . . . . . . .
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P768,580.00 Petitioner maintain that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
P184,459.00 business in the Philippines, nor did they have office here.
46,114.00
The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising
100.00 from the original insurances in the Philippines were performed in the Philippines. The
liability of the foreign reinsurers commenced simultaneously with the liability of Philippine
Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in
P230,673.00 Manila a register of the risks ceded to the foreign reinsurers. Entries made in such
========== register bound the foreign resinsurers, localizing in the Philippines the actual cession of
the risks and premiums and assumption of the reinsurance undertaking by the foreign
reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege
P780.880.68 of doing insurance business in the Philippines were payable by the foreign reinsurers
when the same were not recoverable from the original assured. The foreign reinsurers
P184,411.00 paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of the affairs of the former
P184,411.00 in the Philippines in regard to their reinsurance activities here. Disputes and differences
between the parties were subject to arbitration in the City of Manila. All the reinsurance
contracts, except that with Swiss Reinsurance Company, were signed by Philippine
100.00
Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance
P234,364.00 Company was signed by both parties in Switzerland, the same specifically provided that
========== its provision shall be construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to Philippine law.

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not
subject to withholding tax. Its protest was denied and it appealed to the Court of Tax
Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive
portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine
Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal
Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking,
as explained above, took place in the Philippines. These insurance premiums, therefore,
came from sources within the Philippines and, hence, are subject to corporate income
tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity
may consist of only a single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign corporation to engage in
business in the Philippines in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section 37 of the
Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the
kinds of income mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not be considered
likewise.
1äw phï1.ñët
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It
is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. Considering that the reinsurance premiums
in question were afforded protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax, but
it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its
agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that this question has already been
answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal
Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And
since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding
tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships
(compañias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross income
of such corporation for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize
such tax to be deducted and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in
determining the amount to be withheld. According, in computing the withholding tax due
on the reinsurance premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc.
is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax for
the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid within 30
days from the date this judgement becomes final, there shall be collected a surcharged
of 5% on the amount unpaid, plus interest at the rate of 1% a month from the date of
delinquency to the date of payment, provided that the maximum amount that may be
collected as interest shall not exceed the amount corresponding to a period of three (3)
years. With costs againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and
Regala, JJ., concur.
Makalintal and Zaldivar, JJ., took no part.
acquired the authority or power to enact an ordinance similar to that previously declared
by this Court as ultra vires, enacted Ordinance 11, series of 1960, hereunder quoted in
full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS
ENGAGED IN THE BUSINESS OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the
provisions of Republic Act No. 2264, otherwise known as the Autonomy Law of
Local Government, that:
Section 1. — A municipal license tax is hereby imposed on tenement houses in
accordance with the schedule of payment herein provided.

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee, Section 2. — Tenement house as contemplated in this ordinance shall mean any
vs. building or dwelling for renting space divided into separate apartments or
CITY OF ILOILO, defendants-appellants. accessorias.

Pelaez, Jalandoni and Jamir for plaintiff-appellees. Section 3. — The municipal license tax provided in Section 1 hereof shall be as
Assistant City Fiscal Vicente P. Gengos for defendant-appellant. follows:

CASTRO, J.:
I. Tenement houses:
Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of
(a) Apartment house made of strong materials P20.00 per d
Iloilo declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing
Municipal License Tax On Persons Engaged In The Business Of Operating Tenement (b) Apartment house made of mixed materials P10.00 per d
Houses," and ordering the City to refund to the plaintiffs-appellees the sums of collected
from them under the said ordinance. II Rooming house of strong materials P10.00 per d

On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, Rooming house of mixed materials P5.00 per do
imposing license tax fees as follows: (1) tenement house (casa de vecindad), P25.00
annually; (2) tenement house, partly or wholly engaged in or dedicated to business in the III. Tenement house partly or wholly engaged in or dedicated to
streets of J.M. Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, business in the following streets: J.M. Basa, Iznart, Aldeguer,
partly or wholly engaged in business in any other streets, P12.00 per apartment. The Guanco and Ledesma from Plazoleto Gay to Valeria. St. P30.00 per d
validity and constitutionality of this ordinance were challenged by the spouses Eusebio
Villanueva and Remedies Sian Villanueva, owners of four tenement houses containing IV. Tenement house partly or wholly engaged in or dedicated to
34 apartments. This Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio business in any other street P12.00 per d
Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires, "it not
V. Tenement houses at the streets surrounding the super market
appearing that the power to tax owners of tenement houses is one among those clearly
as soon as said place is declared commercial P24.00 per d
and expressly granted to the City of Iloilo by its Charter."

