INCOME TAX
However, the one that
G.R. No. 182722. January 22, 2010.*
DUMAGUETE CATHEDRAL CREDIT COOPERATIVE [DCCCO], Represented by Felicidad L.
Ruiz, its General Manager, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.
Taxation; Cooperatives; Cooperatives are not required to withhold taxes on interest from
savings and time deposits of their members.—On November 16, 1988, the BIR declared in
BIR Ruling No. 551-888 that cooperatives are not required to withhold taxes on interest from
savings and time deposits of their members.
Same; Same; To encourage the formation of cooperatives and to create an atmosphere
conducive to their growth and development, the State extends all forms of assistance to
them, one of which is providing cooperatives a preferential tax treatment.—Under Article
2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting self-reliance and
harnessing people power towards the attainment of economic development and social
justice. Thus, to encourage the formation of cooperatives and to create an atmosphere
conducive to their growth and development, the State extends all forms of assistance to
them, one of which is providing cooperatives a preferential tax treatment.
Same; Same; Although the tax exemption only mentions cooperatives, this should be
construed to include the members pursuant to Article 126 of Republic Act No. 6938.—This
exemption extends to members of cooperatives. It must be emphasized that cooperatives
exist for the benefit of their members. In fact, the primary objective of every cooperative is
to provide goods and services to its members to enable them to attain increased income,
savings, investments, and productivity. Therefore, limiting the application of the tax
exemption to cooperatives would go against the very purpose of a credit cooperative.
Extending the exemption to members of cooperatives, on the other hand, would be
consistent with the intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, thisshould be construed to include the members, pursuant to Article
126 of RA 6938
DEL CASTILLO, J.:
The clashing interests of the State and the taxpayers are again pitted against each other.
Two basic principles, the State’s inherent power of taxation and its declared policy of
fostering the creation and growth of cooperatives come into play.
embodies the spirit of the law and the true intent of the legislature prevails.
This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No. 9282, 1 in
relation to Rule 45 of the Rules of Court, seeks to set aside the December 18, 2007
Decision2 of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency
withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, pursuant to Section 24(B)(1) of the National Internal Revenue Code of
1997 (NIRC), as well as the delinquency interest of 20% per annum under Section 249(C) of
the same Code. It also assails the April 11, 2008 Resolution 3 denying petitioner’s Motion for
Reconsideration.
Factual Antecedents
Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative duly
registered with and regulated by the Cooperative Development Authority (CDA). 4 It was
established on February 17, 1968 5 with the following objectives and purposes: (1) to increase
the income and purchasing power of the members; (2) to pool the resources of the
members by encouraging savings and promoting thrift to mobilize capital formation for
development activities; and (3) to extend loans to members for provident and productive
purposes.6 It has the power (1) to draw, make, accept, endorse, guarantee, execute, and
issue promissory notes, mortgages, bills of exchange, drafts, warrants, certificates and all
kinds of obligations and instruments in connection with and in furtherance of its business
operations; and (2) to issue bonds, debentures, and other obligations; to contract
indebtedness; and to secure the same with a mortgage or deed of trust, or pledge or lien on
any or all of its real and personal properties.7
On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group Deputy
Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223, authorizing
BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12, Bacolod City,
to examine petitioner’s books of accounts and other accounting records for all internal
revenue taxes for the taxable years 1999 and 2000. 8
Proceedings before the BIR Regional Office
On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000 which were protested by petitioner on
July 23, 2002.9 Thereafter, on October 16, 2002, petitioner received two other Pre-
Assessment Notices for deficiency withholding taxes also for taxable years 1999 and
2000.10 The deficiency withholding taxes cover the payments of the honorarium of the Board
of Directors, security and janitorial services, legal and professional fees, and interest on
savings and time deposits of its members.
1
On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it would
only pay the deficiency withholding taxes corresponding to the honorarium of the Board of
Directors, security and janitorial services, legal and professional fees for the year 1999 in the
amount of ₱87,977.86, excluding penalties and interest.11
In another letter dated November 8, 2002, petitioner also informed the BIR Assistant
Regional Director, Rogelio B. Zambarrano, that it would pay the withholding taxes due on
the honorarium and per diems of the Board of Directors, security and janitorial services,
commissions and legal & professional fees for the year 2000 in the amount of ₱119,889.37,
excluding penalties and interest, and that it would avail of the Voluntary Assessment and
Abatement Program (VAAP) of the BIR under Revenue Regulations No. 17-2002. 12
On November 29, 2002, petitioner availed of the VAAP and paid the amounts of ₱105,574.62
and ₱143,867.2413corresponding to the withholding taxes on the payments for the
compensation, honorarium of the Board of Directors, security and janitorial services, and
legal and professional services, for the years 1999 and 2000, respectively.
On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L. Flores, Letters
of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of Assessment and
Audit Results/Assessment Notices, ordering petitioner to pay the deficiency withholding
taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of ₱1,489,065.30
and ₱1,462,644.90, respectively.14
Proceedings before the Commissioner of Internal Revenue
On May 9, 2003, petitioner protested the Letters of Demand and Assessment Notices with
the Commissioner of Internal Revenue (CIR).15 However, the latter failed to act on the
protest within the prescribed 180-day period. Hence, on December 3, 2003, petitioner filed a
Petition for Review before the CTA, docketed as C.T.A. Case No. 6827. 16
Proceedings before the CTA First Division
The case was raffled to the First Division of the CTA which rendered its Decision on February
6, 2007, disposing of the case in this wise:
IN VIEW OF ALL THE FOREGOING, the Petition for Review is hereby PARTIALLY GRANTED.
Assessment Notice Nos. 00026-2003 and 00027-2003 are hereby MODIFIED and the
assessment for deficiency withholding taxes on the honorarium and per diems of
petitioner’s Board of Directors, security and janitorial services, commissions and legal and
professional fees are hereby CANCELLED. However, the assessments for deficiency
withholding taxes on interests are hereby AFFIRMED.
Accordingly, petitioner is ORDERED TO PAY the respondent the respective amounts of
₱1,280,145.89 and ₱1,357,881.14 representing deficiency withholding taxes on interests from
savings and time deposits of its members for the taxable years 1999 and 2000. In addition,
petitioner is ordered to pay the 20% delinquency interest from May 26, 2003 until the
amount of deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the Tax
Code.
SO ORDERED.17
Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the First
Division in its Resolution dated May 29, 2007. 18
Proceedings before the CTA En Banc
On July 3, 2007, petitioner filed a Petition for Review with the CTA En Banc,19 interposing the
lone issue of whether or not petitioner is liable to pay the deficiency withholding taxes on
interest from savings and time deposits of its members for taxable years 1999 and 2000, and
the consequent delinquency interest of 20% per annum.20
Finding no reversible error in the Decision dated February 6, 2007 and the Resolution dated
May 29, 2007 of the CTA First Division, the CTA En Banc denied the Petition for Review 21 as
well as petitioner’s Motion for Reconsideration.22
The CTA En Banc held that Section 57 of the NIRC requires the withholding of tax at source.
Pursuant thereto, Revenue Regulations No. 2-98 was issued enumerating the income
payments subject to final withholding tax, among which is "interest from any peso bank
deposit and yield, or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements x x x". According to the CTA En Banc, petitioner’s business
falls under the phrase "similar arrangements;" as such, it should have withheld the
corresponding 20% final tax on the interest from the deposits of its members.
Issue
Hence, the present recourse, where petitioner raises the issue of whether or not it is liable
to pay the deficiency withholding taxes on interest from savings and time deposits of its
members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per
annum.
Petitioner’s Arguments
Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:
SECTION 24. Income Tax Rates. —
2
xxxx
(B) Rate of Tax on Certain Passive Income: —
(1) Interests, Royalties, Prizes, and Other Winnings. — A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements; x x x
applies only to banks and not to cooperatives, since the phrase "similar arrangements" is
preceded by terms referring to banking transactions that have deposit peculiarities.
Petitioner thus posits that the savings and time deposits of members of cooperatives are
not included in the enumeration, and thus not subject to the 20% final tax. To bolster its
position, petitioner cites BIR Ruling No. 551-888 23 and BIR Ruling [DA-591-2006]24 where the
BIR ruled that interests from deposits maintained by members of cooperative are not
subject to withholding tax under Section 24(B)(1) of the NIRC. Petitioner further contends
that pursuant to Article XII, Section 15 of the Constitution 25and Article 2 of Republic Act No.
6938 (RA 6938) or the Cooperative Code of the Philippines, 26 cooperatives enjoy a
preferential tax treatment which exempts their members from the application of Section
24(B)(1) of the NIRC.
Respondent’s Arguments
As a counter-argument, respondent invokes the legal maxim "Ubi lex non distinguit nec nos
distinguere debemos" (where the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to cooperatives
as the phrase "similar arrangements" is not limited to banks, but includes cooperatives that
are depositaries of their members. Regarding the exemption relied upon by petitioner,
respondent adverts to the jurisprudential rule that tax exemptions are highly disfavored and
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. In
this connection, respondent likewise points out that the deficiency tax assessments were
issued against petitioner not as a taxpayer but as a withholding agent.
Our Ruling
The petition has merit.
Petitioner’s invocation of BIR Ruling No. 551-888, reiterated in BIR Ruling [DA-591-2006], is
proper.
On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives are not
required to withhold taxes on interest from savings and time deposits of their members. The
pertinent BIR Ruling reads:
November 16, 1988
BIR RULING NO. 551-888
24 369-88 551-888
Gentlemen:
This refers to your letter dated September 5, 1988 stating that you are a corporation
established under P.D. No. 175 and duly registered with the Bureau of Cooperatives
Development as full fledged cooperative of good standing with Certificate of Registration
No. FF 563-RR dated August 8, 1985; and that one of your objectives is to provide and
strengthen cooperative endeavor and extend assistance to members and non-members
through credit scheme both in cash and in kind.
Based on the foregoing representations, you now request in effect a ruling as to whether or
not you are exempt from the following:
1. Payment of sales tax
2. Filing and payment of income tax
3. Withholding taxes from compensation of employees and savings account and
time deposits of members. (Underscoring ours)
In reply, please be informed that Executive Order No. 93 which took effect on March 10,
1987 withdrew all tax exemptions and preferential privileges e.g., income tax and sales tax,
granted to cooperatives under P.D. No. 175 which were previously withdrawn by P.D. No.
1955 effective October 15, 1984 and restored by P.D. No. 2008 effective January 8, 1986.
However, implementation of said Executive Order insofar as electric, agricultural, irrigation
and waterworks cooperatives are concerned was suspended until June 30, 1987.
(Memorandum Order No. 65 dated January 21, 1987 of the President) Accordingly, your tax
exemption privilege expired as of June 30, 1987. Such being the case, you are now subject to
income and sales taxes.
Moreover, under Section 72(a) of the Tax Code, as amended, every employer making
payment of wages shall deduct and withhold upon such wages a tax at the rates prescribed
by Section 21(a) in relation to section 71, Chapter X, Title II, of the same Code as amended by
Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended.
Accordingly, as an employer you are required to withhold the corresponding tax due from
the compensation of your employees.
Furthermore, under Section 50(a) of the Tax Code, as amended, the tax imposed or
prescribed by Section 21(c) of the same Code on specified items of income shall be withheld
3
by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 51 of the Tax Code, as amended. Such being the case, and
since interest from any Philippine currency bank deposit and yield or any other monetary
benefit from deposit substitutes are paid by banks, you are not the party required to
withhold the corresponding tax on the aforesaid savings account and time deposits of your
members. (Underscoring ours)
Very truly yours,
(SGD.) BIENVENIDO A. TAN, JR.
Commissioner
The CTA First Division, however, disregarded the above quoted ruling in determining
whether petitioner is liable to pay the deficiency withholding taxes on interest from the
deposits of its members. It ratiocinated in this wise:
This Court does not agree. As correctly pointed out by respondent in his Memorandum,
nothing in the above quoted resolution will give the conclusion that savings account and
time deposits of members of a cooperative are tax-exempt. What is entirely clear is the
opinion of the Commissioner that the proper party to withhold the corresponding taxes on
certain specified items of income is the payor-corporation and/or person. In the same way, in
the case of interests earned from Philippine currency deposits made in a bank, then it is the
bank which is liable to withhold the corresponding taxes considering that the bank is the
payor-corporation. Thus, the ruling that a cooperative is not the proper party to withhold
the corresponding taxes on the aforementioned accounts is correct. However, this ruling
does not hold true if the savings and time deposits are being maintained in the cooperative,
for in this case, it is the cooperative which becomes the payor-corporation, a separate entity
acting no more than an agent of the government for the collection of taxes, liable to
withhold the corresponding taxes on the interests earned. 27(Underscoring ours)
The CTA En Banc affirmed the above-quoted Decision and found petitioner’s invocation of
BIR Ruling No. 551-88 misplaced. According to the CTA En Banc, the BIR Ruling was based on
the premise that the savings and time deposits were placed by the members of the
cooperative in the bank.28 Consequently, it ruled that the BIR Ruling does not apply when
the deposits are maintained in the cooperative such as the instant case.
We disagree.