On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the Section 4. — All ordinances or parts thereof inconsistent herewith are hereby
passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had amended.
 Section 5. — Any person found violating this ordinance shall be punished with a
fine note exceeding Two Hundred Pesos (P200.00) or an imprisonment of not
more than six (6) months or both at the discretion of the Court.
Section 6 — This ordinance shall take effect upon approval.
ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners
of five tenement houses, aggregately containing 43 apartments, while the other
appellees and the same Remedios S. Villanueva are owners of ten apartments. Each of
the appellees' apartments has a door leading to a street and is rented by either a Filipino
or Chinese merchant. The first floor is utilized as a store, while the second floor is used
as a dwelling of the owner of the store. Eusebio Villanueva owns, likewise, apartment
buildings for rent in Bacolod, Dumaguete City, Baguio City and Quezon City, which cities,
according to him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio
Villanueva and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30,
and from the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S.
Villanueva, for the years 1960-1964, the sum of P1,317.00. Eusebio Villanueva has
likewise been paying real estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an
amended complaint, respectively, against the City of Iloilo, in the aforementioned court,
praying that Ordinance 11, series of 1960, be declared "invalid for being beyond the
powers of the Municipal Council of the City of Iloilo to enact, and unconstitutional for
being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of
the equal protection clause of the Constitution," and that the City be ordered to refund
the amounts collected from them under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal
on the grounds that (a) "Republic Act 2264 does not empower cities to impose apartment
taxes," (b) the same is "oppressive and unreasonable," for the reason that it penalizes
owners of tenement houses who fail to pay the tax, (c) it constitutes not only double
taxation, but treble at that and (d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes
double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement
taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it
carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities,
municipalities and municipal districts shall have authority to impose municipal
license taxes or fees upon persons engaged in any occupation or business, or
exercising privileges in chartered cities, municipalities or municipal districts by
requiring them to secure licences at rates fixed by the municipal board or city
council of the city, the municipal council of the municipality, or the municipal
district council of the municipal district; to collect fees and charges for services
rendered by the city, municipality or municipal district; to regulate and impose
reasonable fees for services rendered in connection with any business,
profession or occupation being conducted within the city, municipality or
municipal district and otherwise to levy for public purposes, just and uniform
taxes, licenses or fees; Provided, That municipalities and municipal districts shall,
in no case, impose any percentage tax on sales or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax, except gasoline,
under the provisions of the National Internal Revenue Code; Provided, however,
That no city, municipality or municipal district may levy or impose any of the
following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and publication of
any newspaper, magazine, review or bulletin appearing at regular intervals and
having fixed prices for for subscription and sale, and which is not published
primarily for the purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities
except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis
causa;
(g) Taxes on income of any kind whatsoever;
 (h) Taxes or fees for the registration of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the national
government, tonnage, and all other kinds of customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying
franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance directly
with foreign insurance companies.
A tax ordinance shall go into effect on the fifteenth day after its passage, unless
the ordinance shall provide otherwise: Provided, however, That the Secretary of
Finance shall have authority to suspend the effectivity of any ordinance within
one hundred and twenty days after its passage, if, in his opinion, the tax or fee
therein levied or imposed is unjust, excessive, oppressive, or confiscatory, and
when the said Secretary exercises this authority the effectivity of such ordinance
shall be suspended.
In such event, the municipal board or city council in the case of cities and the
municipal council or municipal district council in the case of municipalities or
municipal districts may appeal the decision of the Secretary of Finance to the
court during the pendency of which case the tax levied shall be considered as
paid under protest.
It is now settled that the aforequoted provisions of Republic Act 2264 confer on local
governments broad taxing authority which extends to almost "everything, excepting
those which are mentioned therein," provided that the tax so levied is "for public
purposes, just and uniform," and does not transgress any constitutional provision or is
not repugnant to a controlling statute.2 Thus, when a tax, levied under the authority of a
city or municipal ordinance, is not within the exceptions and limitations aforementioned,
the same comes within the ambit of the general rule, pursuant to the rules of expressio
unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the exceptions
provided for in section 2 of the Local Autonomy Act? For this purpose, it is necessary to
determine the true nature of the tax. The appellees strongly maintain that it is a "property
tax" or "real estate tax,"3 and not a "tax on persons engaged in any occupation or
business or exercising privileges," or a license tax, or a privilege tax, or an excise
tax.4 Indeed, the title of the ordinance designates it as a "municipal license
tax on persons engaged in the business of operating tenement houses," while section 1
thereof states that a "municipal license tax is hereby imposed on tenement houses." It is
the phraseology of section 1 on which the appellees base their contention that the tax
involved is a real estate tax which, according to them, makes the ordinance ultra vires as
it imposes a levy "in excess of the one per centum real estate tax allowable under Sec.
38 of the Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in question is not a real
estate tax. Obviously, the appellees confuse the tax with the real estate tax within the
meaning of the Assessment Law,6 which, although not applicable to the City of Iloilo, has
counterpart provisions in the Iloilo City Charter.7 A real estate tax is a direct tax on the
ownership of lands and buildings or other improvements thereon, not specially
exempted,8 and is payable regardless of whether the property is used or not, although
the value may vary in accordance with such factor.9 The tax is usually single or
indivisible, although the land and building or improvements erected thereon are
assessed separately, except when the land and building or improvements belong to
separate owners.10 It is a fixed proportion11 of the assessed value of the property taxed,
and requires, therefore, the intervention of assessors.12 It is collected or payable at
appointed times,13 and it constitutes a superior lien on and is enforceable against the
property14 subject to such taxation, and not by imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the aforestated
attributes. It is not a tax on the land on which the tenement houses are erected, although
both land and tenement houses may belong to the same owner. The tax is not a fixed
proportion of the assessed value of the tenement houses, and does not require the
intervention of assessors or appraisers. It is not payable at a designated time or date,
and is not enforceable against the tenement houses either by sale or distraint. Clearly,
therefore, the tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the construction thereof,
and the court looks less to its words and more to the context, subject-matter,
consequence and effect. Accordingly, what is within the spirit is within the ordinance
although it is not within the letter thereof, while that which is in the letter, although not
within the spirit, is not within the ordinance."15 It is within neither the letter nor the spirit of
the ordinance that an additional real estate tax is being imposed, otherwise the subject-
matter would have been not merely tenement houses. On the contrary, it is plain from the
context of the ordinance that the intention is to impose a license tax on the operation of
tenement houses, which is a form of business or calling. The ordinance, in both its title
and body, particularly sections 1 and 3 thereof, designates the tax imposed as a
"municipal license tax" which, by itself, means an "imposition or exaction on the right to
use or dispose of property, to pursue a business, occupation, or calling, or to exercise a
privilege."16.
"The character of a tax is not to be fixed by any isolated words that may
beemployed in the statute creating it, but such words must be taken in the
connection in which they are used and the true character is to be deduced from
 the nature and essence of the subject."17 The subject-matter of the ordinance is
tenement houses whose nature and essence are expressly set forth in section 2
which defines a tenement house as "any building or dwelling for renting
space divided into separate apartments or accessorias." The Supreme Court,
in City of Iloilo vs. Remedios Sian Villanueva, et al., L-12695, March 23, 1959,
adopted the definition of a tenement house18 as "any house or building, or portion
thereof, which is rented, leased, or hired out to be occupied, or is occupied, as
the home or residence of three families or more living independently of each
other and doing their cooking in the premises or by more than two families upon
any floor, so living and cooking, but having a common right in the halls,
stairways, yards, water-closets, or privies, or some of them." Tenement houses,
being necessarily offered for rent or lease by their very nature and essence,
therefore constitute a distinct form of business or calling, similar to the hotel or
motel business, or the operation of lodging houses or boarding houses. This is
precisely one of the reasons why this Court, in the said case of City of Iloilo vs.
Remedios Sian Villanueva, et al., supra, declared Ordinance 86 ultra vires,
because, although the municipal board of Iloilo City is empowered, under sec.
21, par. j of its Charter, "to tax, fix the license fee for, and regulate hotels,
restaurants, refreshment parlors, cafes, lodging houses, boarding houses, livery
garages, public warehouses, pawnshops, theaters, cinematographs," tenement
houses, which constitute a different business enterprise,19 are not mentioned in
the aforestated section of the City Charter of Iloilo. Thus, in the aforesaid case,
this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is one
among those clearly and expressly granted to the City of Iloilo by its Charter, the
exercise of such power cannot be assumed and hence the ordinance in question
is ultra vires insofar as it taxes a tenement house such as those belonging to
defendants." .
The lower court has interchangeably denominated the tax in question as a tenement tax
or an apartment tax. Called by either name, it is not among the exceptions listed in
section 2 of the Local Autonomy Act. On the other hand, the imposition by the ordinance
of a license tax on persons engaged in the business of operating tenement houses finds
authority in section 2 of the Local Autonomy Act which provides that chartered cities
have the authority to impose municipal license taxes or fees upon persons engaged in
any occupation or business, or exercising privileges within their respective territories, and
"otherwise to levy for public purposes, just and uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only double taxation but
treble at that," because "buildings pay real estate taxes and also income taxes as
provided for in Sec. 182 (A) (3) (s) of the National Internal Revenue Code, besides the
tenement tax under the said ordinance." Obviously, what the trial court refers to as
"income taxes" are the fixed taxes on business and occupation provided for in section
182, Title V, of the National Internal Revenue Code, by virtue of which persons engaged
in "leasing or renting property, whether on their account as principals or as owners of
rental property or properties," are considered "real estate dealers" and are taxed
according to the amount of their annual income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of
the National Internal Revenue Code as real estate dealers, and still taxable under the
ordinance in question, the argument against double taxation may not be invoked. The
same tax may be imposed by the national government as well as by the local
government. There is nothing inherently obnoxious in the exaction of license fees or
taxes with respect to the same occupation, calling or activity by both the State and a
political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they are paying the
real estate taxes and the tenement tax imposed by the ordinance in question, is also
devoid of merit. It is a well-settled rule that a license tax may be levied upon a business
or occupation although the land or property used in connection therewith is subject to
property tax. The State may collect an ad valorem tax on property used in a calling, and
at the same time impose a license tax on that calling, the imposition of the latter kind of
tax being in no sensea double tax.22.
"In order to constitute double taxation in the objectionable or prohibited sense the
same property must be taxed twice when it should be taxed but once; both taxes
must be imposed on the same property or subject-matter, for the same purpose,
by the same State, Government, or taxing authority, within the same jurisdiction
or taxing district, during the same taxing period, and they must be the same kind
or character of tax."23 It has been shown that a real estate tax and the tenement