There is nothing in the ruling to suggest that it applies only when deposits are maintained in
a bank. Rather, the ruling clearly states, without any qualification, that since interest from
any Philippine currency bank deposit and yield or any other monetary benefit from deposit
substitutes are paid by banks, cooperatives are not required to withhold the corresponding
tax on the interest from savings and time deposits of their members. This interpretation was
reiterated in BIR Ruling [DA-591-2006] dated October 5, 2006, which was issued by Assistant
Commissioner James H. Roldan upon the request of the cooperatives for a confirmatory
ruling on several issues, among which is the alleged exemption of interest income on
members’ deposit (over and above the share capital holdings) from the 20% final
withholding tax. In the said ruling, the BIR opined that:
xxxx
3. Exemption of interest income on members’ deposit (over and above the share capital
holdings) from the 20% Final Withholding Tax.
The National Internal Revenue Code states that a "final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or
any other monetary benefit from the deposit substitutes and from trust funds and similar
arrangement x x x" for individuals under Section 24(B)(1) and for domestic corporations
under Section 27(D)(1). Considering the members’ deposits with the cooperatives are not
currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1),
therefore, do not apply to members of cooperatives and to deposits of primaries with
federations, respectively.
It bears stressing that interpretations of administrative agencies in charge of enforcing a law
are entitled to great weight and consideration by the courts, unless such interpretations are
in a sharp conflict with the governing statute or the Constitution and other laws. 29 In this
case, BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in perfect harmony with the
Constitution and the laws they seek to implement. Accordingly, the interpretation in BIR
Ruling No. 551-888 that cooperatives are not required to withhold the corresponding tax on
the interest from savings and time deposits of their members, which was reiterated in BIR
Ruling [DA-591-2006], applies to the instant case.
Members of cooperatives deserve a preferential tax treatment pursuant to RA 6938, as
amended by RA 9520.
Given that petitioner is a credit cooperative duly registered with the Cooperative
Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA
6938, as amended by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to
foster the creation and growth of cooperatives as a practical vehicle for promoting self-
reliance and harnessing people power towards the attainment of economic development
and social justice. Thus, to encourage the formation of cooperatives and to create an
atmosphere conducive to their growth and development, the State extends all forms of
assistance to them, one of which is providing cooperatives a preferential tax treatment.
4
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code
which do not transact any business with non-members or the general public shall not be
subject to any government taxes and fees imposed under the Internal Revenue Laws and
other tax laws. Cooperatives not falling under this article shall be governed by the
succeeding section.
ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both
members and nonmembers shall not be subject to tax on their transactions to members.
Notwithstanding the provision of any law or regulation to the contrary, such cooperatives
dealing with nonmembers shall enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity. 30 Therefore, limiting the
application of the tax exemption to cooperatives would go against the very purpose of a
credit cooperative. Extending the exemption to members of cooperatives, on the other
hand, would be consistent with the intent of the legislature. Thus, although the tax
exemption only mentions cooperatives, this should be construed to include the members,
pursuant to Article 126 of RA 6938, which provides:
ART. 126. Interpretation and Construction. – In case of doubt as to the meaning of any
provision of this Code or the regulations issued in pursuance thereof, the same shall be
resolved liberally in favor of the cooperatives and their members.
We need not belabor that what is within the spirit is within the law even if it is not within the
letter of the law because the spirit prevails over the letter. 31 Apropos is the ruling in the case
of Alonzo v. Intermediate Appellate Court,32 to wit:
But as has also been aptly observed, we test a law by its results; and likewise, we may add,
by its purposes. It is a cardinal rule that, in seeking the meaning of the law, the first concern
of the judge should be to discover in its provisions the intent of the lawmaker.
Unquestionably, the law should never be interpreted in such a way as to cause injustice as
this is never within the legislative intent. An indispensable part of that intent, in fact, for we
presume the good motives of the legislature, is to render justice.1avvphi1
Thus, we interpret and apply the law not independently of but in consonance with justice.
Law and justice are inseparable, and we must keep them so. To be sure, there are some laws
that, while generally valid, may seem arbitrary when applied in a particular case because of
its peculiar circumstances. In such a situation, we are not bound, because only of our nature
and functions, to apply them just the same, [is] slavish obedience to their language. What
we do instead is find a balance between the word and the will, that justice may be done
even as the law is obeyed.
As judges, we are not automatons. We do not and must not unfeelingly apply the law as it is
worded, yielding like robots to the literal command without regard to its cause and
consequence. "Courts are apt to err by sticking too closely to the words of a law," so we are
warned, by Justice Holmes again, "where these words import a policy that goes beyond
them." While we admittedly may not legislate, we nevertheless have the power to interpret
the law in such a way as to reflect the will of the legislature. While we may not read into the
law a purpose that is not there, we nevertheless have the right to read out of it the reason
for its enactment. In doing so, we defer not to "the letter that killeth" but to "the spirit that
vivifieth," to give effect to the lawmaker’s will.
The spirit, rather than the letter of a statute determines its construction, hence, a statute
must be read according to its spirit or intent. For what is within the spirit is within the
statute although it is not within the letter thereof, and that which is within the letter but not
within the spirit is not within the statute. Stated differently, a thing which is within the intent
of the lawmaker is as much within the statute as if within the letter; and a thing which is
within the letter of the statute is not within the statute unless within the intent of the
lawmakers. (Underscoring ours)
It is also worthy to note that the tax exemption in RA 6938 was retained in RA 9520. The
only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly
states that transactions of members with the cooperatives are not subject to any taxes and
fees. Thus:
ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members
and non-members shall not be subjected to tax on their transactions with members. In
relation to this, the transactions of members with the cooperative shall not be subject to
any taxes and fees, including but not limited to final taxes on members’ deposits and
documentary tax. Notwithstanding the provisions of any law or regulation to the contrary,
such cooperatives dealing with nonmembers shall enjoy the following tax exemptions:
(Underscoring ours)
xxxx
This amendment in Article 61 of RA 9520, specifically providing that members of
cooperatives are not subject to final taxes on their deposits, affirms the interpretation of the
BIR that Section 24(B)(1) of the NIRC does not apply to cooperatives and confirms that such
ruling carries out the legislative intent. Under the principle of legislative approval of
administrative interpretation by reenactment, the reenactment of a statute substantially
5
unchanged is persuasive indication of the adoption by Congress of a prior executive
construction.33

Moreover, no less than our Constitution guarantees the protection of cooperatives. Section
15, Article XII of the Constitution considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II of the Constitution
declares that it is a policy of the State to promote social justice in all phases of national
development. In relation thereto, Section 2 of Article XIII of the Constitution states that the
promotion of social justice shall include the commitment to create economic opportunities
based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions,
we find that an interpretation exempting the members of cooperatives from the imposition
of the final tax under Section 24(B)(1) of the NIRC is more in keeping with the letter and
spirit of our Constitution.

All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes
on interest from the savings and time deposits of its members, as well as the delinquency
interest of 20% per annum.

In closing, cooperatives, including their members, deserve a preferential tax treatment

because of the vital role they play in the attainment of economic development and social
justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax
must give way to foster the creation and growth of cooperatives. To borrow the words of
Justice Isagani A. Cruz: "The power of taxation, while indispensable, is not absolute and may
be subordinated to the demands of social justice."34

WHEREFORE, the Petition is hereby GRANTED. The assailed December 18, 2007 Decision of
the Court of Tax Appeals and the April 11, 2008 Resolution are REVERSED and SET ASIDE.
Accordingly, the assessments for deficiency withholding taxes on interest from the savings
and time deposits of petitioner’s members for the taxable years 1999 and 2000 as well as
the delinquency interest of 20% per annum are hereby CANCELLED.

SO ORDERED.

6

G.R. No. 175356. December 3, 2013.*
MANILA MEMORIAL PARK, INC. and LA FUNERARIA PAZ-SUCAT, INC., petitioners, vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE
SECRETARY OF THE DEPARTMENT OF FINANCE, respondents.
Constitutional Law; Courts; Judicial Review; Requisites of Judicial Review.—When the
constitutionality of a law is put in issue, judicial review may be availed of only if the following
requisites concur: “(1) the existence of an actual and appropriate case; (2) the existence of
personal and substantial interest on the part of the party raising the [question of
constitutionality]; (3) recourse to judicial review is made at the earliest opportunity; and (4)
the [question of constitutionality] is the lis mota of the case.”
Same; Same; Same; An actual case or controversy exists when there is “a conflict of legal
rights” or “an assertion of opposite legal claims susceptible of judicial resolution.”—An
actual case or controversy exists when there is “a conflict of legal rights” or “an assertion of
opposite legal claims susceptible of judicial resolution.” The Petition must therefore show
that “the governmental act being challenged has a direct adverse effect on the individual
challenging it.” In this case, the tax deduction scheme challenged by petitioners has a direct
adverse effect on them. Thus, it cannot be denied that there exists an actual case or
controversy.
Taxation; Tax Deductions; Police Power; Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit scheme under the previous law), does
not provide for a peso for peso reimbursement of the 20% discount given by private
establishments, no constitutional infirmity obtains because, being a valid exercise of police
power, payment of just compensation is not warranted.—The present case, thus, affords
an opportunity for us to clarify the above-quoted statements in Central Luzon Drug
Corporation, 456 SCRA 414 (2005) and Carlos Superdrug Corporation, 526 SCRA 130 (2007).
First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug
Corporation is obiter dicta and, thus, not binding precedent. As stated earlier, in Central
Luzon Drug Corporation, we ruled that the BIR acted ultra vires when it effectively treated
the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the
clear wording of the previous law that the same should be treated as a tax credit. We were,
therefore, not confronted in that case with the issue as to whether the 20% discount is an
exercise of police power or eminent domain. Second, although we adverted to Central
Luzon Drug Corporation in our ruling in Carlos Superdrug Corporation, this referred only to
preliminary matters. A fair reading of Carlos Superdrug Corporation would show that we
categorically ruled therein that the 20% discount is a valid exercise of police power. Thus,
even if the current law, through its tax deduction scheme (which abandoned the tax credit
scheme under the previous law), does not provide for a peso for peso reimbursement of the
20% discount given by private establishments, no constitutional infirmity obtains because,
being a valid exercise of police power, payment of just compensation is not warranted. We
have carefully reviewed the basis of our ruling in Carlos Superdrug Corporation and we find
no cogent reason to overturn, modify or abandon it. We also note that petitioners’
arguments are a mere reiteration of those raised and resolved in Carlos Superdrug
Corporation. Thus, we sustain Carlos Superdrug Corporation.
Police Power; Eminent Domain; “Police Power” and “Eminent Domain,” Distinguished.—
Police power is the inherent power of the State to regulate or to restrain the use of liberty
and property for public welfare. The only limitation is that the restriction imposed should be
reasonable, not oppressive. In other words, to be a valid exercise of police power, it must
have a lawful subject or objective and a lawful method of accomplishing the goal. Under the
police power of the State, “property rights of individuals may be subjected to restraints and
burdens in order to fulfill the objectives of the government.” The State “may interfere with
personal liberty, property, lawful businesses and occupations to promote the general
welfare [as long as] the interference [is] reasonable and not arbitrary.” Eminent domain, on
the other hand, is the inherent power of the State to take or appropriate private property
for public use. The Constitution, however, requires that private property shall not be taken
without due process of law and the payment of just compensation.
Same; In the exercise of police power, a property right is impaired by regulation, or the use
of property is merely prohibited, regulated or restricted to promote public welfare. In such
cases, there is no compensable taking, hence, payment of just compensation is not
required.—In the exercise of police power, a property right is impaired by regulation, or the
use of property is merely prohibited, regulated or restricted to promote public welfare. In
such cases, there is no compensable taking, hence, payment of just compensation is not
required. Examples of these regulations are property condemned for being noxious or
intended for noxious purposes (e.g., a building on the verge of collapse to be demolished
for public safety, or obscene materials to be destroyed in the interest of public morals) as
well as zoning ordinances prohibiting the use of property for purposes injurious to the
health, morals or safety of the community (e.g., dividing a city’s territory into residential and
industrial areas). It has, thus, been observed that, in the exercise of police power (as
distinguished from eminent domain), although the regulation affects the right of ownership,
none of the bundle of rights which constitute ownership is appropriated for use by or for
the benefit of the public.
Eminent Domain; In the exercise of the power of eminent domain, property interests are
appropriated and applied to some public purpose which necessitates the payment of just
compensation therefor.—In the exercise of the power of eminent domain, property
interests are appropriated and applied to some public purpose which necessitates the
7
payment of just compensation therefor. Normally, the title to and possession of the
property are transferred to the expropriating authority. Examples include the acquisition of
lands for the construction of public highways as well as agricultural lands acquired by the
government under the agrarian reform law for redistribution to qualified farmer
beneficiaries. However, it is a settled rule that the acquisition of title or total destruction of
the property is not essential for “taking” under the power of eminent domain to be present.
Examples of these include establishment of easements such as where the land owner is
perpetually deprived of his proprietary rights because of the hazards posed by electric
transmission lines constructed above his property or the compelled interconnection of the
telephone system between the government and a private company. In these cases,
although the private property owner is not divested of ownership or possession, payment of
just compensation is warranted because of the burden placed on the property for the use or
benefit of the public.
Same; Police Power; It may not always be easy to determine whether a challenged
governmental act is an exercise of police power or eminent domain.—It may not always be
easy to determine whether a challenged governmental act is an exercise of police power or
eminent domain. The very nature of police power as elastic and responsive to various social
conditions as well as the evolving meaning and scope of public use and just compensation in
eminent domain evinces that these are not static concepts. Because of the exigencies of
rapidly changing times, Congress may be compelled to adopt or experiment with different
measures to promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain. The judicious
approach, therefore, is to look at the nature and effects of the challenged governmental act
and decide, on the basis thereof, whether the act is the exercise of police power or eminent
domain. Thus, we now look at the nature and effects of the 20% discount to determine if it
constitutes an exercise of police power or eminent domain.