tax imposed by the ordinance, although imposed by the sametaxing authority,
are not of the same kind or character.
At all events, there is no constitutional prohibition against double taxation in the
Philippines.24 It is something not favored, but is permissible, provided some other
constitutional requirement is not thereby violated, such as the requirement that taxes
must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court that the
ordinance is not only oppressive because it "carries a penal clause of a fine of P200.00
or imprisonment of 6 months or both, if the owner or owners of the tenement buildings
divided into apartments do not pay the tenement or apartment tax fixed in said
ordinance," but also unconstitutional as it subjects the owners of tenement houses to
criminal prosecution for non-payment of an obligation which is purely sum of money."
The lower court apparently had in mind, when it made the above ruling, the provision of
the Constitution that "no person shall be imprisoned for a debt or non-payment of a poll
tax."26 It is elementary, however, that "a tax is not a debt in the sense of an obligation
incurred by contract, express or implied, and therefore is not within the meaning of
constitutional or statutory provisions abolishing or prohibiting imprisonment for debt, and
a statute or ordinance which punishes the non-payment thereof by fine or imprisonment
is not, in conflict with that prohibition."27 Nor is the tax in question a poll tax, for the latter
is a tax of a fixed amount upon all persons, or upon all persons of a certain class,
resident within a specified territory, without regard to their property or the occupations in
which they may be engaged.28 Therefore, the tax in question is not oppressive in the
manner the lower court puts it. On the other hand, the charter of Iloilo City29 empowers its
municipal board to "fix penalties for violations of ordinances, which shall not exceed a
fine of two hundred pesos or six months' imprisonment, or both such fine and
imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this
Court overruled the pronouncement of the lower court declaring illegal and void an
ordinance imposing an occupation tax on persons exercising various professions in the
City of Manilabecause it imposed a penalty of fine and imprisonment for its violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.
"... because while the owners of the other buildings only pay real estate tax and
income taxes the ordinance imposes aside from these two taxes an apartment or
tenement tax. It should be noted that in the assessment of real estate tax all
parts of the building or buildings are included so that the corresponding real
estate tax could be properly imposed. If aside from the real estate tax the owner
or owners of the tenement buildings should pay apartment taxes as required in
the ordinance then it will violate the rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue that there is
"lack of uniformity" and "relative inequality," because "only the taxpayers of the City of
Iloilo are singled out to pay taxes on their tenement houses, while citizens of other cities,
where their councils do not enact a similar tax ordinance, are permitted to escape such
imposition." .
It is our view that both assertions are undeserving of extended attention. This Court has
already ruled that tenement houses constitute a distinct class of property. It has likewise
ruled that "taxes are uniform and equal when imposed upon all property of the same
class or character within the taxing authority."31 The fact, therefore, that the owners of
other classes of buildings in the City of Iloilo do not pay the taxes imposed by the
ordinance in question is no argument at all against uniformity and equality of the tax
imposition. Neither is the rule of equality and uniformity violated by the fact that tenement
taxesare not imposed in other cities, for the same rule does not require that taxes for the
same purpose should be imposed in different territorial subdivisions at the same
time.32 So long as the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and uniformity of
taxation is accomplished.33 The plaintiffs-appellees, as owners of tenement houses in the
City of Iloilo, have not shown that the tax burden is not equally or uniformly distributed
among them, to overthrow the presumption that tax statutes are intended to operate
uniformly and equally.34.
5. The last important issue posed by the appellees is that since the ordinance in the case
at bar is a mere reproduction of Ordinance 86 of the City of Iloilo which was declared by
this Court in L-12695, supra, as ultra vires, the decision in that case should be accorded
the effect of res judicata in the present case or should constitute estoppel by judgment.
To dispose of this contention, it suffices to say that there is no identity of subject-matter
in that case andthis case because the subject-matter in L-12695 was an ordinance which
dealt not only with tenement houses but also warehouses, and the said ordinance was
enacted pursuant to the provisions of the City charter, while the ordinance in the case at
bar was enacted pursuant to the provisions of the Local Autonomy Act. There is likewise
no identity of cause of action in the two cases because the main issue in L-12695 was
whether the City of Iloilo had the power under its charter to impose the tax levied by
Ordinance 11, series of 1960, under the Local Autonomy Act which took effect on June
19, 1959, and therefore was not available for consideration in the decision in L-12695
which was promulgated on March 23, 1959. Moreover, under the provisions of section 2
of the Local Autonomy Act, local governments may now tax any taxable subject-matter or
object not included in the enumeration of matters removed from the taxing power of local
governments.Prior to the enactment of the Local Autonomy Act the taxes that could be
legally levied by local governments were only those specifically authorized by law, and
their power to tax was construed in strictissimi juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing
valid, the complaint is hereby dismissed. No pronouncement as to costs..
SAN MIGUEL BREWERY, INC., plaintiff-appellant,
vs.
THE CITY OF CEBU, defendant-appellee.
G.R. No. L-20496 February 26, 1972
CEBU PORTLAND CEMENT COMPANY, plaintiff-appellant,
vs.
MUNICIPALITY OF NAGA, CEBU and THE MUNICIPAL TREASURER, NAGA,
CEBU, defendants-appellees.
Picazo and Agcaoili for plaintiff-appellant San Miguel Brewery, Inc.
Government Corporate Counsel Tomas P. Matic, Jr. and Assistant Government
Corporate Counsel Lorenzo R. Mosqueda for plaintiff-appellant Cebu Portland Cement
Company.
Eliseo Ynclino, Second Asst. City Fiscal and Quirico del Mar for defendant-appellee The
City of Cebu.
Ananias V. Maribao, 2nd Asst. Provincial Fiscal and Vicente Mendiola for defendants-
appellees Municipality of Naga, Cebu, etc.
CONCEPCION, C.J.:p
The above-entitled cases are jointly disposed of in this decision owing to the common issue therein — namely, the extent of
the taxing power of municipal corporations under section 2 of Republic Act No. 2264, otherwise known as the Local
Autonomy Act.
In L-20312, plaintiff San Miguel Brewery, Inc. — hereinafter referred to as SMB —
assails the validity of Ordinance No. 298, as amended by Ordinance No. 300, both series
of 1960, of the City of Cebu, providing that "(t)here shall be collected on any sale or
disposal of liquor or intoxicating beverages of any form in the City of Cebu by
manufacturers and wholesalers for purposes of a municipal tax the following rates: .
(a) On sales or disposal per bottle or container not exceeding P.50, a tax
of P.03;
(b) On sales or disposal per bottle or container over P.50, but not
exceeding P1, a tax of P.05;
(c) On sales or disposal per bottle or container over P1, but not
exceeding P2, a tax of P.15;
(d) On sales or disposal per bottle or container exceeding P2, the amount
of tax provided under schedule C, plus P.10 per P1, or a fraction thereof.
PROVIDED, however, that manufacturers, who are at the same time
wholesalers of their own product, shall pay only as manufacturers under
the rates specified hereinabove.
Pursuant to said ordinance, the SMB which is engaged in the manufacture, bottling,
distribution and sale of beer throughout the Philippines, including the defendant Cebu
City, paid thereto, under protest, on April 20, 1961, the sum of P29,874.69, the refund of
which is prayed for in the complaint herein, upon the ground that said ordinance is ultra
vires, for imposing a sales tax, which is allegedly beyond defendant's power to levy,
apart from resulting in illegal double taxation, since SMB already pays the defendant a
business license tax of P600 per annum. The Court of First Instance of Manila having
rendered judgment dismissing the complaint, with costs, plaintiff seeks a review by
record on appeal.
In L-20496, the Cebu Portland Cement Company — Cebu Portland for short — seeks to
annul Ordinance No. 22, series of 1959, of the Municipality of Naga, Cebu, imposing
upon "all cement factories, corporations, or enterprises operating within" said
municipality "an annual municipal license tax, payable quarterly, graduated" according to
the "maximum annual output capacity" of the factory, as follows: P150 if the capacity is
not more than 10,000 bags of cement; P300, if over 10,000 but not more than 20,000
bags; P450, if over 20,000 but not more than 30,000 bags; P600, if over 30,000 but not
more than 40,000 bags; P750, if over 40,000 but not more than 50,000 bags; P900, if
over 50,000 but not more than 60,000 bags; and P75 for every 5,000 bags or fraction
thereof in excess of 60,000 bags.
Having failed to pay said tax for the years 1960 and 1961, and the corresponding
penalties therefor, 100,000 bags of cement of Cebu Portland were placed under distraint
and levy by the municipal treasurer of Naga. This triggered the filing by Cebu Portland of
two (2) actions, namely: 1) one to impugn the validity of the distraint and then the sale of
said 100,000 bags of cement, both of which were, in due course, upheld by the Court of
First Instance of Manila, the decision of which was, on appeal, affirmed by Us1; and 2)
the present case, to annul said ordinance and secure the refund of P44,000,
subsequently paid under protest by Cebu Portland, in partial satisfaction of its tax liability,
which said plaintiff contests as illegal upon the theory that it partakes of the nature of a
specific tax and that it is allegedly unjust, excessive, oppressive and confiscatory. The
defendants having obtained a favorable judgment in the Court of First Instance of Manila,
Cebu Portland appealed by record on appeal.
Said section 2 of Republic Act No. 2264 reads as follows: .
"SEC. 2. Taxation. -- Any provision of law to the contrary notwithstanding,
all chartered cities, municipalities and municipal districts shall have
authority to impose municipal license taxes or fees upon persons
engaged in any occupation or business, or exercising privileges in
chartered cities, municipalities or municipal districts by requiring them to
secure licenses at rates fixed by the municipal board or city council of the
city, the municipal council of the municipality, or the municipal district
council of the municipal district; to collect fees and charges for services
rendered by the city, municipality or municipal district; to regulate and
impose reasonable fees for services rendered in connection with any
business, profession or occupation being conducted within the city,
municipality or municipal district and otherwise to levy for public
purposes, just and uniform taxes, licenses or fees: Provided, That
municipalities and municipal districts shall, in no case, impose any
 percentage tax on sales or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax, except gasoline, under
the provisions of the national internal revenue code: Provided,
however, That no city, municipality or municipal district may levy or
impose any of the following: .
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and
publication of any newspaper, magazine, review or bulletin appearing at
regular intervals and having fixed prices for subscription and sale, and
which is not published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public
utilities except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritances, gifts, legacies, and other
acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage on wharves owned by the
national government, tonnage, and all other kinds of customs fees,
charges and dues;
(j) Taxes of any kind on banks, insurance companies, and persons
paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance
directly with foreign insurance companies." .
Referring to the above provision, this Court declared in Nin Bay Mining Co. vs.
Municipality of Roxas, Palawan,2 that "Republic Act No. 2264 confers upon all chartered
cities, municipalities and municipal districts the general power to levy, not only taxes, but,
also, municipal license taxes, subject to specified exceptions, as well as service fees."
Subsequently, Luzon Surety Co., Inc. vs. City of Bacolod3 cited with approval the fact that
this Court had consistently upheld the "doctrine that the grant of the power to tax to
chartered cities under section 2 of the Local Autonomy Act is sufficiently plenary to cover
everything excepting those which are mentioned therein, subject only to the limitation
that the tax so levied is for public purposes, just and uniform."4
Appellant in L-20312 questions the conclusions reached in the decision appealed from,
to the effect that the first proviso in the above-quoted provision, prohibiting
"municipalities and municipal districts" from imposing "any percentage tax on sales or
other taxes in any form based thereon," implies that cities, like appellee therein, are not
subject to said restriction, and that the contested ordinance is not invalid upon the
ground of double taxation.
We find no merit in this pretense, for: (a) double taxation is not prohibited by the
Constitution5; (b) there is double taxation when the same person is taxed by the same
jurisdiction for the same purpose,6 which is not the case in L-20312, for the ordinance in
question imposes a tax on the sale or disposal of every "bottle or container" of "liquor
intoxicating beverages," and, as such, is a typical tax or revenue measure, whereas the
sum of P600 it pays annually is for a "second-class wholesale liquor license," which is a
license to engage in the business of wholesale liquor in Cebu City, and, accordingly,
constitutes a regulatory measure, in the exercise of the police power;7 and (c) the
authority of cities under the above -- quoted section 2 of Rep. Act No. 2264, to impose a
sales tax has already been upheld in City of Bacolod vs. Gruet8 and Pepsi-Cola Bottling
Co. of the Philippines, Inc. vs. City of Butuan,9and We find no plausible reason to depart
from said view.
Neither is there any merit in the contention of Cebu Portland in L-20496, to the effect that
the tax involved therein partakes of the nature of a percentage or sales tax or a specific
tax, merely because the amount of the tax is dependent upon the maximum annual
capacity of the cement factory subject thereto. Settled is the rule that a graduation of the
tax based upon the taxpayer's volume of business, when the same is considered solely
for purposes of classification, and there is no set ratio between said volume and the
amount of the tax, does not render the latter invalid as a sales, percentage or specific
tax. Thus, in Northern Philippines Tobacco Corporation vs. Municipality of Agoo, La
Union, 10 We held: .
The circumstance that the rate of tax payable under the ordinance is
made to some extent dependent on the minimum and maximum quantity
of tobacco redried per quarter, does not transform said tax into a
percentage or sales or income tax and does not bring the case out of the
council's authorized sphere of action. It may be noted that, as framed in
the ordinance, the volume of business is merely taken into account in
classifying the taxpayer's business according to its size or extent of
 operations, for the purpose of imposing the fixed graduated tax it has to
pay; and that there is no set ratio between the tax and the amount of
tobacco redried.
This criterion was, also, adhered to in Nin Bay Mining Co. vs. Municipality of Roxas, 11 Li
Seng Giap vs. Municipality of Daet, 12 Standard-Vacuum Oil Co. vs. Antigua, 13 Shell Co.
of P.I. vs. Vano, 14 Syjuco vs. Municipality of Parañaque, 15 Marinduque Iron Mines
Agents, Inc. vs. Municipal Council of Hinabangan, 16 and Victorias Milling Co., Inc. vs.
Municipality of Victorias. 17
For the rest, Cebu Portland has not introduced any evidence in support of its claim that
the tax in question is excessive, oppressive, and confiscatory. Hence, this objection
cannot be sustained for: .
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left
thus to the discretion of municipal authorities. Courts will go slow in
writing off an ordinance as unreasonable unless the amount is so
excessive as to be prohibitive. A rule which has gained acceptance is
that factors relevant to such an inquiry are the municipal conditions as a
whole and the nature of the business made subject to imposition." 18
In Northern Philippines Tobacco Corporation vs. Municipality of Agoo, 19 a similar charge
was disposed of in the following language: .
We find nothing in the record, however, to supports such charge.
Appellant has failed to present proof of the existing municipal conditions
and the nature of its business, as well as other factors that would have
been relevant to the issue of the arbitrariness or unreasonableness of the
questioned rates. An increase in the rate of tax alone would not support
the claim that it is oppressive, unjust and confiscatory; municipal
corporations are allowed much discretion in determining the rates of
imposable license fees, even in cases of purely police power-measures.
WHEREFORE, the decisions appealed from should be and are hereby affirmed, with
costs against plaintiffs-appellants San Miguel Brewery, Inc. and Cebu Portland Cement
Company. It is so ordered.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BANK OF COMMERCE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition (or Review on Certiorari1 filed by the Commissioner of Internal Revenue
(CIR) wherein the September 17 2007 Amended Decision2 and November 15 2007
Resolution3 of the Court of Tax Appeals En Bane (CTA) in C.T.A. EB No. 259, are sought
to be nullified and set aside.4
The facts of the case, as stipulated by the parties are as follows:
1. [Bank of Commerce (BOC)] is a banking corporation duly organized and
existing under and by virtue of the laws of the Republic of the Philippines, with
principal office address at 12th Floor, Bankers Centre Building, 6764 Ayala
Avenue, Makati City.
2. Respondent is the Commissioner of the Bureau of Internal Revenue [(CIR)],
duly appointed to perform the duties of his office, including, among others, the
power to decide, cancel and abate tax liabilities pursuant to Section 244(B) of the
Tax Code, as amended by Republic Act ("RA" No.) 8424, otherwise known as
the ‘Tax Reform Act’ ("TRA") of 1997.
3. On November 9, 2001, [BOC] and Traders Royal Bank (TRB) executed a
Purchase and Sale Agreement5whereby it stipulated the TRB’s desire to sell and
the BOC’s desire to purchase identified recorded assets of TRB in consideration
of BOC assuming identified recorded liabilities. 4. Under the Purchase and Sale
Agreement, BOC and TRB shall continue to exist as separate corporations with
distinct corporate personalities.
5. On September 27, 2002, [BOC] received copies of the Formal Letter of
Demand and Assessment Notice No. DST-99-00-000049 dated September 11,
2002, addressed to "TRADERS ROYAL BANK (now Bank of Commerce)",
issued by the CIR demanding payment of the amount of ₱41,467,887.51, as
deficiency documentary stamp taxes (DST) on Special Savings Deposit (SSD)
account of TRB for taxable year 1999.
6. On October 11, 2002, [TRB] filed its protest letter contesting the Formal Letter
of Demand and Assessment Notice No. DST-99-00-000049 dated September 11,
2002, pursuant to Sec. 228 of the Tax Code.
 7. On March 31, 2004, [BOC] received the Decision dated March 22, 2004
denying the protest filed by [TRB] on October 11, 2002. The last two paragraphs
of the Decision stated that:
"WHEREFORE, in view of all the foregoing, Assessment Notice No. DST-99-00-000049
demanding payment of the amount of ₱41,467,887.51, as deficiency stamp tax for the
taxable year 1999 is hereby MODIFIED AND/OR REDUCED to ₱41,442,887.51.
Consequently, Traders Royal Bank (now Bank of Commerce) is hereby ordered to pay
the above-stated amount, plus interest that have accrued thereon until the actual date of
payment, to the Large Taxpayers Service, B.I.R. National Office Building, Diliman,
Quezon City, within thirty (30) days from receipt hereof; otherwise, collection thereof
shall be effected through the summary remedies provided by law.
This constitutes the Final Decision of this Office on the matter."6
On April 30, 2004, the Bank of Commerce (BOC) filed a Petition for Review,7 assigned to
the CTA 2nd Division, praying that it be held not liable for the subject Documentary
Stamp Taxes (DST).
As also stipulated by the parties, the issues before the CTA 2nd Division were:
1. Whether [BOC] can be held liable for [TRB]’s alleged deficiency [DST] liability
on [its SSD] Accounts for taxable year 1999 in the amount of ₱41,442,887.51,
inclusive of penalties.
2. Whether TRB’s [SSD] Accounts for taxable year 1999 is subject to [DST].8
In support of the first issue, BOC called the attention of the CTA 2nd Division to the fact
that as stated in Article III of the Purchase and Sale Agreement, it and Traders Royal
Bank (TRB) continued to exist as separate corporations with distinct corporate
personalities. BOC emphasized that there was no merger between it and TRB as it only
acquired certain assets of TRB in return for its assumption of some of TRB’s liabilities.9
Ruling of the CTA 2nd Division
In a Decision10 dated August 31, 2006, the CTA 2nd Division dismissed the petition for
lack of merit. It held that the Special Savings Deposit (SSD) account in issue is subject to
DST because its nature and substance are akin to that of a certificate of deposit bearing
interest, which under the then Section 180 of the National Internal Revenue Code
(NIRC), is subject to DST.
As for BOC’s liability, the CTA 2nd Division said that since the issue of non-merger
between BOC and TRB was not raised in the administrative level, it could not be raised
for the first time on appeal. The CTA 2nd Division also noted how BOC "actively
participated in the proceedings before the administrative body without questioning the
legitimacy of the proper party in interest."11
When its Motion for Reconsideration12 was denied13 on January 8, 2007, BOC filed a
Petition for Review14 before the CTA En Banc, adducing the following grounds:
THE HOLDING OF THE HONORABLE SECOND DIVISION THAT [BOC] IS
DEEMED TO HAVE ADMITTED THAT IT IS THE PROPER PARTY ASSESSED
BY THE [CIR] BECAUSE IT DID NOT RAISE THE ISSUE OF MERGER IN THE
LETTER OF PROTEST FILED WITH THE [CIR] IS WITHOUT BASIS AND
VIOLATES ELEMENTARY RULES OF DUE PROCESS.
THE HONORABLE SECOND DIVISION ERRED IN HOLDING THAT TRB’S
SSD ACCOUNTS FOR TAXABLE YEAR 1999 ARE SUBJECT TO [DST]
UNDER THEN SECTION 180 OF THE TAX CODE.15
Ruling of the CTA En Banc
on BOC’s Petition for Review
On June 27, 2007, the CTA En Banc affirmed the CTA 2nd Division’s Decision and
Resolution, ruling that BOC was liable for the DST on TRB’s SSD accounts.16
Citing this Court’s decision in International Exchange Bank v. Commissioner of Internal
Revenue,17 the CTA En Banc said that the CTA 2nd Division was correct when it deemed
TRB’s SSD accounts to be certificates of deposit bearing interest, subject to DST under
Section 180 of the NIRC, as they involved deposits, which though may be withdrawn
anytime, earned a higher rate of interest when kept in the bank for a specified number of
days.18
Proceeding then to what it considered to be the pivotal issue, the CTA En Banc, agreeing
with the decision of the CTA 2nd Division, held that BOC was liable for the DST on the
subject SSD accounts. The CTA En Banc also noted that BOC was inconsistent in its
position, for claiming that it was the one that filed the protest letter with the BIR, in its
Petition for Review before the CTA 2nd Division and Pre-Trial Brief, while stating that it
was TRB that filed the protest letter, in its Joint Stipulation of Facts and Issues. The CTA
En Banc added that it would not be unfair to hold BOC liable for the subject DST as TRB
constituted an Escrow Fund in the amount of Fifty Million Pesos (₱50,000,000.00) to
answer for all claims against TRB, which are excluded from the Agreement.19
Undaunted, BOC filed before the CTA En Banc a Motion for Reconsideration20 of its June
27, 2007 Decision, positing the following grounds for reconsideration:
 I Division,24 which the CTA 1st Division granted in a Resolution on June 18, 2007, primarily
There was no merger between [BOC] and [TRB] as already decided by this Honorable
Court in a decision dated 18 June 2007; hence [BOC] cannot be held liable for the tax
liability of [TRB.]
II
[BOC] could not have raised the issue of non-merger of [BOC] and [TRB] in the
proceedings before the [CIR] because it was never a party to the proceedings before the
[CIR]. Contrary to the Court’s findings, the issue of non-merger is no longer an issue but
a fact stipulated by both parties.
III
The [CIR]’s decision holding [BOC] liable for TRB’s tax liability is void since [BOC] was
not a party to the proceedings before the [CIR].21
Ruling of the CTA En Banc
on BOC’s Motion for Reconsideration
On September 17, 2007, the CTA En Banc, in its Amended Decision, reversed itself and
ruled that BOC could not be held liable for the deficiency DST of TRB on its SSD
accounts. The dispositive portion of the CTA En Banc ’s Amended Decision reads:
WHEREFORE, [BOC]’s Motion for Reconsideration is hereby GRANTED. The Decision
in the case at bar promulgated on June 27, 2007 is REVERSED. The appealed Decision
in C.T.A. Case No. 6975 is SET ASIDE and a new one is hereby ENTERED finding
petitioner Bank of Commerce NOT LIABLE for the amount of ₱41,442,887.51
representing the assessment of deficiency Documentary Stamp Tax on the Special
Savings Deposit accounts of Traders Royal Bank for taxable year 1999.22
In its Amended Decision, the CTA En Banc said that while it did not make a categorical
ruling in its June 27, 2007 Decision on the issue of merger between BOC and TRB, the
CTA 1st Division did in its June 18, 2007 Resolution23in C.T.A. Case No. 6392, entitled
Traders Royal Bank v. Commissioner of Internal Revenue.
The Traders Royal Bank case, just like the case at bar, involved a deficiency DST
assessment against TRB on its SSD accounts, albeit for taxable years 1996 and 1997.
When the CIR attempted to implement a writ of execution against BOC, which was not a
party to the case, by simply inserting its name beside TRB’s in the motion for execution,
BOC filed a Motion to Quash (By Way of Special Appearance) with the CTA 1st
on the ground that there was no merger between BOC and TRB.
With the foregoing ruling, the CTA En Banc declared that BOC could not be held liable
for the deficiency DST assessed on TRB’s SSD accounts for taxable year 1999 in the
interest of substantial justice and to be consistent with the CTA 1st Division’s Resolution
in the Traders Royal Bank case.25
The CTA En Banc also gave weight to BIR Ruling No. 10-200626 dated October 6, 2006
wherein the CIR expressly recognized the fact that the Purchase and Sale Agreement
between BOC and TRB did not result in their merger.27Elaborating on this point the CTA
En Banc said:
By practice, a BIR ruling contains the official written interpretative opinion of the
Commissioner of Internal Revenue addressed to a particular taxpayer regarding his
taxability over certain matters. Moreover, well-settled is the rule that the interpretation of
an administrative government agency like the BIR, is accorded great respect and
ordinarily controls the construction of the courts. The reason behind this rule was
explained in Nestle Philippines, Inc. vs. Court of Appeals, in this wise: "The rationale for
this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the accumulation of experience
and growth of specialized capabilities by the administrative agency charged with
implementing a particular statute.
Here, We have no reason to disregard the interpretation made by the Commissioner as it
is in accord with the aforementioned Resolution of the First Division.28 (Citation omitted.)
With the reversal of the CTA En Banc ’s June 27, 2007 Decision, the CIR filed a Motion
for Reconsideration29praying that BOC be held liable for the deficiency DST of TRB on its
SSD accounts for taxable year 1999. In support of its motion, the CIR presented the
following arguments:
[BOC] is estopped from raising the issue that it is not the party held liable for Trader[s]