Senior Citizen Discount; The 20% discount is intended to improve the welfare of senior
citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses
and other disabilities, and, thus, in need of subsidy in purchasing basic commodities .—The
20% discount is intended to improve the welfare of senior citizens who, at their age, are less
likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in
need of subsidy in purchasing basic commodities. It may not be amiss to mention also that
the discount serves to honor senior citizens who presumably spent the productive years of
their lives on contributing to the development and progress of the nation. This distinct
cultural Filipino practice of honoring the elderly is an integral part of this law. As to its nature
and effects, the 20% discount is a regulation affecting the ability of private establishments to
price their products and services relative to a special class of individuals, senior citizens, for
which the Constitution affords preferential concern. In turn, this affects the amount of
profits or income/gross sales that a private establishment can derive from senior citizens. In
other words, the subject regulation affects the pricing, and, hence, the profitability of a
private establishment. However, it does not purport to appropriate or burden specific
properties, used in the operation or conduct of the business of private establishments, for
the use or benefit of the public, or senior citizens for that matter, but merely regulates the
pricing of goods and services relative to, and the amount of profits or income/gross sales
that such private establishments may derive from, senior citizens.
Statutes; Because all laws enjoy the presumption of constitutionality, courts will uphold a
law’s validity if any set of facts may be conceived to sustain it.— Because all laws enjoy the
presumption of constitutionality, courts will uphold a law’s validity if any set of facts may be
conceived to sustain it. On its face, we find that there are at least two conceivable bases to
sustain the subject regulation’s validity absent clear and convincing proof that it is
unreasonable, oppressive or confiscatory. Congress may have legitimately concluded that
business establishments have the capacity to absorb a decrease in profits or income/gross
sales due to the 20% discount without substantially affecting the reasonable rate of return
on their investments considering (1) not all customers of a business establishment are senior
citizens and (2) the level of its profit margins on goods and services offered to the general
public. Concurrently, Congress may have, likewise, legitimately concluded that the
establishments, which will be required to extend the 20% discount, have the capacity to
revise their pricing strategy so that whatever reduction in profits or income/gross sales that
they may sustain because of sales to senior citizens, can be recouped through higher mark -
ups or from other products not subject of discounts. As a result, the discounts resulting
from sales to senior citizens will not be confiscatory or unduly oppressive.
Same; A court, in resolving cases before it, may look into the possible purposes or reasons
that impelled the enactment of a particular statute or legal provision.—A court, in
resolving cases before it, may look into the possible purposes or reasons that impelled the
enactment of a particular statute or legal provision. However, statements made relative
thereto are not always necessary in resolving the actual controversies presented before it.
This was the case in Central Luzon Drug Corporation, 456 SCRA 414 (2005), resulting in that
unfortunate statement that the tax credit “can be deemed” as just compensation. This, in
turn, led to the erroneous conclusion, by deductive reasoning, that the 20% discount is an
exercise of the power of eminent domain. The Dissent essentially adopts this theory and
reasoning which, as will be shown below, is contrary to settled principles in police power
and eminent domain analysis.
Police Power; Indeed, there is a whole class of police power measures which justify the
destruction of private property in order to preserve public health, morals, safety or
welfare.—The Dissent discusses at length the doctrine on “taking” in police power which
occurs when private property is destroyed or placed outside the commerce of man. Indeed,
there is a whole class of police power measures which justify the destruction of private
property in order to preserve public health, morals, safety or welfare. As earlier mentioned,
these would include a building on the verge of collapse or confiscated obscene materials as
well as those mentioned by the Dissent with regard to property used in violating a criminal
statute or one which constitutes a nuisance. In such cases, no compensation is required.
However, it is equally true that there is another class of police power measures which do not
involve the destruction of private property but merely regulate its use. The minimum wage
8
law, zoning ordinances, price control laws, laws regulating the operation of motels and
hotels, laws limiting the working hours to eight, and the like would fall under this category.
The examples cited by the Dissent, likewise, fall under this category: Article 157 of the Labor
Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law.
These laws merely regulate or, to use the term of the Dissent, burden the conduct of the
affairs of business establishments. In such cases, payment of just compensation is not
required because they fall within the sphere of permissible police power measures. The
senior citizen discount law falls under this latter category.
Same; It is a basic postulate of our democratic system of government that the Constitution
is a social contract whereby the people have surrendered their sovereign powers to the
State for the common good.—That there may be a burden placed on business
establishments or the consuming public as a result of the operation of the assailed law is
not, by itself, a ground to declare it unconstitutional for this goes into the wisdom and
expediency of the law. The cost of most, if not all, regulatory measures of the government
on business establishments is ultimately passed on to the consumers but that, by itself, does
not justify the wholesale nullification of these measures. It is a basic postulate of our
democratic system of government that the Constitution is a social contract whereby the
people have surrendered their sovereign powers to the State for the common good. All
persons may be burdened by regulatory measures intended for the common good or to
serve some important governmental interest, such as protecting or improving the welfare of
a special class of people for which the Constitution affords preferential concern. Indubitably,
the one assailing the law has the heavy burden of proving that the regulation is
unreasonable, oppressive or confiscatory, or has gone “too far” as to amount to a “taking.”
Yet, here, the Dissent would have this Court nullify the law without any proof of such nature.
Same; Senior Citizen Discount; Prior to the sale of goods or services, a business
establishment may be subject to State regulations, such as the 20% senior citizen discount,
which may impact the level or amount of profits or income/gross sales that can be
generated by such establishment.—Prior to the sale of goods or services, a business
establishment may be subject to State regulations, such as the 20% senior citizen discount,
which may impact the level or amount of profits or income/gross sales that can be
generated by such establishment. For this reason, the validity of the discount is to be
determined based on its overall effects on the operations of the business establishment.
Eminent Domain; Taking; It should be noted though that potential profits or income/gross
sales are relevant in police power and eminent domain analyses because they may, in
appropriate cases, serve as an indicia when a regulation has gone “too far” as to amount
to a “taking” under the power of eminent domain.—It should be noted though that
potential profits or income/gross sales are relevant in police power and eminent domain
analyses because they may, in appropriate cases, serve as an indicia when a regulation has
gone “too far” as to amount to a “taking” under the power of eminent domain. When the
deprivation or reduction of profits or income/gross sales is shown to be unreasonable,
oppressive or confiscatory, then the challenged governmental regulation may be nullified
for being a “taking” under the power of eminent domain. In such a case, it is not profits or
income/gross sales which are actually taken and appropriated for public use. Rather, when
the regulation causes an establishment to incur losses in an unreasonable, oppressive or
confiscatory manner, what is actually taken is capital and the right of the business
establishment to a reasonable return on investment. If the business losses are not halted
because of the continued operation of the regulation, this eventually leads to the
destruction of the business and the total loss of the capital invested therein. But, again,
petitioners in this case failed to prove that the subject regulation is unreasonable,
oppressive or confiscatory.
Police Power; Senior Citizen Discount; The State has, in the past, regulated prices and
profits of business establishments. In other words, this type of regulatory measures is
traditionally recognized as police power measures so that the senior citizen discount may
be considered as a police power measure as well.—The State has, in the past, regulated
prices and profits of business establishments. In other words, this type of regulatory
measures is traditionally recognized as police power measures so that the senior citizen
discount may be considered as a police power measure as well. What is more, the
substantial distinctions between price and rate of return on investment control laws vis-à-vis
the senior citizen discount law provide greater reason to uphold the validity of the senior
citizen discount law. As previously discussed, the ability to adjust prices allows the
establishment subject to the senior citizen discount to prevent or mitigate any reduction of
profits or income/gross sales arising from the giving of the discount. In contrast,
establishments subject to price and rate of return on investment control laws cannot adjust
prices accordingly.
Constitutional Law; There is nothing in the Constitution that prohibits Congress from
regulating the profits or income/gross sales of industries and enterprises without
franchises. On the contrary, the social justice provisions of the Constitution enjoin the
State to regulate the “acquisition, ownership, use, and disposition” of property and its
increments.—There is nothing in the Constitution that prohibits Congress from regulating
the profits or income/gross sales of industries and enterprises without franchises. On the
contrary, the social justice provisions of the Constitution enjoin the State to regulate the
“acquisition, ownership, use, and disposition” of property and its increments. This may
cover the regulation of profits or income/gross sales of all businesses, without qualification,
to attain the objective of diffusing wealth in order to protect and enhance the right of all the
people to human dignity. Thus, under the social justice policy of the Constitution, business
establishments may be compelled to contribute to uplifting the plight of vulnerable or
marginalized groups in our society provided that the regulation is not arbitrary, oppressive
or confiscatory, or is not in breach of some specific constitutional limitation.
Statutes; A law, which has been in operation for many years and promotes the welfare of a
group accorded special concern by the Constitution, cannot and should not be summarily
invalidated on a mere allegation that it reduces the profits or income/gross sales of
business establishments.—We maintain that the correct rule in determining whether the
9
subject regulatory measure has amounted to a “taking” under the power of eminent
domain is the one laid down in Alalayan v. National Power Corporation, 24 SCRA 172 (1968),
and followed in Carlos Superdrug Corporation, 526 SCRA 130 (2007), consistent with long
standing principles in police power and eminent domain analysis. Thus, the deprivation or
reduction of profits or income/gross sales must be clearly shown to be unreasonable,
oppressive or confiscatory. Under the specific circumstances of this case, such
determination can only be made upon the presentation of competent proof which
petitioners failed to do. A law, which has been in operation for many years and promotes
the welfare of a group accorded special concern by the Constitution, cannot and should not
be summarily invalidated on a mere allegation that it reduces the profits or income/gross
sales of business establishments.
CARPIO, J., Dissenting Opinion:
Police Power; Eminent Domain; View that when police power is exercised, there is no just
compensation to the citizen who loses his private property. When eminent domain is
exercised, there must be just compensation.—As regards Carlos Superdrug Corporation,
526 SCRA 130 (2007), a second look at the case shows that it barely distinguished between
police power and eminent domain. While it is true that police power is similar to the power
of eminent domain because both have the general welfare of the people for their object, we
need to clarify the concept of taking in eminent domain as against taking in police power to
prevent any claim of police power when the power actually exercised is eminent domain.
When police power is exercised, there is no just compensation to the citizen who loses his
private property. When eminent domain is exercised, there must be just compensation.
Thus, the Court must clarify taking in police power and taking in eminent domain.
Government officials cannot just invoke police power when the act constitutes eminent
domain.
Same; Same; View that taking under the exercise of police power does not require any
compensation because the property taken is either destroyed or placed outside the
commerce of man; In order to be valid, the taking of private property by the government
under eminent domain has to be for public use and there must be just compensation.—
Clearly, taking under the exercise of police power does not require any compensation
because the property taken is either destroyed or placed outside the commerce of man. On
the other hand, the power of eminent domain has been described as — x x x ‘the highest
and most exact idea of property remaining in the government’ that may be acquired for
some public purpose through a method in the nature of a forced purchase by the State. It is
a right to take or reassert dominion over property within the state for public use or to meet
public exigency. It is said to be an essential part of governance even in its most primitive
form and thus inseparable from sovereignty. The only direct constitutional qualification is
that “private property should not be taken for public use without just compensation.” This
proscription is intended to provide a safeguard against possible abuse and so to protect as
well the individual against whose property the power is sought to be enforced. In order to
be valid, the taking of private property by the government under eminent domain has to be
for public use and there must be just compensation.
Eminent Domain; View that the taking of property under Section 4 of R.A. 7432 is an
exercise of the power of eminent domain and not an exercise of the police power of the
State.—In Section 4 of R.A. 7432, it is undeniable that there is taking of property for public
use. Private property is anything that is subject to private ownership. The property taken for
public use applies not only to land but also to other proprietary property, including the
mandatory discounts given to senior citizens which form part of the gross sales of the
private establishments that are forced to give them. The amount of mandatory discount is
money that belongs to the private establishment. For sure, money or cash is private
property because it is something of value that is subject to private ownership. The taking of
property under Section 4 of R.A. 7432 is an exercise of the power of eminent domain and
not an exercise of the police power of the State. A clear and sharp distinction should be
made because private property owners will be left at the mercy of government officials if
these officials are allowed to invoke police power when what is actually exercised is the
power of eminent domain.
Same; View that Section 9, Article III of the 1987 Constitution speaks of private property
without any distinction. It does not state that there should be profit before the taking of
property is subject to just compensation.—Section 9, Article III of the 1987 Constitution
speaks of private property without any distinction. It does not state that there should be
profit before the taking of property is subject to just compensation. The private property
referred to for purposes of taking could be inherited, donated, purchased, mortgaged, or as
in this case, part of the gross sales of private establishments. They are all private property
and any taking should be attended by a corresponding payment of just compensation. The
20% discount granted to senior citizens belongs to private establishments, whether these
establishments make a profit or suffer a loss. In fact, the 20% discount applies to non-profit
establishments like country, social, or golf clubs which are open to the public and not only
for exclusive membership. The issue of profit or loss to the establishments is immaterial.
Just compensation is “the full and fair equivalent of the property taken from its owner by
the expropriator.”
Same; Senior Citizen Discount; View that in the case of the senior citizen’s discount, the
private establishment is compensated only in the equivalent amount of 32% of the
mandatory discount. There are no services rendered by the senior citizens, or any other
form of payment, that could make up for the 68% balance of the mandatory discount.