Royal Bank (TRB)’s deficiency DST assessment because it was not a party to the
proceeding before [the] Bureau of Internal Revenue (BIR).30
Issues not raised in the administrative level cannot be raised for the first time on appeal.31
The deficiency Assessment of TRB can be enforced and collected against [BOC].32
The Honorable Court En Banc erred in considering BIR Ruling No. 10-2006 as basis to
justify its conclusion.33
The Honorable Court En Banc has no sufficient justification for not considering the
Escrow fund in its Amended Decision.34
On November 15, 2007, the CTA En Banc denied the motion for lack of merit.
The CTA En Banc said that the rule that no issue may be raised for the first time on
appeal is not a hard and fast rule as "jurisprudence declares that the appellate court is
clothed with ample authority to review matters, even if they are not assigned as errors in
their appeal, if it finds that their consideration is necessary in arriving at a just decision of
the case." Thus, in the interest of justice, the CTA En Banc found it necessary to
consider and resolve issues, even though not previously raised in the administrative
level, if it is necessary for the complete adjudication of the rights and obligations of the
parties and it falls within the issues they already identified.35
The CTA En Banc also reiterated its ruling in its Amended Decision, that BOC could not
be held liable for the deficiency DST on the SSD accounts of TRB, in consonance with
the Resolution of the CTA 1st Division in the Traders Royal Bank case; and BIR Ruling
No. 10-2006, which has not been shown to have been revoked or nullified by the CIR.36
With the foregoing disquisition rendering the issue on the Escrow Fund moot, the CTA
En Banc found no more reason to discuss it.37
Unsuccessful in its Motion for Reconsideration, the CIR is now before this Court, praying
for the reinstatement of the CTA 2nd Division’s August 31, 2006 Decision, which found
BOC liable for the subject DST. The CIR posits the following grounds in its Petition for
Review:
I.
THE DEFICIENCY ASSESSMENT OF TRADERS ROYAL BANK (TRB) CAN BE
ENFORCED AND COLLECTED AGAINST RESPONDENT BANK OF COMMERCE
(BOC) BECAUSE THE LATTER ASSUMED THE OBLIGATIONS AND LIABILITIES OF
TRB PURSUANT TO THE PURCHASE AND SALE AGREEMENT EXECUTED
BETWEEN THEM AND THE APPLICABLE LAW ON MERGER OF CORPORATIONS
(SECTION 80 OF THE CORPORATION CODE).
II.
THE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN REVERSING ITS
PREVIOUS DECISION WHICH AFFIRMED THE ASSESSMENT AND ENFORCEMENT
OF DEFICIENCY TAXES BY PETITIONER AGAINST RESPONDENT, CONTRARY TO
LAW AND JURISPRUDENCE.38
In response, BOC presented in its Comment,39 the following grounds in support of its
prayer that the CIR’s petition be denied:
I. THE PETITION FOR REVIEW DID NOT RAISE QUESTIONS OF LAW.
II. THE COURT OF TAX APPEALS EN BANC WAS CORRECT AND DID NOT COMMIT
GRAVE ABUSE OF DISCRETION WHEN IT FOUND RESPONDENT NOT LIABLE FOR
THE SUBJECT TAX BECAUSE:
A. THERE WAS NO MERGER CREATED BETWEEN THE RESPONDENT
BANK OF COMMERCE AND TRADERS ROYAL BANK (TRB).
B. THE PETITIONER ITSELF RULED AND RENDERED AN OPINION UNDER
BIR REVENUE RULING NO. 10-2006 THAT THERE WAS NO MERGER
BETWEEN THE RESPONDENT AND TRB.
III. RESPONDENT IS NOT ESTOPPED FROM RAISING THE ISSUE OF NON-
MERGER BETWEEN RESPONDENT AND TRB BECAUSE IT WAS NOT A PARTY TO
THE PROCEEDINGS BEFORE THE PETITIONER.
IV. THE PETITIONER’S DECISION HOLDING RESPONDENT LIABLE FOR TRB’S TAX
LIABILITY IS VOID SINCE RESPONDENT WAS NOT A PARTY TO [THE]
PROCEEDINGS BEFORE THE PETITIONER.40
This Court’s Ruling
The petition is denied for lack of merit.
As the CTA En Banc stated in its Amended Decision, the issue boils down to whether or
not BOC is liable for the deficiency DST of TRB for taxable year 1999.
In resolving this issue, the CTA En Banc relied on 1) the Resolution in the Traders Royal
Bank case, wherein the CTA 1st Division made a categorical pronouncement on the
issue of merger based on the evidence at its disposal, which included the Purchase and
Sale Agreement; and 2) the CIR’s own administrative ruling on the issue of merger in
BIR Ruling No. 10-2006 dated October 6, 2006.
Unlike the Decision of the CTA 2nd Division in this case, which focused on the taxability
of the SSD accounts, the CTA 1st Division’s Resolution in Traders Royal Bank, explicitly
addressed the issue of merge between BOC and TRB. The CTA 1st Division, relying on
the provisions in both the Purchase and Sale Agreement and the Tax Code, determined
that the agreement did not result in a merger, to wit:
In the Motion, [BOC] moves to have the Writ of Execution dated March 09, 2007 issued
against it quashed on the ground that it is a separate entity from [TRB]; that there was no
merger or consolidation between the two entities. Further, [BOC] claims that the
deficiency [DST] amounting to ₱27,698,562.92 for the taxable years 1996 and 1997 of
[TRB] was not one of the liabilities assumed by [BOC] in the Purchase and Sale
Agreement.
After carefully evaluating the records, the [CTA 1st Division] agrees with [BOC] for the
following reasons:
First, a close reading of the Purchase and Sale Agreement shows the following self-
explanatory provisions:
a) Items in litigation, both actual and prospective, against [TRB] are excluded
from the liabilities to be assumed by the Bank of Commerce (Article II, paragraph
2); and
b) The Bank of Commerce and Traders Royal Bank shall continue to exist as
separate corporations with distinct corporate personalities (Article III, paragraph
1).
Second, aside from the foregoing, the Purchase and Sale Agreement does not contain
any provision that the [BOC] acquired the identified assets of [TRB] solely in exchange
for the latter’s stocks. Merger is defined under Section 40 (C)(6)(b) of the Tax Code as
follows:
"b) The term "merger" or "consolidation", when used in this Section, shall be understood
to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation
of all or substantially all the properties of another corporation solely for stock: Provided,
[t]hat for a transaction to be regarded as a merger or consolidation within the purview of
this Section, it must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden of taxation: x x x."
Since the purchase and sale of identified assets between the two companies does not
constitute a merger under the foregoing definition, the Bank of Commerce is considered
an entity separate from petitioner. Thus, it cannot be held liable for the payment of the
deficiency DST assessed against petitioner.41 (Citation omitted.)
Thus, when the CTA En Banc took into consideration the above ruling in its Amended
Decision, it necessarily affirmed the findings of the CTA 1st Division and found them to
be correct. This Court likewise finds the foregoing ruling to be correct. The CTA 1st
Division was spot on when it interpreted the Purchase and Sale Agreement to be just
that and not a merger.
The Purchase and Sale Agreement, the document that is supposed to have tied BOC
and TRB together, was replete with provisions that clearly stated the intent of the parties
and the purpose of its execution, viz:
1. Article I of the Purchase and Sale Agreement set the terms of the assets sold to BOC,
while Article II was about the consideration for those assets. Moreover, it was explicitly
stated that liabilities not included in the Consolidated Statement of Condition were
excluded from the liabilities BOC was to assume, to wit:
ARTICLE II
CONSIDERATION: ASSUMPTION OF LIABILITIES
In consideration of the sale of identified recorded assets and properties covered by this
Agreement, [BOC] shall assume identified recorded TRB’s liabilities including booked
contingent liabilities as listed and referred to in its Consolidated Statement of Condition
as of August 31, 2001, in the total amount of PESOS: TEN BILLION FOUR HUNDRED
ONE MILLION FOUR HUNDRED THIRTY-SIX THOUSAND (₱10,401,436,000.00),
provided that the liabilities so assumed shall not include:
xxxx
2. Items in litigation, both actual and prospective, against TRB which include but are not
limited to the following:
xxxx
2.3 Other liabilities not included in said Consolidated Statement of
Condition.42 (Emphases supplied.)
2. Article III of the Purchase and Sale Agreement enumerated in no uncertain terms the
effects and consequences of such agreement as follows:
ARTICLE III
EFFECTS AND CONSEQUENCES
The effectivity of this Agreement shall have the following effects and consequences:
1. [BOC] and TRB shall continue to exist as separate corporations with distinct
corporate personalities;
2. With the transfer of its branching licenses to [BOC] and upon surrender of its
commercial banking license to BSP, TRB shall exist as an ordinary corporation
 placed outside the supervisory jurisdiction of BSP. To this end, TRB shall cause
the amendment of its articles and by-laws to delete the terms "bank" and
"banking" from its corporate name and purpose.
3. There shall be no employer-employee relationship between [BOC] and the
personnel and officers of TRB.43(Emphases supplied.)
Moreover, the second whereas clause, which served as the premise for the subsequent
terms in the agreement, stated that the sale of TRB’s assets to BOC were in
consideration of BOC’s assumption of some of TRB’s liabilities, viz:
WHEREAS, TRB desires to sell and [BOC] desires to purchase identified recorded
assets of TRB in consideration of [BOC] assuming identified recorded liabilities of TRB x
x x.44
The clear terms of the above agreement did not escape the CIR itself when it issued BIR
Ruling No. 10-2006, wherein it was concluded that the Purchase and Sale Agreement
did not result in a merger between BOC and TRB.
In this petition however, the CIR insists that BIR Ruling No. 10-2006 cannot be used as a
basis for the CTA En Banc’s Amended Decision, due to BOC’s failure, at the time it
requested for such ruling, to inform the CIR of TRB’s deficiency DST assessments for
taxable years 1996, 1997, and 1999.45
The CIR’s contention is untenable.
A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on the issue of merger
without any reference to TRB’s subject tax liabilities. The relevant portions of such ruling
are quoted below:
One distinctive characteristic for a merger to exist under the second part of [Section
40(C)(b) of the 1997 NIRC] is that, it is not enough for a corporation to acquire all or
substantially all the properties of another corporation but it is also necessary that such
acquisition is solely for stock of the absorbing corporation. Stated differently, the
acquiring corporation will issue a block of shares equal to the net asset value transferred,
which stocks are in turn distributed to the stockholders of the absorbed corporation in
proportion to the respective share.
After a careful perusal of the facts presented as well as the details of the instant case, it
is observed by this Office that the transaction was purely concerning acquisition and
assumption by [BOC] of the recorded liabilities of TRB. The [Purchase and Sale]
Agreement did not mention with respect to the issuance of shares of stock of [BOC] in
favor of the stockholders of TRB. Such transaction is absent of the requisite of a stock
transfer and same belies the existence of a merger. As such, this Office considers the
Agreement between [BOC] and TRB as one of "a sale of assets with an assumption of
liabilities rather than ‘merger’."
xxxx
In the case at bar, [BOC] purchased identified recorded assets and properties of
TRB. In consideration thereof, [BOC] assumed certain liabilities of TRB which were
1âwphi1
identified in the Consolidated Statement of Condition as of August 31, 2001. In this wise,
the liabilities of TRB assumed by [BOC] were limited only to those already identified as of
August 31, 2001 amounting in all to Ten Billion Four Hundred One Million Four Hundred
Thirty-Six Thousand Pesos (₱10,401, 436,000.00) x x x. More so, liabilities that were not
assumed by [BOC] should not be enforced against it. x x x. (Emphasis supplied.)
xxxx
2. Much have been said that the transaction between TRB and [BOC] is not a merger
within the contemplation of Section 40(C)(b) of the Tax Code of 1997. To reiterate, this
Office has ruled in the foregoing discussion that the transaction is one of sale of assets
with assumption of identified recorded liabilities of TRB. As such, the liabilities assumed
by [BOC] amounted only to ₱10,401,436,000.00 with some enumerated exclusion in the
Agreeement. x x x.46
Clearly, the CIR, in BIR Ruling No. 10-2006, ruled on the issue of merger without taking
into consideration TRB’s pending tax deficiencies. The ruling was based on the Purchase
and Sale Agreement, factual evidence on the status of both companies, and the Tax
Code provision on merger. The CIR’s knowledge then of TRB’s tax deficiencies would
not be material as to affect the CIR’s ruling. The resolution of the issue on merger
depended on the agreement between TRB and BOC, as detailed in the Purchase and
Sale Agreement, and not contingent on TRB’s tax liabilities.
It is worthy to note that in the Joint Stipulation of Facts and Issues submitted by the
parties, it was explicitly stated that both BOC and TRB continued to exist as separate
corporations with distinct corporate personalities, despite the effectivity of the Purchase
and Sale Agreement.47
Considering the foregoing, this Court finds no reason to reverse the CTA En Banc’s
Amended Decision. In reconsidering its June 27, 2007 Decision, the CTA En Banc not
only took into account the CTA 1st Division’s ruling in Traders Royal Bank, which, save
for the facts that BOC was not made a party to the case, and the deficiency DST
assessed were for taxable years 1996 and 1997, is almost identical to the case herein;
but more importantly, the CIR’s very own ruling on the issue of merger between BOC
WHEREFORE, the petition is hereby DENIED. foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35% dividend tax rate and the
NON-RESIDENT FOREIGN CORPORATION- reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for
”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and
DIVIDENDS such tax credit must reach at least 20 percentage points. Requirements were met.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF the country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in
the Philippines,” applicable against the tax payable to the domiciliary country by the
foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic
corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid a
proportionate extent of taxes paid by such foreign corporation upon its remittance of
dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