Clearly, the private establishments cannot recover the full amount of the discount they
give and thus there is taking to the extent of the amount that cannot be recovered.—
Article 157 is a burden imposed by the State on private employers to complement a
government program of promoting a healthy workplace. The employer itself, however,
benefits fully from this burden because the health of its workers while in the workplace is a
legitimate concern of the private employer. Moreover, the cost of maintaining the clinic and
staff is part of the legislated wages for which the private employer is fully compensated by
10
the services of the employees. In the case of the senior citizen’s discount, the private
establishment is compensated only in the equivalent amount of 32% of the mandatory
discount. There are no services rendered by the senior citizens, or any other form of
payment, that could make up for the 68% balance of the mandatory discount. Clearly, the
private establishments cannot recover the full amount of the discount they give and thus
there is taking to the extent of the amount that cannot be recovered.
Same; Same; View that the State cannot compel private establishments without franchises
to grant discounts, or to operate at a loss, because that constitutes taking of private
property for public use without just compensation.—The State cannot compel private
establishments without franchises to grant discounts, or to operate at a loss, because that
constitutes taking of private property for public use without just compensation. The State
can take over private property without compensation in times of war or other national
emergency under Section 23(2), Article VI of the 1987 Constitution but only for a limited
period and subject to such restrictions as Congress may provide. Under its police power, the
State may also temporarily limit or suspend business activities. One example is the two-day
liquor ban during elections under Article 261 of the Omnibus Election Code but this, again, is
only for a limited period. This is a valid exercise of police power of the State.
Same; Police Power; View that the State has the power to regulate the conduct of the
business of private establishments as long as the regulation is reasonable, but when the
regulation amounts to permanent taking of private property for public use, there must be
just compensation because the regulation now reaches the level of eminent domain.—Any
form of permanent taking of private property is an exercise of eminent domain that requires
the State to pay just compensation. The police power to regulate business cannot negate
another provision of the Constitution like the eminent domain clause, which requires just
compensation to be paid for the taking of private property for public use. The State has the
power to regulate the conduct of the business of private establishments as long as the
regulation is reasonable, but when the regulation amounts to permanent taking of private
property for public use, there must be just compensation because the regulation now
reaches the level of eminent domain.
Same; Senior Citizen Discount; View that due to the patent unconstitutionality of Section 4
of R.A. 7432, as amended by R.A. 9257, providing that private establishments may claim the
20% discount to senior citizens as tax deduction, the old law, or Section 4 of R.A. 7432,
which allows the 20% discount as tax credit, is automatically reinstated.—Due to the patent
unconstitutionality of Section 4 of R.A. 7432, as amended by R.A. 9257, providing that
private establishments may claim the 20% discount to senior citizens as tax deduction, the
old law, or Section 4 of R.A. 7432, which allows the 20% discount as tax credit, is
automatically reinstated. Where amendments to a statute are declared unconstitutional, the
original statute as it existed before the amendment remains in force. An amendatory law, if
declared null and void, in legal contemplation does not exist. The private establishments
should therefore be allowed to claim the 20% discount granted to senior citizens as tax
credit.
VELASCO, J., Concurring Opinion:
Police Power; View that Sec. 4 of RA 9257 is no more than a regulation of the right to
profits of certain taxpayers in order to benefit a significant sector of society. It is, thus, a
valid exercise of the police power of the State.—Indeed, the practice of allowing taking of
private property without just compensation is an abhorrent policy. However, I do not agree
that such policy underpins Sec. 4 of RA 9257. Rather, it is my humble opinion that Sec. 4 of
RA 9257 is no more than a regulation of the right to profits of certain taxpayers in order to
benefit a significant sector of society. It is, thus, a valid exercise of the police power of the
State.
Same; Senior Citizen Discount; View that the right to profit, as distinguished from profit
itself, is not subject to expropriation as it is of a mercurial character that denies the
possibility of taking for a public purpose.—The right to profit, as distinguished from profit
itself, is not subject to expropriation as it is of a mercurial character that denies the
possibility of taking for a public purpose. It is a right solely within the discretion of the
taxpayers that cannot be appropriated by the government. The mandated 20% discount for
the benefit of senior citizens is not a property already vested with the taxpayer before the
sale of the product or service. Such percentage of the sale price may include both the
markup on the cost of the good or service and the income to be gained from the sale.
Without the sale and corresponding purchase by senior citizens, there is no gain derived by
the taxpayer. This nebulous nature of the financial gain of the seller deters the acquisition by
the state of the “domain” or ownership of the right to such financial gain through
expropriation. At best, the State is empowered to regulate this right to the acquisition of
this financial gain to benefit senior citizens by ensuring that the good or service be sold to
them at a price 20% less than the regular selling price.
Same; Same; View that the imposition of price control is recognized as a valid exercise of
police power that does not give businessmen the right to be compensated for the amount
of what they could have earned considering the demand of the market. The effect of RA
9257 is not dissimilar to a price control law.—Time and again, this Court has recognized the
fundamental police power of the State to regulate the exercise of various rights holding that
“equally fundamental with the private right is that of the public to regulate it in the common
interest.” This Court has, for instance, recognized the power of the State to regulate and
temper the right of employers to dismiss their employees. Similarly, We have sustained the
State’s power to regulate the right to acquire and possess arms. Contractual rights are also
subject to the regulatory police power of the State. The right to profit is not immune from
this regulatory power of the State intended to promote the common good and the
attainment of social justice. As early as the first half of the past century, this Court has
rejected the doctrine of laissez faire as an axiom of economic theory and has upheld the
power of the State to regulate businesses even to the extent of limiting their profit. Thus,
the imposition of price control is recognized as a valid exercise of police power that does
not give businessmen the right to be compensated for the amount of what they could have
11
earned considering the demand of the market. The effect of RA 9257 is not dissimilar to a
price control law.
Same; Same; View that RA 9257 has to be sure not obliterated the right of taxpayers to
profit nor divested them of profits already earned; it simply regulated the right to the
attainment of these profits. The enforcement of the 20% discount in favor of senior citizens
does not, therefore, partake the nature of “taking” in the context of eminent domain.—
The fact that the State has not fixed an amount to be deducted from the selling price of
certain goods and services to senior citizens indicates that RA 9257 is a regulatory law under
the police power of the State. It is an acknowledgment that proprietors can and will factor
in the potential deduction of 20% of the price given to some of their customers, i.e., the
senior citizens, in the overall pricing strategy of their products and services. RA 9257 has to
be sure not obliterated the right of taxpayers to profit nor divested them of profits already
earned; it simply regulated the right to the attainment of these profits. The enforcement of
the 20% discount in favor of senior citizens does not, therefore, partake the nature of
“taking” in the context of eminent domain. As such, proprietors like petitioners cannot
insist that they are entitled to a peso-for-peso compensation for complying with the valid
regulation embodied in RA 9257 that restricts their right to profit.
Same; Same; View that as it is a regulatory law, not a law implementing the power of
eminent domain, the assertion that the use of the 20% discount as a deduction negates its
role as a “just compensation” is mislaid and irrelevant.—As it is a regulatory law, not a law
implementing the power of eminent domain, the assertion that the use of the 20% discount
as a deduction negates its role as a “just compensation” is mislaid and irrelevant. In the first
place, as RA 9257 is a regulatory law, the allowance to use the 20% discount, as a deduction
from the gross income for purposes of computing the income tax payable to the
government, is not intended as compensation. Rather, it is simply a recognition of the fact
that no income was realized by the taxpayer to the extent of the 20% of the selling price by
virtue of the discount given to senior citizens. Be that as it may, the logical result is that no
tax on income can be imposed by the State. In other words, by forcing some businesses to
give a 20% discount to senior citizens, the government is likewise foregoing the taxes it
could have otherwise earned from the earnings pertinent to the 20% discount. This is the real
import of Sec. 4 of RA 9257. As RA 9257 does not sanction any taking of private property,
the regulatory law does not require the payment of compensation.
BERSAMIN, J., Concurring Opinion:
Police Power; Senior Citizen Discount; View that the imposition of the discount does not
emanate from the exercise of the power of eminent domain, but from the exercise of
police power.—The petitioners’ claim of unconstitutionality of the tax deduction scheme
under the Expanded Senior Citizens Act rests on the premise that the 20% senior citizen
discount was enacted by Congress in the exercise of its power of eminent domain. Like the
Majority, I cannot sustain the claim of the petitioners, because I find that the imposition of
the discount does not emanate from the exercise of the power of eminent domain, but from
the exercise of police power.
Eminent Domain; View that the State’s exercise of the power of eminent domain is not
without limitations, but is constrained by Section 9, Article III of the Constitution, which
requires that private property shall not be taken for public use without just compensation,
as well as by the Due Process Clause found in Section 1, Article III of the Constitution .—The
State’s exercise of the power of eminent domain is not without limitations, but is
constrained by Section 9, Article III of the Constitution, which requires that private property
shall not be taken for public use without just compensation, as well as by the Due Process
Clause found in Section 1, Article III of the Constitution. According to Republic v. Vda. de
Castellvi, 58 SCRA 336 (1974), the requisites of taking in eminent domain are as follows: first,
the expropriator must enter a private property; second, the entry into private property must
be for more than a momentary period; third, the entry into the property should be under
warrant or color of legal authority; fourth, the property must be devoted to a public use or
otherwise informally appropriated or injuriously affected; and, fifth, the utilization of the
property for public use must be in such a way as to oust the owner and deprive him of all
beneficial enjoyment of the property.
Same; View that the essential component of the proper exercise of the power of eminent
domain is, therefore, the existence of compensable taking.—The essential component of
the proper exercise of the power of eminent domain is, therefore, the existence of
compensable taking. There is taking when — [T]he owner is actually deprived or
dispossessed of his property; when there is a practical destruction or a material impairment
of the value of his property or when he is deprived of the ordinary use thereof. There is a
“taking” in this sense when the expropriator enters private property not only for a
momentary period but for a more permanent duration, for the purpose of devoting the
property to a public use in such a manner as to oust the owner and deprive him of all
beneficial enjoyment thereof. For ownership, after all, “is nothing without the inherent
rights of possession, control and enjoyment.” Where the owner is deprived of the ordinary
and beneficial use of his property or of its value by its being diverted to public use, there is
taking within the Constitutional sense.
Same; Senior Citizen Discount; View that the nature and effects of the 20% senior citizen
discount do not meet all the requisites of taking for purposes of exercising the power of
eminent domain as delineated in Republic v. Vda. de Castellvi, 58 SCRA 336 (1974),
considering that the second of the requisites, that the taking must be for more than a
momentary period, is not met.—The nature and effects of the 20% senior citizen discount
do not meet all the requisites of taking for purposes of exercising the power of eminent
domain as delineated in Republic v. Vda. de Castellvi, 58 SCRA 336 (1974), considering that
the second of the requisites, that the taking must be for more than a momentary period, is
not met. I base this conclusion on the universal understanding of the term momentary,
rendered in Republic v. Vda. de Castellvi thusly: “Momentary” means, “lasting but a
moment; of but a moment’s duration” (The Oxford English Dictionary, Volume VI, page 596);
12
“lasting a very short time; transitory; having a very brief life; operative or recurring at every
moment” (Webster’s Third International Dictionary, 1963 edition.) The word “momentary”
when applied to possession or occupancy of (real) property should be construed to mean “a
limited period” — not indefinite or permanent.
Same; Same; View that under the Expanded Senior Citizens Act, the 20% senior citizen
discount is a special privilege granted only to senior citizens or the elderly, as defined by
law, when a sale is made or a service is rendered by a covered establishment to a senior
citizen or an elderly.—In concept, discount is an abatement or reduction made from the
gross amount or value of anything; a reduction from a price made to a specific customer or
class of customers. Under the Expanded Senior Citizens Act, the 20% senior citizen discount
is a special privilege granted only to senior citizens or the elderly, as defined by law, when a
sale is made or a service is rendered by a covered establishment to a senior citizen or an
elderly. The income or revenue corresponding to the amount of the discount granted to a
senior citizen is thus unrealized only in the event that a sale is made or a service is rendered
to a senior citizen. Verily, the discount is not availed of when there is no sale or service
rendered to a senior citizen.
Same; Same; View that the amount corresponding to the discount, instead of being
converted to income of the covered establishments, is retained by the senior citizen to be
used by him in order to promote his well-being, to recognize his important role in society,
and to maximize his contribution to nation-building.—The 20% senior citizen discount
forbids a covered establishment from selling certain goods or rendering services to senior
citizens in excess of 80% of the offered price, thereby causing a diminution in the revenue or
profits of the covered establishment. The amount corresponding to the discount, instead of
being converted to income of the covered establishments, is retained by the senior citizen
to be used by him in order to promote his well-being, to recognize his important role in
society, and to maximize his contribution to nation-building. Although a form of regulation
of or limitation on property right is thereby manifest, what the law clearly and primarily
intends is to grant benefits and special privileges to senior citizens.
Same; Same; View that police power, insofar as it is being exercised by the State, is
depicted as a regulating, prohibiting, and punishing power. It is neither benevolent nor
generous. Unlike traditional regulatory legislations, however, the Expanded Senior Citizens
Act does not intend to prevent any evil or destroy anything obnoxious. Even so, the
Expanded Senior Citizens Act remains a valid exercise of the State’s police power.—Police
power, insofar as it is being exercised by the State, is depicted as a regulating, prohibiting,
and punishing power. It is neither benevolent nor generous. Unlike traditional regulatory
legislations, however, the Expanded Senior Citizens Act does not intend to prevent any evil
or destroy anything obnoxious. Even so, the Expanded Senior Citizens Act remains a valid
exercise of the State’s police power. The ruling in Binay v. Domingo, 201 SCRA 508 (1991),
which involves police power as exercised by a local government unit pursuant to the general
welfare clause, proves instructive. Therein, the erstwhile Municipality of Makati had passed
a resolution granting burial assistance of P500.00 to qualified beneficiaries, to be taken out
of the unappropriated available existing funds from the Municipal Treasury.