FACTS: P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
Procter and Gamble Philippines declared dividends payable to its parent company and P 35.00 -- paid by P&G Phil as corporate income tax
sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a
35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently
filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, P 100.00
claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as - 35.00
amended by Presidential Decree No. 369, the applicable rate of withholding tax on the 65. 00 -- available for remittance
dividends remitted was only 15%.
P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax
MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit. P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

HELD: P 65.00 -- dividends remittable

YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF he country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in
the Philippines,” applicable against the tax payable to the domiciliary country by the
- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA
Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00 points of dividend tax foregone by the Philippines, in the assumption that a positive
profits earned incentive effect would thereby be felt by the investor.

G.R. No. 147295 February 16, 2007

P35 is the income tax paid.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income
tax ‘deemed paid’ by the parent company. Since P29.75 is much higher than P13, Sec
902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand
why these were divided and multiplied. Point is, requirements were met) THE COMMISIONER OF INTERNAL REVENUE, Petitioner,

vs.

Reason behind the law: ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.

Since the US Congress desires to avoid or reduce double taxation of the same income
stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines DECISION
but “deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on

Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend tax VELASCO, JR., J.:
to a maximum of 20% of he gross amount of dividends paid to US parent corporations,
and established a treaty obligation on the part of the United States that it “shall allow” to
a US parent corporation receiving dividends from its Philippine subsidiary “a [tax] credit
for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine The Case
[subsidiary].

Note:
The NIRC does not require that the US tax law deem the parent corporation to have paid
the 20 percentage points of dividend tax waived by the Philippines. It only requires that
the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the
20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax
exemption nor does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
assailing the November 17, 2000 Decision2 of the Court of Appeals (CA) in CA-G.R. SP
No. 56816, which affirmed the January 3, 2000 Decision3 of the Court of Tax Appeals
(CTA) in CTA Case No. 5645 entitled Acesite (Philippines) Hotel Corporation v. The
Commissioner of Internal Revenue for Refund of VAT Payments.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in
the Philippines by reducing the tax cost of earning profits here and thereby increasing the The Facts
net dividends remittable to the investor. The foreign investor, however, would not benefit
from the reduction of the Philippine dividend tax rate unless its home country gives it
some relief from double taxation by allowing the investor additional tax credits which
would be applicable against the tax payable to such home country. Accordingly Section The facts as found by the appellate court are undisputed, thus:
24(b)(1) of the NIRC requires the home or domiciliary country to give the investor
corporation a “deemed paid” tax credit at least equal in amount to the 20 percentage
 Less Prescribed amount (Exhs A, X, & X-20)

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United January 1996 P 2,199.94
Nations Avenue in Manila. It leases 6,768.53 square meters of the hotel’s premises to
the Philippine Amusement and Gaming Corporation [hereafter, PAGCOR] for casino February 1996 26,205.04
operations. It also caters food and beverages to PAGCOR’s casino patrons through the
hotel’s restaurant outlets. For the period January (sic) 96 to April 1997, Acesite incurred March 1996 70,338.42
VAT amounting to P30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR during said period. Acesite tried to shift the said taxes to
98,743.40
PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused
to pay the taxes on account of its tax exempt status.1awphi1.net
P30,054,148.64

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while
the latter paid the VAT to the Commissioner of Internal Revenue [hereafter, CIR] as it
feared the legal consequences of non-payment of the tax. However, Acesite belatedly
arrived at the conclusion that its transaction with PAGCOR was subject to zero rate as it
was rendered to a tax-exempt entity. On 21 May 1998, Acesite filed an administrative
claim for refund with the CIR but the latter failed to resolve the same. Thus on 29 May
1998, Acesite filed a petition with the Court of Tax Appeals [hereafter, CTA] which was
decided in this wise:
vvvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially
GRANTED. The Respondent is hereby ORDERED to REFUND to the petitioner the
amount of THIRTY MILLION FIFTY FOUR THOUSAND ONE HUNDRED FORTY EIGHT
PESOS AND SIXTY FOUR CENTAVOS (P30,054,148.64) immediately.
SO ORDERED.4

As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3)
[now 106(A)(C)] insofar as its gross income from rentals and sales to PAGCOR, a tax
exempt entity by virtue of a special law. Accordingly, the amounts of P21,413,026.78 and
P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross
rentals, respectively from PAGCOR shall, as a matter of course, be refunded to the
petitioner for having been inadvertently remitted to the respondent.
Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of
P98,743.40, and considering further the principle of ‘solutio indebiti’ which requires the
return of what has been delivered through mistake, Respondent must refund to the
Petitioner the amount of P30,054,148.64 computed as follows:
The Ruling of the Court of Appeals
Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that
PAGCOR was not only exempt from direct taxes but was also exempt from indirect taxes
like the VAT and consequently, the transactions between respondent Acesite and
PAGCOR were "effectively zero-rated" because they involved the rendition of services to
an entity exempt from indirect taxes. Thus, the CA affirmed the CTA’s determination by
ruling that respondent Acesite was entitled to a refund of PhP 30,054,148.64 from
petitioner.