LEONEN, J., Concurring and Dissenting Opinion:
Police Power; Senior Citizen Discount; View that the imposition of a discount for senior
citizens affects the price. It is thus an inherently regulatory function.—The imposition of a
discount for senior citizens affects the price. It is thus an inherently regulatory function.
However, nothing in the law controls the prices of the goods subject to such discount.
Legislation interferes with the autonomy of contractual arrangements in that it imposes a
two-tiered pricing system. There will be two prices for every good or service: one is the
regular price for everyone except for senior citizens who get a twenty percent (20%)
discount. Businesses’ discretion to fix the regular price or improve the costs of the goods or
the service that they offer to the public — and therefore determine their profit — is not
affected by the law. Of course, rational businesses will take into consideration economic
factors such as price elasticity, the market structure, the kind of competition businesses
face, the barriers to entry that will make possible the expansion of suppliers should there be
a change in the prices and the profits that can be made in that industry. Taxes, which include
qualifications such as exemptions, exclusions and deductions, will be part of the cost of
doing business for all such businesses.
Constitutional Law; View that the Supreme Court does not decide constitutional issues on
the basis of inchoate losses and uncertain burdens.—Losses, therefore, are not guaranteed
by the change in legislation challenged in this Petition. Put simply, losses are not inevitable.
On this basis alone, the constitutional challenge should fail. The case is premised on the
inevitable loss to be suffered by the petitioners. There is no factual basis for that kind of
certainty. We do not decide constitutional issues on the basis of inchoate losses and
uncertain burdens. Furthermore, income and profits are not vested rights. They are the
results of good or bad business judgments occasioned by the proper response to their
economic environment. Profits and the maintenance of a steady stream of income should be
the reward of business acumen of entrepreneurship. Courts read law and in doing so
provide the givens in a business environment. We should not allow ourselves to become the
tools for good business results for some businesses.
Taxation; View that the power to tax also allows Congress to determine matters as
whether tax rates will be applied to gross income or net income and whether costs such as
discounts may be allowed as a deduction from gross income or a tax credit from net
income after tax.—The power to tax is “a principal attribute of sovereignty.” Such inherent
power of the State anchors on its “social contract with its citizens [which] obliges it to
promote public interest and common good.” The scope of the legislative power to tax
necessarily includes not only the power to determine the rate of tax but the method of its
collection as well. We have held that Congress has the power to “define what tax shall be
imposed, why it should be imposed, how much tax shall be imposed, against whom (or
what) it shall be imposed and where it shall be imposed.” In fact, the State has the power
13
“to make reasonable and natural classifications for the purposes of taxation x x x [w]hether
it relates to the subject of taxation, the kind of property, the rates to be levied, or the
amounts to be raised, the methods of assessment, valuation and collection, the State’s
power is entitled to presumption of validity x x x.” This means that the power to tax also
allows Congress to determine matters as whether tax rates will be applied to gross income
or net income and whether costs such as discounts may be allowed as a deduction from
gross income or a tax credit from net income after tax.
Same; View that while the power to tax has been considered the strongest of all of
government’s powers with taxes as the “lifeblood of the government,” this power has its
limits.—While the power to tax has been considered the strongest of all of government’s
powers with taxes as the “lifeblood of the government,” this power has its limits. In a
number of cases, we have referred to our discussion in the 1988 case of Commissioner of
Internal Revenue v. Algue, 158 SCRA 9 (1988), as follows: 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. x x x x It is said
that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one’s hard-earned income to the taxing authorities, every
person who is able to must contribute his share in the running of the government. The
government, for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not
been observed.
Same; Constitutional Law; View that the Constitution provides for limitations on the power
of taxation. First, the rule of taxation shall be uniform and equitable; Second, taxes must
neither be confiscatory nor arbitrary as to amount to a deprivation of property without
due process of law.—The Constitution provides for limitations on the power of taxation.
First, “[t]he rule of taxation shall be uniform and equitable.” This requirement for uniformity
and equality means that “all taxable articles or kinds of property of the same class [shall] be
taxed at the same rate.” The tax deduction scheme for the 20% discount applies equally and
uniformly to all the private establishments covered by the law. Thus, it complies with this
limitation. Second, taxes must neither be confiscatory nor arbitrary as to amount to a
“[deprivation] of property without due process of law.” In Chamber of Real Estate and
Builders’ Associations, Inc. v. Executive Secretary Romulo, 614 SCRA 605 (2010), petitioners
questioned the constitutionality of the Minimum Corporate Income Tax (MCIT) alleging
among others that “pegging the tax base of the MCIT to a corporation’s gross income is
tantamount to a confiscation of capital because gross income, unlike net income, is not
‘realized gain.’ ”
Same; View that while the main opinion held that the 20% senior citizen discount is a valid
exercise of police power, it explained that this is due to the absence of any clear showing
that the discount is unreasonable, oppressive or confiscatory as to amount to a taking
under eminent domain requiring the payment of just compensation.—The ponencia is,
however, open to the possibility that eminent domain will apply. While the main opinion
held that the 20% senior citizen discount is a valid exercise of police power, it explained that
this is due to the absence of any clear showing that the discount is unreasonable, oppressive
or confiscatory as to amount to a taking under eminent domain requiring the payment of
just compensation. Alalayan v. National Power Corporation, 24 SCRA 172 (1968), and Carlos
Superdrug Corp. v. Department of Social Welfare and Development, 526 SCRA 130 (2007),
were cited as examples when there was failure to prove that the limited rate of return for
franchise holders, or the required 20% senior citizens discount, “were arbitrary, oppressive
or confiscatory.” It found that petitioners similarly did not establish the factual bases of
their claims and relied on hypothetical computations.
Eminent Domain; View that eminent domain has been defined as “an inherent power of
the State that enables it to forcibly acquire private lands intended for public use upon
payment of just compensation to the owner.”—Eminent domain has been defined as “an
inherent power of the State that enables it to forcibly acquire private lands intended for
public use upon payment of just compensation to the owner.” Most if not all jurisprudence
on eminent domain involves real property, specifically that of land. Although Rule 67 of the
Rules of Court, the rules governing expropriation proceedings, requires the complaint to
“describe the real or personal property sought to be expropriated,” this refers to tangible
personal property for which the court will deliberate as to its value for purposes of just
compensation. In a sense, the forced nature of a sale under eminent domain is more justified
for real property such as land. The common situation is that the government needs a specific
plot, for the construction of a public highway for example, and the private owner cannot
move his land to avoid being part of the project. On the other hand, most tangible personal
or movable property need not be subject of a forced sale when the government can procure
these items in a public bidding with several able and willing private sellers.
Same; View that in Republic of the Philippines v. Vda. de Castellvi, 58 SCRA 336 (1974), the
Supreme Court laid down five (5) “circumstances that must be present in the ‘taking’ of
property for purposes of eminent domain.”—In Republic of the Philippines v. Vda. de
Castellvi, 58 SCRA 336 (1974), this Court also laid down five (5) “circumstances [that] must
be present in the ‘taking’ of property for purposes of eminent domain” as follows: First, the
expropriator must enter a private property. x x x. Second, the entrance into private property
must be for more than a momentary period. x x x. Third, the entry into the property should
14
be under warrant or color of legal authority. x x x. Fourth, the property must be devoted to
a public use or otherwise informally appropriated or injuriously affected. x x x. Fifth, the
utilization of the property for public use must be in such a way as to oust the owner and
deprive him of all beneficial enjoyment of the property. x x x. The requirement for “entry”
or the element of “oust[ing] the owner” is not possible for intangible personal property
such as profits.
Same; View that profits are considered as “future economic benefits” which, at best,
entitles petitioners only to an inchoate right. This is not the private property referred in
the Constitution that can be taken and would require the payment of just compensation.—
Profits are not only intangible personal property. They are also inchoate rights. An inchoate
right means that the right “has not fully developed, matured, or vested.” It may or may not
ripen. The existence of profits, more so its specific amount, is uncertain. Business decisions
are made every day dealing with factors such as price, quantity, and cost in order to manage
potential outcomes of profit or loss at any given point. Profits are thus considered as “future
economic benefits” which, at best, entitles petitioners only to an inchoate right. This is not
the private property referred in the Constitution that can be taken and would require the
payment of just compensation. Just compensation has been defined “to be the just and
complete equivalent of the loss which the owner of the thing expropriated has to suffer by
reason of the expropriation.”
Police Power; Senior Citizen Discount; View that when the 20% discount is given to
customers who are senior citizens, there is a perceived loss for the establishment for that
same amount at that precise moment. However, this moment is fleeting and the perceived
loss can easily be recouped by sales to ordinary citizens at higher prices.—When the 20%
discount is given to customers who are senior citizens, there is a perceived loss for the
establishment for that same amount at that precise moment. However, this moment is
fleeting and the perceived loss can easily be recouped by sales to ordinary citizens at higher
prices. The concern that more consumers will suffer as a result of a price increase is a matter
better addressed to the wisdom of the Congress. As it stands, Republic Act No. 9257 does
not establish a price control. For non-profit establishments, they may cut down on costs and
make other business decisions to optimize performance. Business decisions like these have
been made even before the 20% discount became law, and will continue to be made to
adapt to the ever changing market. We cannot consider this fluid concept of possible loss
and potential profit as private property belonging to private establishments. They are
inchoate. They may or may not exist depending on many factors, some of which are within
the control of the private establishments. There is nothing concrete, earmarked, actual or
specific for taking in this scenario. Necessarily, there is nothing to compensate.
Same; Same; View that in the exercise of its police power and in promoting senior citizens’
welfare, the government “can impose upon private establishments the burden of partly
subsidizing a government program.”—Article XIII was introduced in the 1987 Constitution
to specifically address Social Justice and Human Rights. For this purpose, the state may
regulate the acquisition, ownership, use, and disposition of property and its increments, viz.:
Section 1. The Congress shall give highest priority to the enactment of measures that protect
and enhance the right of all the people to human dignity, reduce social, economic, and
political inequalities, and remove cultural inequities by equitably diffusing wealth and
political power for the common good. To this end, the State shall regulate the acquisition,
ownership, use, and disposition of property and its increments. Thus, in the exercise of its
police power and in promoting senior citizens’ welfare, the government “can impose upon
private establishments [like petitioners] the burden of partly subsidizing a government
program.” Manila Memorial Park, Inc. vs. Secretary of the Department of Social Welfare and
Development, 711 SCRA 302, G.R. No. 175356 December 3, 2013
hen a party challeges the constitutionality of a law, the burden of proof rests upon him.
Before us is a Petition for Prohibition 2 under Rule 65 of the Rules of Court filed by petitioners
Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged
in the business of providing funeral and burial services, against public respondents
Secretaries of the Department of Social Welfare and Development (DSWD) and the
Department of Finance (DOF).
Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432, 3 as
amended by RA 9257,4 and the implementing rules and regulations issued by the DSWD and
DOF insofar as these allow business establishments to claim the 20% discount given to senior
citizens as a tax deduction.
Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following
privileges:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the
following:
a) the grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishment[s],
restaurants and recreation centers and purchase of medicine anywhere in the
country: Provided, That private establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees charged by
theaters, cinema houses and concert halls, circuses, carnivals and other similar
places of culture, leisure, and amusement;
c) exemption from the payment of individual income taxes: Provided, That their
annual taxable income does not exceed the property level as determined by the
National Economic and Development Authority (NEDA) for that year;
15
 d) exemption from training fees for socioeconomic programs undertaken by the
OSCA as part of its work;
e) free medical and dental services in government establishment[s] anywhere in the
country, subject to guidelines to be issued by the Department of Health, the
Government Service Insurance System and the Social Security System;
f) to the extent practicable and feasible, the continuance of the same benefits and
privileges given by the Government Service Insurance System (GSIS), Social Security
System (SSS) and PAG-IBIG, as the case may be, as are enjoyed by those in actual
service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432.
Sections 2(i) and 4 of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax Credit – refers to the amount
representing the 20% discount granted to a qualified senior citizen by all establishments
relative to their utilization of transportation services, hotels and similar lodging
establishments, restaurants, drugstores, recreation centers, theaters, cinema houses,
concert halls, circuses, carnivals and other similar places of culture, leisure and amusement,
which discount shall be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or other percentage tax
purposes. x x x x Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE
ESTABLISHMENTS. – Private establishments, i.e., transport services, hotels and similar
lodging establishments, restaurants, recreation centers, drugstores, theaters, cinema
houses, concert halls, circuses, carnivals and other similar places of culture[,] leisure and
amusement, giving 20% discounts to qualified senior citizens are required to keep separate
and accurate record[s] of sales made to senior citizens, which shall include the name,
identification number, gross sales/receipts, discounts, dates of transactions and invoice
number for every transaction. The amount of 20% discount shall be deducted from the gross
income for income tax purposes and from gross sales of the business enterprise concerned
for purposes of the VAT and other percentage taxes.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 5 the Court declared
Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene RA 7432, 6 thus:
RA 7432 specifically allows private establishments to claim as tax credit the amount of
discounts they grant. In turn, the Implementing Rules and Regulations, issued pursuant
thereto, provide the procedures for its availment. To deny such credit, despite the plain
mandate of the law and the regulations carrying out that mandate, is indefensible. First, the
definition given by petitioner is erroneous. It refers to tax credit as the amount representing
the 20 percent discount that "shall be deducted by the said establishments from their gross
income for income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes." In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount shall be credited
against taxes has not been clarified by the revenue regulations. By ordinary acceptation, a
discount is an "abatement or reduction made from the gross amount or value of anything."
To be more precise, it is in business parlance "a deduction or lowering of an amount of
money;" or "a reduction from the full amount or value of something, especially a price." In
business there are many kinds of discount, the most common of which is that affecting the
income statement or financial report upon which the income tax is based.
xxxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT
or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related
to a sales discount. This contrived definition is improper, considering that the latter has to
be deducted from gross sales in order to compute the gross income in the income
statement and cannot be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that
the amount — when claimed — shall be treated as a reduction from any tax liability, plain
and simple. The option to avail of the tax credit benefit depends upon the existence of a tax
liability, but to limit the benefit to a sales discount — which is not even identical to the
discount privilege that is granted by law — does not define it at all and serves no useful
purpose. The definition must, therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that
"operates to create a rule out of harmony with the statute is a mere nullity;" it cannot
prevail. It is a cardinal rule that courts "will and should respect the contemporaneous
construction placed upon a statute by the executive officers whose duty it is to enforce it x x
x." In the scheme of judicial tax administration, the need for certainty and predictability in
the implementation of tax laws is crucial. Our tax authorities fill in the details that "Congress
may not have the opportunity or competence to provide." The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be followed by the courts.
Courts, however, will not uphold these authorities’ interpretations when clearly absurd,
erroneous or improper. In the present case, the tax authorities have given the term tax
credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432
provides. Their interpretation has muddled x x x the intent of Congress in granting a mere
discount privilege, not a sales discount. The administrative agency issuing these regulations
may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft
additional requirements not contemplated by the legislature.
16
In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law."
Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and
has neither the force nor the effect of law.7
On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicines in all establishments for the exclusive use or
enjoyment of senior citizens, including funeral and burial services for the death of senior
citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the
cost of the discount shall be allowed as deduction from gross income for the same taxable
year that the discount is granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.
To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006,
the pertinent provision of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM
GROSS INCOME. – Establishments enumerated in subparagraph (6) hereunder granting
sales discounts to senior citizens on the sale of goods and/or services specified thereunder
are entitled to deduct the said discount from gross income subject to the following
conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR
ENJOYED BY THE SENIOR CITIZEN shall be eligible for the deductible sales discount.
(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED
IN THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the
sale of goods or services to the senior citizen.
(3) Only the actual amount of the discount granted or a sales discount not
exceeding 20% of the gross selling price can be deducted from the gross income,
net of value added tax, if applicable, for income tax purposes, and from gross sales
or gross receipts of the business enterprise concerned, for VAT or other percentage
tax purposes.
(4) The discount can only be allowed as deduction from gross income for the same
taxable year that the discount is granted.
(5) The business establishment giving sales discounts to qualified senior citizens is
required to keep separate and accurate record[s] of sales, which shall include the
name of the senior citizen, TIN, OSCA ID, gross sales/receipts, sales discount
granted, [date] of [transaction] and invoice number for every sale transaction to
senior citizen.
(6) Only the following business establishments which granted sales discount to
senior citizens on their sale of goods and/or services may claim the said discount
granted as deduction from gross income, namely:
xxxx
(i) Funeral parlors and similar establishments – The beneficiary or any person who shall
shoulder the funeral and burial expenses of the deceased senior citizen shall claim the
discount, such as casket, embalmment, cremation cost and other related services for the
senior citizen upon payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts
granted under Rule V, Section 4 – Discounts for Establishments, Section 9, Medical and
Dental Services in Private Facilities and Sections 10 and 11 – Air, Sea and Land Transportation
as tax deduction based on the net cost of the goods sold or services rendered.
Provided, That the cost of the discount shall be allowed as deduction from gross income for
the same taxable year that the discount is granted; Provided, further, That the total amount
of the claimed tax deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper documentation and to
the provisions of the National Internal Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue Regulations to be
issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance
(DOF).
17
Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse,
praying that Section 4 of RA 7432, as amended by RA 9257, and the implementing rules and
regulations issued by the DSWD and the DOF be declared unconstitutional insofar as these
allow business establishments to claim the 20% discount given to senior citizens as a tax
deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the
tax credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be
reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES
AND REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%)
DISCOUNT TO SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE
ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL.9
Petitioners’ Arguments
Petitioners emphasize that they are not questioning the 20% discount granted to senior
citizens but are only assailing the constitutionality of the tax deduction scheme prescribed
under RA 9257 and the implementing rules and regulations issued by the DSWD and the
DOF.10
Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the
Constitution, which provides that: "[p]rivate property shall not be taken for public use
without just compensation."11
In support of their position, petitioners cite Central Luzon Drug Corporation, 12 where it was
ruled that the 20% discount privilege constitutes taking of private property for public use
which requires the payment of just compensation, 13 and Carlos Superdrug Corporation v.
Department of Social Welfare and Development,14 where it was acknowledged that the tax
deduction scheme does not meet the definition of just compensation. 15
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation 16 that the
tax deduction scheme adopted by the government is justified by police power. 17
They assert that "[a]lthough both police power and the power of eminent domain have the
general welfare for their object, there are still traditional distinctions between the
two"18 and that "eminent domain cannot be made less supreme than police power." 19
Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous
contemporaneous construction that prior payment of taxes is required for tax credit. 20
Petitioners also contend that the tax deduction scheme violates Article XV, Section 4 21 and
Article XIII, Section 1122of the Constitution because it shifts the State’s constitutional
mandate or duty of improving the welfare of the elderly to the private sector. 23
Under the tax deduction scheme, the private sector shoulders 65% of the discount because
only 35%24 of it is actually returned by the government. 25
Consequently, the implementation of the tax deduction scheme prescribed under Section 4
of RA 9257 affects the businesses of petitioners.26
Thus, there exists an actual case or controversy of transcendental importance which
deserves judicious disposition on the merits by the highest court of the land. 27
Respondents’ Arguments
Respondents, on the other hand, question the filing of the instant Petition directly with the
Supreme Court as this disregards the hierarchy of courts. 28
They likewise assert that there is no justiciable controversy as petitioners failed to prove
that the tax deduction treatment is not a "fair and full equivalent of the loss sustained" by
them.29
As to the constitutionality of RA 9257 and its implementing rules and regulations,
respondents contend that petitioners failed to overturn its presumption of
constitutionality.30
More important, respondents maintain that the tax deduction scheme is a legitimate
exercise of the State’s police power.31
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
18
We shall first resolve the procedural issue. When the constitutionality of a law is put in issue,
judicial review may be availed of only if the following requisites concur: "(1) the existence of
an actual and appropriate case; (2) the existence of personal and substantial interest on the
part of the party raising the [question of constitutionality]; (3) recourse to judicial review is
made at the earliest opportunity; and (4) the [question of constitutionality] is the lis mota of
the case."32
In this case, petitioners are challenging the constitutionality of the tax deduction scheme
provided in RA 9257 and the implementing rules and regulations issued by the DSWD and
the DOF. Respondents, however, oppose the Petition on the ground that there is no actual
case or controversy. We do not agree with respondents. An actual case or controversy exists
when there is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible
of judicial resolution."33
The Petition must therefore show that "the governmental act being challenged has a direct
adverse effect on the individual challenging it."34
In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect
on them. Thus, it cannot be denied that there exists an actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an
exercise of police power of the State, has already been settled in Carlos Superdrug
Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the
legally mandated 20% senior citizen discount is an exercise of police power or eminent
domain. If it is police power, no just compensation is warranted. But if it is eminent domain,
the tax deduction scheme is unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of
private property without payment of just compensation. At the outset, we note that this
question has been settled in Carlos Superdrug Corporation. 35
In that case, we ruled:
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant
the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up
of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount. Examining petitioners’ arguments, it
is apparent that what petitioners are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax
deduction scheme does not fully reimburse petitioners for the discount privilege accorded
to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the
application of the tax rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso for peso basis but merely
offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a
deduction reduces the net income of the private establishments concerned. The discounts
given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of private property for public use
or benefit. This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation. Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the expropriator. The measure is not the
taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word
compensation, and to convey the idea that the equivalent to be rendered for the property
to be taken shall be real, substantial, full and ample. A tax deduction does not offer full
reimbursement of the senior citizen discount. As such, it would not meet the definition of
just compensation. Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government program. The Court believes
so. The Senior Citizens Act was enacted primarily to maximize the contribution of senior
citizens to nation-building, and to grant benefits and privileges to them for their
improvement and well-being as the State considers them an integral part of our society. The
priority given to senior citizens finds its basis in the Constitution as set forth in the law
itself.1âwphi1 Thus, the Act provides: SEC. 2. Republic Act No. 7432 is hereby amended to
read as follows:
SECTION 1. Declaration of Policies and Objectives. — Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its elderly members while the State
may design programs of social security for them. In addition to this, Section 10 in the
Declaration of Principles and State Policies provides: "The State shall provide social justice in
all phases of national development." Further, Article XIII, Section 11, provides: "The State
shall adopt an integrated and comprehensive approach to health development which shall
endeavor to make essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the underprivileged sick,
elderly, disabled, women and children." Consonant with these constitutional principles the
following are the declared policies of this Act:
xxx xxx xxx
(f) To recognize the important role of the private sector in the improvement of the welfare
of senior citizens and to actively seek their partnership.
19
To implement the above policy, the law grants a twenty percent discount to senior citizens
for medical and dental services, and diagnostic and laboratory fees; admission fees charged
by theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers; and purchases of
medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement,
the law provides that business establishments extending the twenty percent discount to
senior citizens may claim the discount as a tax deduction. The law is a legitimate exercise of
police power which, similar to the power of eminent domain, has general welfare for its
object. Police power is not capable of an exact definition, but has been purposely veiled in
general terms to underscore its comprehensiveness to meet all exigencies and provide
enough room for an efficient and flexible response to conditions and circumstances, thus
assuring the greatest benefits. Accordingly, it has been described as "the most essential,
insistent and the least limitable of powers, extending as it does to all the great public
needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and
establish all manner of wholesome and reasonable laws, statutes, and ordinances, either
with penalties or without, not repugnant to the constitution, as they shall judge to be for
the good and welfare of the commonwealth, and of the subjects of the same." For this
reason, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due
process, must yield to general welfare. Police power as an attribute to promote the
common good would be diluted considerably if on the mere plea of petitioners that they will
suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the
absence of evidence demonstrating the alleged confiscatory effect of the provision in
question, there is no basis for its nullification in view of the presumption of validity which
every law has in its favor. Given these, it is incorrect for petitioners to insist that the grant of
the senior citizen discount is unduly oppressive to their business, because petitioners have
not taken time to calculate correctly and come up with a financial report, so that they have
not been able to show properly whether or not the tax deduction scheme really works
greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist
that they will incur losses because, referring to the DOF Opinion, for every ₱1.00 senior
citizen discount that petitioners would give, P0.68 will be shouldered by them as only P0.32
will be refunded by the government by way of a tax deduction. To illustrate this point,
petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an
example. According to the latter, it acquires Norvasc from the distributors at ₱37.57 per
tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20% discount to senior
citizens or an amount equivalent to ₱7.92, then it would have to sell Norvasc at ₱31.68
which translates to a loss from capital of ₱5.89 per tablet. Even if the government will allow
a tax deduction, only ₱2.53 per tablet will be refunded and not the full amount of the
discount which is ₱7.92. In short, only 32% of the 20% discount will be reimbursed to the
drugstores. Petitioners’ computation is flawed. For purposes of reimbursement, the law
states that the cost of the discount shall be deducted from gross income, the amount of
income derived from all sources before deducting allowable expenses, which will result in
net income. Here, petitioners tried to show a loss on a per transaction basis, which should
not be the case. An income statement, showing an accounting of petitioners' sales,
expenses, and net profit (or loss) for a given period could have accurately reflected the
effect of the discount on their income. Absent any financial statement, petitioners cannot
substantiate their claim that they will be operating at a loss should they give the discount. In
addition, the computation was erroneously based on the assumption that their customers
consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not
on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the
prices of their medicines given the cutthroat nature of the players in the industry. It is a
business decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch
as pricing is a property right, petitioners cannot reproach the law for being oppressive,
simply because they cannot afford to raise their prices for fear of losing their customers to
competition. The Court is not oblivious of the retail side of the pharmaceutical industry and
the competitive pricing component of the business. While the Constitution protects
property rights, petitioners must accept the realities of business and the State, in the
exercise of police power, can intervene in the operations of a business which may result in
an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts and public utilities,
continuously serve as x x x reminder[s] that the right to property can be relinquished upon
the command of the State for the promotion of public good. Undeniably, the success of the
senior citizens program rests largely on the support imparted by petitioners and the other
private establishments concerned. This being the case, the means employed in invoking the
active participation of the private sector, in order to achieve the purpose or objective of the
law, is reasonably and directly related. Without sufficient proof that Section 4 (a) of R.A. No.
9257 is arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative
act.36 (Bold in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise
of the police power of the State.