The Issues
Total amount per claim 30,152,892.02
Hence, we have the instant petition with the following issues: (1) whether PAGCOR’s tax
exemption privilege includes the indirect tax of VAT to entitle Acesite to zero percent
(0%) VAT rate; and (2) whether the zero percent (0%) VAT rate under then Section 102
(b)(3) of the Tax Code (now Section 108 (B)(3) of the Tax Code of 1997) legally applies
to Acesite.
The petition is devoid of merit.
In resolving the first issue on whether PAGCOR’s tax exemption privilege includes the
indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate, we answer in the
affirmative. We will however discuss both issues together.
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an
exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides:
Sec. 13. Exemptions. –
xxxx
(2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise from the Corporation; nor
shall any form of tax or charge attach in any way to the earnings of the Corporation,
except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by
the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied, established or
collected by any municipal, provincial, or national government authority.
xxxx
(b) Others: The exemptions herein granted for earnings derived from the operations
conducted under the franchise specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
Corporation or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise and to those
receiving compensation or other remuneration from the Corporation or operator as a
result of essential facilities furnished and/or technical services rendered to the
Corporation or operator. (Emphasis supplied.)
Petitioner contends that the above tax exemption refers only to PAGCOR’s direct tax
liability and not to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to
taxes with no distinction on whether the taxes are direct or indirect. We are one with the
CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or
operator refers to PAGCOR. Although the law does not specifically mention PAGCOR’s
exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes
because the law exempts from taxes persons or entities contracting with PAGCOR in
casino operations. Although, differently worded, the provision clearly exempts PAGCOR
from indirect taxes. In fact, it goes one step further by granting tax exempt status to
persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the latter is
effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424. (Emphasis
supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the
legislature clearly granted exemption also from indirect taxes. It must be noted that the
indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer,
transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing with PAGCOR in casino
operations, it is exempting PAGCOR from being liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax
It is true that VAT can either be incorporated in the value of the goods, properties, or
services sold or leased, in which case it is computed as 1/11 of such value, or charged
as an additional 10% to the value. Verily, the seller or lessor has the option to follow
either way in charging its clients and customer. In the instant case, Acesite followed the
latter method, that is, charging an additional 10% of the gross sales and rentals. Be that
as it may, the use of either method, and in particular, the first method, does not denigrate
the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the
latter is not liable for the payment of it as it is exempt in this particular transaction by
operation of law to pay the indirect tax. Such exemption falls within the former Section
102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which
provides:
Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There
shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross
receipts derived by any person engaged in the sale of services x x x; Provided, that the
following services performed in the Philippines by VAT-registered persons shall be
subject to 0%.
xxxx
(b) Transactions subject to zero percent (0%) rated.—
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the
extension of such exemption to entities or individuals dealing with PAGCOR in casino
operations are best elucidated from the 1987 case of Commissioner of Internal Revenue
v. John Gotamco & Sons, Inc.,5 where the absolute tax exemption of the World Health
Organization (WHO) upon an international agreement was upheld. We held in said case
that the exemption of contractee WHO should be implemented to mean that the entity or
person exempt is the contractor itself who constructed the building owned by contractee
WHO, and such does not violate the rule that tax exemptions are personal because the
manifest intention of the agreement is to exempt the contractor so that no contractor’s
tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the
exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly
to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.
Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the
VAT pertaining to the effectively zero-rate transactions between Acesite and PAGCOR.
Verily, Acesite has clearly shown that it paid the subject taxes under a mistake of fact,
that is, when it was not aware that the transactions it had with PAGCOR were zero-rated
at the time it made the payments. In UST Cooperative Store v. City of Manila,6 we
explained that "there is erroneous payment of taxes when a taxpayer pays under a
mistake of fact, as for the instance in a case where he is not aware of an existing
exemption in his favor at the time the payment was made."7 Such payment is held to be
not voluntary and, therefore, can be recovered or refunded.8
Moreover, it must be noted that aside from not raising the issue of Acesite’s compliance
with pertinent Revenue Regulations on exemptions during the proceedings in the CTA, it
cannot be gainsaid that Acesite should have done so as it paid the VAT under a mistake
of fact. Hence, petitioner’s argument on this point is utterly tenuous.
Solutio indebiti applies to the Government
Tax refunds are based on the principle of quasi-contract or solutio indebiti and the
pertinent laws governing this principle are found in Arts. 2142 and 2154 of the Civil Code,
which provide, thus:
Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of
quasi-contract to the end that no one shall be unjustly enriched or benefited at the
expense of another.
Art. 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
When money is paid to another under the influence of a mistake of fact, that is to say, on
the mistaken supposition of the existence of a specific fact, where it would not have been
known that the fact was otherwise, it may be recovered. The ground upon which the right
of recovery rests is that money paid through misapprehension of facts belongs in equity
and in good conscience to the person who paid it.9
The Government comes within the scope of solutio indebiti principle as elucidated in
Commissioner of Internal Revenue v. Fireman’s Fund Insurance Company, where we
held that: "Enshrined in the basic legal principles is the time-honored doctrine that no
person shall unjustly enrich himself at the expense of another. It goes without saying that
the Government is not exempted from the application of this doctrine."10
Action for refund strictly construed; Acesite discharged the burden of proof
Since an action for a tax refund partakes of the nature of an exemption, which cannot be
allowed unless granted in the most explicit and categorical language, it is strictly
construed against the claimant who must discharge such burden convincingly.11 In the
instant case, respondent Acesite had discharged this burden as found by the CTA and
the CA. Indeed, the records show that Acesite proved its actual VAT payments subject to
refund, as attested to by an independent Certified Public Accountant who was duly
commissioned by the CTA. On the other hand, petitioner never disputed nor contested
respondent’s testimonial and documentary evidence. In fact, petitioner never presented
any evidence on its behalf.
One final word. The BIR must release the refund to respondent without any
unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR and
this duty demands that the BIR should refund without any unreasonable delay what it has
erroneously collected.12
WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000
Decision of the CA is hereby AFFIRMED. No costs.

SO ORDERED.
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher
Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of first refusal
under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot. No.
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by Transfer
Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components
International Inc. the same property and providing that during the
existence or after the term of this lease the lessor should he decide to
sell the property leased shall first offer the same to the lessee and the
letter has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc.
assigned its rights and obligations under the contract of lease in favor of
Hydro Pipes Philippines, Inc. with the signed conformity and consent of
lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated
at he back of the title, as per stipulation of the parties (Exhs. A to D-3
inclusive)
On January 3, 1976, a deed of exchange was executed between lessors
Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation
whereby the former conveyed to the latter the leased property (TCT
No.T-4240) together with another parcel of land also located in Malinta
Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of
stock of defendant corporation with a total value of P1,500,000.00 (Exhs.
C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to
the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an
amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions
similar to those whereby Delpher Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The
dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid
existence of the plaintiffs preferential right to acquire the subject property
(right of first refusal) and ordering the defendants and all persons deriving
rights therefrom to convey the said property to plaintiff who may offer to
acquire the same at the rate of P14.00 per square meter, more or less,
for Lot 1095 whose area is 27,169 square meters only. Without
pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp.
246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the
appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the
resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in
that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will
acquire from petitioners a parcel of industrial land consisting of 27,169
square meters or 2.7 hectares (located right after the Valenzuela,
Bulacan exit of the toll expressway) for only P14/sq. meter, or a total
 of P380,366, although the prevailing value thereof is approximately
P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if
there is no "sale" or transfer of actual ownership interests by petitioners
to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership
interests, private respondent will acquire the land not under "similar
conditions" by which it was transferred to petitioner Delpher Trades
Corporation, as provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the
properties executed by the Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of sale which, in effect, prejudiced
the private respondent's right of first refusal over the leased property included in the
"deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco
testified that Delpher Trades Corporation is a family corporation; that the corporation was
organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin
Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the
parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over
the property through the corporation and to avoid taxes; that in order to accomplish this
end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro
Pipes Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the
other owners only owned 2,000 shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners'
motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of
ownership of the subject parcel of land since the Pachecos remained in control of the
property. Thus, the petitioners allege: "Considering that the beneficial ownership and
control of petitioner corporation remained in the hands of the original co-owners, there
was no transfer of actual ownership interests over the land when the same was
transferred to petitioner corporation in exchange for the latter's shares of stock. The
transfer of ownership, if anything, was merely in form but not in substance. In reality,
petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in
substance and in effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that
there was no sale and that they exchanged the land for shares of stocks in their own
corporation. "Hence, such transfer is not within the letter, or even spirit of the contract.
There is a sale when ownership is transferred for a price certain in money or its
equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is
given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a
corporate entity separate and distinct from the Pachecos. Thus, it contends that it cannot
be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that
petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate
and distinct corporate entity, is not a party who may allege that this separate corporate
existence should be disregarded. It maintains that there was actual transfer of ownership
interests over the leased property when the same was transferred to Delpher Trades
Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by
purchasing stock directly from the corporation or from individual owners thereof (Salmon,
Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the
case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation.
Consequently, the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,
Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares
in exchange for their properties.
A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only an
aliquot part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from the certificate
itself that he is only an aliquot sharer in the assets of the corporation. But
this character of proportionate interest is not hidden beneath a false
appearance of a given sum in money, as in the case of par value shares.
The capital stock of a corporation issuing only no-par value shares is not
set forth by a stated amount of money, but instead is expressed to be
divided into a stated number of shares, such as, 1,000 shares. This
 indicates that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par value of shares,
the attention of persons interested in the financial condition of a
corporation is focused upon the value of assets and the amount of its
debts. (Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real
estate. Land valued at P300.00 a square meter was turned over to the family's
corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45% of
the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What
they really did was to invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher Trades Corporation to
take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there
any benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange on
the properties for no par value shares of the defendant
corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in
entering in the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these
benefits to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption
benefits, and other inherent benefits in a corporation.
Q What are these advantages to the said spouses from
the point of view of taxation in entering in the deed of
exchange?
A Having fulfilled the conditions in the income tax law,
providing for tax free exchange of property, they were
able to execute the deed of exchange free from income
tax and acquire a corporation.
Q What provision in the income tax law are you referring
to?
A I refer to Section 35 of the National Internal Revenue
Code under par. C-sub-par. (2) Exceptions regarding the
provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in
a corporation of which as a result of such exchange said
person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time
you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the
decision to have no par value share in the defendant
corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of the
property in question?
A There is flexibility in using no par value shares as the
value is determined by the board of directors in increasing
capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
 Q Now also from the point of taxation, is there any
flexibility in the holding by the corporation of the property
in question?
A Yes, since a corporation does not die it can continue to
hold on to the property indefinitely for a period of at least
50 years. On the other hand, if the property is held by the
spouse the property will be tied up in succession
proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to
ownership by a particular person of certain properties in
respect to taxation?
A The property is not subjected to taxes on succession as
the corporation does not die.
Q So the benefit you are talking about are inheritance
taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning"
scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the
amount of what otherwise could be his taxes or altogether avoid them, by means which
the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the same
hands. Hence, the private respondent has no basis for its claim of a light of first refusal
under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and
resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE.
The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance of
Bulacan is DISMISSED. No costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE
ESTATE OF BENIGNO P. TODA, JR., Represented by
Special Co-administrators Lorna Kapunan and Mario
Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the
tax planning scheme adopted by a corporation constitutes tax
evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision of the Court of
[1]
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the
3 January 2000 Decision of the Court of Tax Appeals (CTA) in
[2]
C.T.A. Case No. 5328, which held that the respondent Estate of
[3]
Benigno P. Toda, Jr. is not liable for the deficiency income tax of
Cibeles Insurance Corporation (CIC) in the amount
of P79,099,999.22 for the year 1989, and ordered the cancellation
and setting aside of the assessment issued by Commissioner of
Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to
CIC by the Commissioner of Internal Revenue for deficiency income
tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land
on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr.,
President and owner of 99.991% of its issued and outstanding capital
stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than P90 million.
[4]
On 30 August 1989, Toda purportedly sold the property for P100
million to Rafael A. Altonaga, who, in turn, sold the same property on
the same day to Royal Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on Add: Additional gain on sale
the same day by the same notary public. [5]
of real property taxable under
ordinary corporate income
For the sale of the property to RMI, Altonaga paid capital gains
but were substituted with
tax in the amount of P10 million. [6]

individual capital gains

On 16 April 1990, CIC filed its corporate annual income tax (P200M 100M) 100,000,000.00
return for the year 1989, declaring, among other things, its gain from
[7]
Total Net Taxable Income P175,987,725.00
the sale of real property in the amount of P75,728.021. After crediting per investigation
withholding taxes of P254,497.00, it paid P26,341,207 for its net
[8]

taxable income of P75,987,725. Tax Due thereof at 35% P 61,595,703.75

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Less: Payment already made
Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of
Shares of Stocks. Three and a half years later, or on 16 January
[9]
1. Per return P26,595,704.00
1994, Toda died. 2. Thru Capital Gains
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an Tax made by R.A.
assessment notice and demand letter to the CIC for deficiency
[10] Altonaga 10,000,000.00 36,595,704.00
income tax for the year 1989 in the amount of P79,099,999.22. Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
The new CIC asked for a reconsideration, asserting that the 25% Surcharge 6,249,999.94
assessment should be directed against the old CIC, and not against Total P 43,749,999.57
the new CIC, which is owned by an entirely different set of Add: Interest 20% from
stockholders; moreover, Toda had undertaken to hold the buyer of 4/16/90-4/30/94 (.808) 35,349,999.65
his stockholdings and the CIC free from all tax liabilities for the fiscal TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
years 1987-1989. [11]
============
On 27 January 1995, the Estate of Benigno P. Toda, Jr., The Estate thereafter filed a letter of protest. [13]

represented by special co-administrators Lorna Kapunan and Mario

Luza Bautista, received a Notice of Assessment dated 9 January
[12] In the letter dated 19 October 1995, the Commissioner
[14]