No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos
Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug Corporation 37 that the
20% discount is an exercise of the power of eminent domain, thus, requiring the payment of
just compensation. They urge us to re-examine our ruling in Carlos Superdrug
Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation. 39
20
They also point out that Carlos Superdrug Corporation 40 recognized that the tax deduction
scheme under the assailed law does not provide for sufficient just compensation. We agree
with petitioners’ observation that there are statements in Central Luzon Drug
Corporation41 describing the 20% discount as an exercise of the power of eminent domain,
viz.:
[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather
from the private establishments concerned. Accordingly, the tax credit benefit granted to
these establishments can be deemed as their just compensation for private property taken
by the State for public use. The concept of public use is no longer confined to the traditional
notion of use by the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience. The discount privilege to which our senior citizens are
entitled is actually a benefit enjoyed by the general public to which these citizens belong.
The discounts given would have entered the coffers and formed part of the gross sales of
the private establishments concerned, were it not for RA 7432. The permanent reduction in
their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers not only to the issuance of a tax
credit certificate indicating the correct amount of the discounts given, but also to the
promptness in its release. Equivalent to the payment of property taken by the State, such
issuance — when not done within a reasonable time from the grant of the discounts —
cannot be considered as just compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while awaiting actual receipt,
through the certificate, of the equivalent amount it needs to cope with the reduction in its
revenues. Besides, the taxation power can also be used as an implement for the exercise of
the power of eminent domain. Tax measures are but "enforced contributions exacted on
pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the
power to tax has indeed become a most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth. While it is a declared commitment under
Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property
owners who under our Constitution and laws are also entitled to protection. The social
justice consecrated in our [C]onstitution [is] not intended to take away rights from a person
and give them to another who is not entitled thereto." For this reason, a just compensation
for income that is taken away from respondent becomes necessary. It is in the tax credit
that our legislators find support to realize social justice, and no administrative body can alter
that fact. To put it differently, a private establishment that merely breaks even — without
the discounts yet — will surely start to incur losses because of such discounts. The same
effect is expected if its mark-up is less than 20 percent, and if all its sales come from retail
purchases by senior citizens. Aside from the observation we have already raised earlier, it
will also be grossly unfair to an establishment if the discounts will be treated merely as
deductions from either its gross income or its gross sales.1âwphi1 Operating at a loss
through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is
inutile, if not improper. Worse, profit-generating businesses will be put in a better position if
they avail themselves of tax credits denied those that are losing, because no taxes are due
from the latter.42 (Italics in the original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos Superdrug Corporation 43 when we
stated preliminarily that—
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant
the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up
of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount. Examining petitioners’ arguments, it
is apparent that what petitioners are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax
deduction scheme does not fully reimburse petitioners for the discount privilege accorded
to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the
application of the tax rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso for peso basis but merely
offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a
deduction reduces the net income of the private establishments concerned. The discounts
given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of private property for public use
or benefit. This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation. Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the expropriator. The measure is not the
taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word
compensation, and to convey the idea that the equivalent to be rendered for the property
to be taken shall be real, substantial, full and ample. A tax deduction does not offer full
reimbursement of the senior citizen discount. As such, it would not meet the definition of
just compensation. Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government program. The Court believes
so.44
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation 45 that the 20%
discount and tax deduction scheme is a valid exercise of the police power of the State. The
present case, thus, affords an opportunity for us to clarify the above-quoted statements in
Central Luzon Drug Corporation46 and Carlos Superdrug Corporation.47
First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug
Corporation48 is obiter dicta and, thus, not binding precedent. As stated earlier, in Central
21
Luzon Drug Corporation,49 we ruled that the BIR acted ultra vires when it effectively treated
the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the
clear wording of the previous law that the same should be treated as a tax credit. We were,
therefore, not confronted in that case with the issue as to whether the 20% discount is an
exercise of police power or eminent domain. Second, although we adverted to Central
Luzon Drug Corporation50 in our ruling in Carlos Superdrug Corporation, 51 this referred only
to preliminary matters. A fair reading of Carlos Superdrug Corporation 52would show that we
categorically ruled therein that the 20% discount is a valid exercise of police power. Thus,
even if the current law, through its tax deduction scheme (which abandoned the tax credit
scheme under the previous law), does not provide for a peso for peso reimbursement of the
20% discount given by private establishments, no constitutional infirmity obtains because,
being a valid exercise of police power, payment of just compensation is not warranted. We
have carefully reviewed the basis of our ruling in Carlos Superdrug Corporation 53 and we find
no cogent reason to overturn, modify or abandon it. We also note that petitioners’
arguments are a mere reiteration of those raised and resolved in Carlos Superdrug
Corporation.54 Thus, we sustain Carlos Superdrug Corporation. 55
Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos
Superdrug Corporation56 as to why the 20% discount is a valid exercise of police power and
why it may not, under the specific circumstances of this case, be considered as an exercise
of the power of eminent domain contrary to the obiter in Central Luzon Drug Corporation. 57
Police power versus eminent domain.
Police power is the inherent power of the State to regulate or to restrain the use of liberty
and property for public welfare.58
The only limitation is that the restriction imposed should be reasonable, not oppressive. 59
In other words, to be a valid exercise of police power, it must have a lawful subject or
objective and a lawful method of accomplishing the goal.60
Under the police power of the State, "property rights of individuals may be subjected to
restraints and burdens in order to fulfill the objectives of the government." 61
The State "may interfere with personal liberty, property, lawful businesses and occupations
to promote the general welfare [as long as] the interference [is] reasonable and not
arbitrary."62
Eminent domain, on the other hand, is the inherent power of the State to take or
appropriate private property for public use. 63
The Constitution, however, requires that private property shall not be taken without due
process of law and the payment of just compensation.64
Traditional distinctions exist between police power and eminent domain. In the exercise of
police power, a property right is impaired by regulation, 65 or the use of property is merely
prohibited, regulated or restricted66 to promote public welfare. In such cases, there is no
compensable taking, hence, payment of just compensation is not required. Examples of
these regulations are property condemned for being noxious or intended for noxious
purposes (e.g., a building on the verge of collapse to be demolished for public safety, or
obscene materials to be destroyed in the interest of public morals) 67 as well as zoning
ordinances prohibiting the use of property for purposes injurious to the health, morals or
safety of the community (e.g., dividing a city’s territory into residential and industrial
areas).68
It has, thus, been observed that, in the exercise of police power (as distinguished from
eminent domain), although the regulation affects the right of ownership, none of the bundle
of rights which constitute ownership is appropriated for use by or for the benefit of the
public.69
On the other hand, in the exercise of the power of eminent domain, property interests are
appropriated and applied to some public purpose which necessitates the payment of just
compensation therefor. Normally, the title to and possession of the property are transferred
to the expropriating authority. Examples include the acquisition of lands for the
construction of public highways as well as agricultural lands acquired by the government
under the agrarian reform law for redistribution to qualified farmer beneficiaries. However,
it is a settled rule that the acquisition of title or total destruction of the property is not
essential for "taking" under the power of eminent domain to be present. 70
Examples of these include establishment of easements such as where the land owner is
perpetually deprived of his proprietary rights because of the hazards posed by electric
transmission lines constructed above his property 71 or the compelled interconnection of the
telephone system between the government and a private company.72
In these cases, although the private property owner is not divested of ownership or
possession, payment of just compensation is warranted because of the burden placed on
the property for the use or benefit of the public.
The 20% senior citizen discount is an exercise of police power.
It may not always be easy to determine whether a challenged governmental act is an
exercise of police power or eminent domain. The very nature of police power as elastic and
responsive to various social conditions 73 as well as the evolving meaning and scope of public
use74 and just compensation75 in eminent domain evinces that these are not static concepts.
22
Because of the exigencies of rapidly changing times, Congress may be compelled to adopt
or experiment with different measures to promote the general welfare which may not fall
squarely within the traditionally recognized categories of police power and eminent domain.
The judicious approach, therefore, is to look at the nature and effects of the challenged
governmental act and decide, on the basis thereof, whether the act is the exercise of police
power or eminent domain. Thus, we now look at the nature and effects of the 20% discount
to determine if it constitutes an exercise of police power or eminent domain. The 20%
discount is intended to improve the welfare of senior citizens who, at their age, are less
likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in
need of subsidy in purchasing basic commodities. It may not be amiss to mention also that
the discount serves to honor senior citizens who presumably spent the productive years of
their lives on contributing to the development and progress of the nation. This distinct
cultural Filipino practice of honoring the elderly is an integral part of this law. As to its nature
and effects, the 20% discount is a regulation affecting the ability of private establishments to
price their products and services relative to a special class of individuals, senior citizens, for
which the Constitution affords preferential concern.76
In turn, this affects the amount of profits or income/gross sales that a private establishment
can derive from senior citizens. In other words, the subject regulation affects the pricing,
and, hence, the profitability of a private establishment. However, it does not purport to
appropriate or burden specific properties, used in the operation or conduct of the business
of private establishments, for the use or benefit of the public, or senior citizens for that
matter, but merely regulates the pricing of goods and services relative to, and the amount
of profits or income/gross sales that such private establishments may derive from, senior
citizens. The subject regulation may be said to be similar to, but with substantial distinctions
from, price control or rate of return on investment control laws which are traditionally
regarded as police power measures.77
These laws generally regulate public utilities or industries/enterprises imbued with public
interest in order to protect consumers from exorbitant or unreasonable pricing as well as
temper corporate greed by controlling the rate of return on investment of these
corporations considering that they have a monopoly over the goods or services that they
provide to the general public. The subject regulation differs therefrom in that (1) the
discount does not prevent the establishments from adjusting the level of prices of their
goods and services, and (2) the discount does not apply to all customers of a given
establishment but only to the class of senior citizens. Nonetheless, to the degree material to
the resolution of this case, the 20% discount may be properly viewed as belonging to the
category of price regulatory measures which affect the profitability of establishments
subjected thereto. On its face, therefore, the subject regulation is a police power measure.
The obiter in Central Luzon Drug Corporation,78 however, describes the 20% discount as an
exercise of the power of eminent domain and the tax credit, under the previous law,
equivalent to the amount of discount given as the just compensation therefor. The reason is
that (1) the discount would have formed part of the gross sales of the establishment were it
not for the law prescribing the 20% discount, and (2) the permanent reduction in total
revenues is a forced subsidy corresponding to the taking of private property for public use
or benefit. The flaw in this reasoning is in its premise. It presupposes that the subject
regulation, which impacts the pricing and, hence, the profitability of a private establishment,
automatically amounts to a deprivation of property without due process of law. If this were
so, then all price and rate of return on investment control laws would have to be invalidated
because they impact, at some level, the regulated establishment’s profits or income/gross
sales, yet there is no provision for payment of just compensation. It would also mean that
overnment cannot set price or rate of return on investment limits, which reduce the profits
or income/gross sales of private establishments, if no just compensation is paid even if the
measure is not confiscatory. The obiter is, thus, at odds with the settled octrine that the
State can employ police power measures to regulate the pricing of goods and services, and,
hence, the profitability of business establishments in order to pursue legitimate State
objectives for the common good, provided that the regulation does not go too far as to
amount to "taking."79
In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking also could be found if
government regulation of the use of property went "too far." When regulation reaches a
certain magnitude, in most if not in all cases there must be an exercise of eminent domain
and compensation to support the act. While property may be regulated to a certain extent,
if regulation goes too far it will be recognized as a taking. No formula or rule can be devised
to answer the questions of what is too far and when regulation becomes a taking. In Mahon,
Justice Holmes recognized that it was "a question of degree and therefore cannot be
disposed of by general propositions." On many other occasions as well, the U.S. Supreme
Court has said that the issue of when regulation constitutes a taking is a matter of
considering the facts in each case. The Court asks whether justice and fairness require that
the economic loss caused by public action must be compensated by the government and
thus borne by the public as a whole, or whether the loss should remain concentrated on
those few persons subject to the public action.81
The impact or effect of a regulation, such as the one under consideration, must, thus, be
determined on a case-to-case basis. Whether that line between permissible regulation under
police power and "taking" under eminent domain has been crossed must, under the specific
circumstances of this case, be subject to proof and the one assailing the constitutionality of
the regulation carries the heavy burden of proving that the measure is unreasonable,
oppressive or confiscatory. The time-honored rule is that the burden of proving the
unconstitutionality of a law rests upon the one assailing it and "the burden becomes heavier
when police power is at issue."82
The 20% senior citizen discount has not been shown to be unreasonable, oppressive or
confiscatory.
In Alalayan v. National Power Corporation, 83 petitioners, who were franchise holders of
electric plants, challenged the validity of a law limiting their allowable net profits to no more
than 12% per annum of their investments plus two-month operating expenses. In rejecting
23
their plea, we ruled that, in an earlier case, it was found that 12% is a reasonable rate of
return and that petitioners failed to prove that the aforesaid rate is confiscatory in view of
the presumption of constitutionality. 84
We adopted a similar line of reasoning in Carlos Superdrug Corporation 85 when we ruled that
petitioners therein failed to prove that the 20% discount is arbitrary, oppressive or
confiscatory. We noted that no evidence, such as a financial report, to establish the impact
of the 20% discount on the overall profitability of petitioners was presented in order to show
that they would be operating at a loss due to the subject regulation or that the continued
implementation of the law would be unconscionably detrimental to the business operations
of petitioners. In the case at bar, petitioners proceeded with a hypothetical computation of
the alleged loss that they will suffer similar to what the petitioners in Carlos Superdrug
Corporation86 did. Petitioners went directly to this Court without first establishing the
factual bases of their claims. Hence, the present recourse must, likewise, fail. Because all
laws enjoy the presumption of constitutionality, courts will uphold a law’s validity if any set
of facts may be conceived to sustain it.87
On its face, we find that there are at least two conceivable bases to sustain the subject
regulation’s validity absent clear and convincing proof that it is unreasonable, oppressive or
confiscatory. Congress may have legitimately concluded that business establishments have
the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount
without substantially affecting the reasonable rate of return on their investments
considering (1) not all customers of a business establishment are senior citizens and (2) the
level of its profit margins on goods and services offered to the general public. Concurrently,
Congress may have, likewise, legitimately concluded that the establishments, which will be
required to extend the 20% discount, have the capacity to revise their pricing strategy so
that whatever reduction in profits or income/gross sales that they may sustain because of
sales to senior citizens, can be recouped through higher mark-ups or from other products
not subject of discounts. As a result, the discounts resulting from sales to senior citizens will
not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug
Corporation88 that the 20% senior citizen discount and tax deduction scheme are valid
exercises of police power of the State absent a clear showing that it is arbitrary, oppressive
or confiscatory.