1995 from the Commissioner of Internal Revenue for deficiency dismissed the protest, stating that a fraudulent scheme was
income tax for the year 1989 in the amount of P79,099,999.22, deliberately perpetuated by the CIC wholly owned and controlled by
computed as follows: Toda by covering up the additional gain of P100 million, which
resulted in the change in the income structure of the proceeds of the
Income Tax 1989 sale of the two parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate income tax
Net Income per return P75,987,725.00 rate of 35%.
 On 15 February 1996, the Estate filed a petition for review with
[15]
the CTA alleging that the Commissioner erred in holding the Estate
liable for income tax deficiency; that the inference of fraud of the sale
of the properties is unreasonable and unsupported; and that the right
of the Commissioner to assess CIC had already prescribed.
In his Answer and Amended Answer, the Commissioner
[16] [17]
argued that the two transactions actually constituted a single sale of
the property by CIC to RMI, and that Altonaga was neither the buyer
of the property from CIC nor the seller of the same property to RMI.
The additional gain of P100 million (the difference between the
second simulated sale for P200 million and the first simulated sale
for P100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of
35% as corporate income tax of CIC. The income tax return filed by
CIC for 1989 with intent to evade payment of the tax was thus false
or fraudulent. Since such falsity or fraud was discovered by the BIR
only on 8 March 1991, the assessment issued on 9 January 1995
was well within the prescriptive period prescribed by Section 223 (a)
of the National Internal Revenue Code of 1986, which provides that
tax may be assessed within ten years from the discovery of the
falsity or fraud. With the sale being tainted with fraud, the separate
corporate personality of CIC should be disregarded. Toda, being the
registered owner of the 99.991% shares of stock of CIC and the
beneficial owner of the remaining 0.009% shares registered in the
name of the individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized from the
sale were withdrawn by him as cash advances or paid to him as cash
dividends. Since he is already dead, his estate shall answer for his
liability.
In its decision of 3 January 2000, the CTA held that the
[18]
Commissioner failed to prove that CIC committed fraud to deprive
the government of the taxes due it. It ruled that even assuming that a
pre-conceived scheme was adopted by CIC, the same constituted
mere tax avoidance, and not tax evasion. There being no proof of
fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is
three years after the last day prescribed by law for the filing of the
return. Thus, the governments right to assess CIC prescribed on 15
April 1993. The assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in
itself sufficient ground for piercing the separate corporate personality
of CIC. Hence, the CTA declared that the Estate is not liable for
deficiency income tax of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the Commissioner on 9
January 1995.
In its motion for reconsideration, the Commissioner insisted that
[19]
the sale of the property owned by CIC was the result of the
connivance between Toda and Altonaga. She further alleged that the
latter was a representative, dummy, and a close business associate
of the former, having held his office in a property owned by CIC and
derived his salary from a foreign corporation (Aerobin, Inc.) duly
owned by Toda for representation services rendered. The CTA
denied the motion for reconsideration, prompting the Commissioner
[20]
to file a petition for review with the Court of Appeals.
[21]
In its challenged Decision of 31 January 2001, the Court of
Appeals affirmed the decision of the CTA, reasoning that the CTA,
being more advantageously situated and having the necessary
expertise in matters of taxation, is better situated to determine the
correctness, propriety, and legality of the income tax assessments
assailed by the Toda Estate. [22]
Unsatisfied with the decision of the Court of Appeals, the
Commissioner filed the present petition invoking the following
grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE
 SALE OF THE PROPERTIES OF CIBELES INSURANCE
CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE
SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE
CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT
OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY
INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous
pleadings and insists that the sale by CIC of the Cibeles property
was in connivance with its dummy Rafael Altonaga, who was
financially incapable of purchasing it. She further points out that the
documents themselves prove the fact of fraud in that (1) the two
sales were done simultaneously on the same date, 30 August 1989;
(2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with
the former registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter,
as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary
Public; (3) as early as 4 May 1989, CIC received P40 million from
RMI, and not from Altonaga. The said amount was debited by RMI in
its trial balance as of 30 June 1989 as investment in Cibeles
Building. The substantial portion of P40 million was withdrawn by
Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner
failed to present the income tax return of Altonaga to prove that the
latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following
questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the
year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income
tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the
tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length. Tax
evasion, on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer to further
or additional civil or criminal liabilities.
[23]
Tax evasion connotes the integration of three factors: (1) the end
to be achieved, i.e., the payment of less than that known by the
taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due; (2) an accompanying state of mind which is
described as being evil, in bad faith, willfull,or deliberate and not
accidental; and (3) a course of action or failure of action which is
unlawful.[24]
All these factors are present in the instant case. It is significant to
note that as early as 4 May 1989, prior to the purported sale of the
Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received P40 million from RMI, and not from Altonaga. That P40
[25]
million was debited by RMI and reflected in its trial balance as other
[26]
inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million was
debited and reflected in RMIs trial balance as other inv. Cibeles Bldg.
This would show that the real buyer of the properties was RMI, and
not the intermediary Altonaga.
 The investigation conducted by the BIR disclosed that Altonaga
was a close business associate and one of the many trusted
corporate executives of Toda. This information was revealed by Mr.
Boy Prieto, the assistant accountant of CIC and an old timer in the
company. But Mr. Prieto did not testify on this matter, hence, that
[27]
information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for
investigation of Altonaga was unserved, Altonaga having left for the
[28]
United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning
scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:
Petitioner, however, claims there was a change of structure of the proceeds
of sale. Admitted one hundred percent. But isnt this precisely the definition
of tax planning? Change the structure of the funds and pay a lower tax.
Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and the tax to be
paid. As long as it is done legally, changing the structure of a transaction to
achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax.
Surely petitioner [sic] cannot be faulted for wanting to reduce the tax
from 35% to 5%. [Underscoring supplied].
[29]
The scheme resorted to by CIC in making it appear that there
were two sales of the subject properties, i.e., from CIC to Altonaga,
and then from Altonaga to RMI cannot be considered a legitimate tax
planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything
calculated to deceive, including all acts, omissions, and concealment
involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue
and unconscionable advantage is taken of another. [30]
Here, it is obvious that the objective of the sale to Altonaga was
to reduce the amount of tax to be paid especially that the transfer
from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonagas
sole purpose of acquiring and transferring title of the subject
properties on the same day was to create a tax shelter. Altonaga
never controlled the property and did not enjoy the normal benefits
and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead
the BIR with the end in view of reducing the consequent income tax
liability.
In a nutshell, the intermediary transaction, i.e., the sale of
Altonaga, which was prompted more on the mitigation of tax liabilities
than for legitimate business purposes constitutes one of tax
evasion. [31]
Generally, a sale or exchange of assets will have an income tax
incidence only when it is consummated. The incidence of taxation
[32]
depends upon the substance of a transaction. The tax consequences
arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title.
Rather, the transaction must be viewed as a whole, and each step
from the commencement of negotiations to the consummation of the
sale is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit
through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to
alter tax liabilities, would seriously impair the effective administration
of the tax policies of Congress. [33]
 To allow a taxpayer to deny tax liability on the ground that the
sale was made through another and distinct entity when it is proved
that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for
income tax purposes. The two sale transactions should be treated
[34]
as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section
24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform
Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic
corporations.- A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships,
no matter how created or organized but not including general professional
partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does
not exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income
exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net
income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 1986 (now 6% under Section 24 (D)
[35]
(1) of the Tax Reform Act of 1997) is inapplicable. Hence, the
assessment for the deficiency income tax issued by the BIR must be
upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax
Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and
collection of taxes.-(a) In the case of a false or fraudulent return with intent
to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of
in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns
with intent to evade tax; and (3) failure to file a return, the period
within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through
his counsel, asked the Opinion of the BIR on the tax consequence of
the two sale transactions. Thus, the BIR was amply informed of the
[36]
transactions even prior to the execution of the necessary documents
to effect the transfer. Subsequently, the two sales were openly made
with the execution of public documents and the declaration of taxes
for 1989. However, these circumstances do not negate the existence
of fraud. As earlier discussed those two transactions were tainted
with fraud. And even assuming arguendo that there was no fraud, we
find that the income tax return filed by CIC for the year 1989 was
false. It did not reflect the true or actual amount gained from the sale
of the Cibeles property. Obviously, such was done with intent to
evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct
taxes in case of false returns is ten years from the discovery of the
falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March
1991. The assessment for the 1989 deficiency income tax of CIC
[37]
was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive
period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate
from the persons owning or composing it. Thus, the owners or
stockholders of a corporation may not generally be made to answer
for the liabilities of a corporation and vice versa. There are, however,
certain instances in which personal liability may arise. It has been
held in a number of cases that personal liability of a corporate
director, trustee, or officer along, albeit not necessarily, with the
corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith
or gross negligence in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its stockholders, or other
persons;
2. He consents to the issuance of watered down stocks or, having
knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by specific provision of law, to personally answer for his
corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock
to Le Hun T. Choa, he knowingly and voluntarily held himself
personally liable for all the tax liabilities of CIC and the buyer for the
years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of
Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business,
Cibeles has no liabilities or obligations, contingent or otherwise, for taxes,
sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as Annex B
and made a part hereof. The business of Cibeles has at all times been
conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and
Cibeles free from any and all income tax liabilities of Cibeles for the
fiscal years 1987, 1988 and 1989. [Underscoring Supplied].
[39]
When the late Toda undertook and agreed to hold the BUYER
and Cibeles free from any all income tax liabilities of Cibeles for the
fiscal years 1987, 1988, and 1989, he thereby voluntarily held
himself personally liable therefor. Respondent estate cannot,
therefore, deny liability for CICs deficiency income tax for the year
1989 by invoking the separate corporate personality of CIC, since its
obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby
GRANTED. The decision of the Court of Appeals of 31 January 2001
in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of
Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax
of Cibeles Insurance Corporation for the year 1989, plus legal
interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.