Conclusion
In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations,
that the discount will force establishments to raise their prices in order to compensate for
its impact on overall profits or income/gross sales. The general public, or those not
belonging to the senior citizen class, are, thus, made to effectively shoulder the subsidy for
senior citizens. This, in petitioners’ view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this
eventuality. But, more importantly, this goes into the wisdom, efficacy and expediency of
the subject law which is not proper for judicial review. In a way, this law pursues its social
equity objective in a non-traditional manner unlike past and existing direct subsidy programs
of the government for the poor and marginalized sectors of our society. Verily, Congress
must be given sufficient leeway in formulating welfare legislations given the enormous
challenges that the government faces relative to, among others, resource adequacy and
administrative capability in implementing social reform measures which aim to protect and
uphold the interests of those most vulnerable in our society. In the process, the individual,
who enjoys the rights, benefits and privileges of living in a democratic polity, must bear his
share in supporting measures intended for the common good. This is only fair. In fine,
without the requisite showing of a clear and unequivocal breach of the Constitution, the
validity of the assailed law must be sustained.
Refutation of the Dissent
The main points of Justice Carpio’s Dissent may be summarized as follows: (1) the discussion
on eminent domain in Central Luzon Drug Corporation 89 is not obiter dicta ; (2) allowable
taking, in police power, is limited to property that is destroyed or placed outside the
commerce of man for public welfare; (3) the amount of mandatory discount is private
property within the ambit of Article III, Section 9 90 of the Constitution; and (4) the
permanent reduction in a private establishment’s total revenue, arising from the mandatory
discount, is a taking of private property for public use or benefit, hence, an exercise of the
power of eminent domain requiring the payment of just compensation. I We maintain that
the discussion on eminent domain in Central Luzon Drug Corporation 91 is obiter dicta. As
previously discussed, in Central Luzon Drug Corporation, 92 the BIR, pursuant to Sections 2.i
and 4 of RR No. 2-94, treated the senior citizen discount in the previous law, RA 7432, as a
tax deduction instead of a tax credit despite the clear provision in that law which stated –
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the
following:
a) The grant of twenty percent (20%) discount from all establishments
relative to utilization of transportation services, hotels and similar lodging
establishment, restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That private establishments
may claim the cost as tax credit; (Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated the law, viz:
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not
merely a tax deduction from the gross income or gross sale of the establishment concerned.
A tax credit is used by a private establishment only after the tax has been computed; a tax
deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all
covered entities. Thus, the provisions of the revenue regulation that withdraw or modify
24
such grant are void. Basic is the rule that administrative regulations cannot amend or revoke
the law.93
As can be readily seen, the discussion on eminent domain was not necessary in order to
arrive at this conclusion. All that was needed was to point out that the revenue regulation
contravened the law which it sought to implement. And, precisely, this was done in Central
Luzon Drug Corporation94 by comparing the wording of the previous law vis-à-vis the
revenue regulation; employing the rules of statutory construction; and applying the settled
principle that a regulation cannot amend the law it seeks to implement. A close reading of
Central Luzon Drug Corporation95 would show that the Court went on to state that the tax
credit "can be deemed" as just compensation only to explain why the previous law provides
for a tax credit instead of a tax deduction. The Court surmised that the tax credit was a form
of just compensation given to the establishments covered by the 20% discount. However,
the reason why the previous law provided for a tax credit and not a tax deduction was not
necessary to resolve the issue as to whether the revenue regulation contravenes the law.
Hence, the discussion on eminent domain is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or reasons that
impelled the enactment of a particular statute or legal provision. However, statements
made relative thereto are not always necessary in resolving the actual controversies
presented before it. This was the case in Central Luzon Drug Corporation 96resulting in that
unfortunate statement that the tax credit "can be deemed" as just compensation. This, in
turn, led to the erroneous conclusion, by deductive reasoning, that the 20% discount is an
exercise of the power of eminent domain. The Dissent essentially adopts this theory and
reasoning which, as will be shown below, is contrary to settled principles in police power
and eminent domain analysis. II The Dissent discusses at length the doctrine on "taking" in
police power which occurs when private property is destroyed or placed outside the
commerce of man. Indeed, there is a whole class of police power measures which justify the
destruction of private property in order to preserve public health, morals, safety or welfare.
As earlier mentioned, these would include a building on the verge of collapse or confiscated
obscene materials as well as those mentioned by the Dissent with regard to property used in
violating a criminal statute or one which constitutes a nuisance. In such cases, no
compensation is required. However, it is equally true that there is another class of police
power measures which do not involve the destruction of private property but merely
regulate its use. The minimum wage law, zoning ordinances, price control laws, laws
regulating the operation of motels and hotels, laws limiting the working hours to eight, and
the like would fall under this category. The examples cited by the Dissent, likewise, fall
under this category: Article 157 of the Labor Code, Sections 19 and 18 of the Social Security
Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to use the term
of the Dissent, burden the conduct of the affairs of business establishments. In such cases,
payment of just compensation is not required because they fall within the sphere of
permissible police power measures. The senior citizen discount law falls under this latter
category. III The Dissent proceeds from the theory that the permanent reduction of profits
or income/gross sales, due to the 20% discount, is a "taking" of private property for public
purpose without payment of just compensation. At the outset, it must be emphasized that
petitioners never presented any evidence to establish that they were forced to suffer
enormous losses or operate at a loss due to the effects of the assailed law. They came
directly to this Court and provided a hypothetical computation of the loss they would
allegedly suffer due to the operation of the assailed law. The central premise of the Dissent’s
argument that the 20% discount results in a permanent reduction in profits or income/gross
sales, or forces a business establishment to operate at a loss is, thus, wholly unsupported by
competent evidence. To be sure, the Court can invalidate a law which, on its face, is
arbitrary, oppressive or confiscatory.97
But this is not the case here.
In the case at bar, evidence is indispensable before a determination of a constitutional
violation can be made because of the following reasons. First, the assailed law, by imposing
the senior citizen discount, does not take any of the properties used by a business
establishment like, say, the land on which a manufacturing plant is constructed or the
equipment being used to produce goods or services. Second, rather than taking specific
properties of a business establishment, the senior citizen discount law merely regulates the
prices of the goods or services being sold to senior citizens by mandating a 20% discount.
Thus, if a product is sold at ₱10.00 to the general public, then it shall be sold at ₱8.00 ( i.e.,
₱10.00 less 20%) to senior citizens. Note that the law does not impose at what specific price
the product shall be sold, only that a 20% discount shall be given to senior citizens based on
the price set by the business establishment. A business establishment is, thus, free to adjust
the prices of the goods or services it provides to the general public. Accordingly, it can
increase the price of the above product to ₱20.00 but is required to sell it at ₱16.00 (i.e. ,
₱20.00 less 20%) to senior citizens. Third, because the law impacts the prices of the goods or
services of a particular establishment relative to its sales to senior citizens, its profits or
income/gross sales are affected. The extent of the impact would, however, depend on the
profit margin of the business establishment on a particular good or service. If a product
costs ₱5.00 to produce and is sold at ₱10.00, then the profit98 is ₱5.0099 or a profit
margin100 of 50%.101
Under the assailed law, the aforesaid product would have to be sold at ₱8.00 to senior
citizens yet the business would still earn ₱3.00102 or a 30%103 profit margin. On the other
hand, if the product costs ₱9.00 to produce and is required to be sold at ₱8.00 to senior
citizens, then the business would experience a loss of ₱1.00.104
But note that since not all customers of a business establishment are senior citizens, the
business establishment may continue to earn ₱1.00 from non-senior citizens which, in turn,
can offset any loss arising from sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not
prevent the business establishment from revising its pricing strategy.
25
By revising its pricing strategy, a business establishment can recoup any reduction of profits
or income/gross sales which would otherwise arise from the giving of the 20% discount. To
illustrate, suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior
to the law, A sells his products at ₱10.00 a piece to X and Y resulting in income/gross sales of
₱20.00 (₱10.00 + ₱10.00). With the passage of the law, A must now sell his product to X at
₱8.00 (i.e., ₱10.00 less 20%) so that his income/gross sales would be ₱18.00 (₱8.00 +
₱10.00) or lower by ₱2.00. To prevent this from happening, A decides to increase the price
of his products to ₱11.11 per piece. Thus, he sells his product to X at ₱8.89 (i.e. , ₱11.11 less
20%) and to Y at ₱11.11. As a result, his income/gross sales would still be ₱20.00105 (₱8.89 +
₱11.11). The capacity, then, of business establishments to revise their pricing strategy makes
it possible for them not to suffer any reduction in profits or income/gross sales, or, in the
alternative, mitigate the reduction of their profits or income/gross sales even after the
passage of the law. In other words, business establishments have the capacity to adjust
their prices so that they may remain profitable even under the operation of the assailed law.
The Dissent, however, states that – The explanation by the majority that private
establishments can always increase their prices to recover the mandatory discount will only
encourage private establishments to adjust their prices upwards to the prejudice of
customers who do not enjoy the 20% discount. It was likewise suggested that if a company
increases its prices, despite the application of the 20% discount, the establishment becomes
more profitable than it was before the implementation of R.A. 7432. Such an economic
justification is self-defeating, for more consumers will suffer from the price increase than will
benefit from the 20% discount. Even then, such ability to increase prices cannot legally
validate a violation of the eminent domain clause.106
But, if it is possible that the business establishment, by adjusting its prices, will suffer no
reduction in its profits or income/gross sales (or suffer some reduction but continue to
operate profitably) despite giving the discount, what would be the basis to strike down the
law? If it is possible that the business establishment, by adjusting its prices, will not be
unduly burdened, how can there be a finding that the assailed law is an unconstitutional
exercise of police power or eminent domain? That there may be a burden placed on business
establishments or the consuming public as a result of the operation of the assailed law is
not, by itself, a ground to declare it unconstitutional for this goes into the wisdom and
expediency of the law.
The cost of most, if not all, regulatory measures of the government on business
establishments is ultimately passed on to the consumers but that, by itself, does not justify
the wholesale nullification of these measures. It is a basic postulate of our democratic
system of government that the Constitution is a social contract whereby the people have
surrendered their sovereign powers to the State for the common good. 107
All persons may be burdened by regulatory measures intended for the common good or to
serve some important governmental interest, such as protecting or improving the welfare of
a special class of people for which the Constitution affords preferential concern. Indubitably,
the one assailing the law has the heavy burden of proving that the regulation is
unreasonable, oppressive or confiscatory, or has gone "too far" as to amount to a "taking."
Yet, here, the Dissent would have this Court nullify the law without any proof of such nature.
Further, this Court is not the proper forum to debate the economic theories or realities that
impelled Congress to shift from the tax credit to the tax deduction scheme. It is not within
our power or competence to judge which scheme is more or less burdensome to business
establishments or the consuming public and, thereafter, to choose which scheme the State
should use or pursue. The shift from the tax credit to tax deduction scheme is a policy
determination by Congress and the Court will respect it for as long as there is no showing, as
here, that the subject regulation has transgressed constitutional limitations. Unavoidably,
the lack of evidence constrains the Dissent to rely on speculative and hypothetical
argumentation when it states that the 20% discount is a significant amount and not a
minimal loss (which erroneously assumes that the discount automatically results in a loss
when it is possible that the profit margin is greater than 20% and/or the pricing strategy can
be revised to prevent or mitigate any reduction in profits or income/gross sales as illustrated
above),108 and not all private establishments make a 20% profit margin (which conversely
implies that there are those who make more and, thus, would not be greatly affected by this
regulation).109
In fine, because of the possible scenarios discussed above, we cannot assume that the 20%
discount results in a permanent reduction in profits or income/gross sales, much less that
business establishments are forced to operate at a loss under the assailed law. And, even if
we gratuitously assume that the 20% discount results in some degree of reduction in profits
or income/gross sales, we cannot assume that such reduction is arbitrary, oppressive or
confiscatory. To repeat, there is no actual proof to back up this claim, and it could be that
the loss suffered by a business establishment was occasioned through its fault or negligence
in not adapting to the effects of the assailed law. The law uniformly applies to all business
establishments covered thereunder. There is, therefore, no unjust discrimination as the
aforesaid business establishments are faced with the same constraints. The necessity of
proof is all the more pertinent in this case because, as similarly observed by Justice Velasco
in his Concurring Opinion, the law has been in operation for over nine years now. However,
the grim picture painted by petitioners on the unconscionable losses to be indiscriminately
suffered by business establishments, which should have led to the closure of numerous
business establishments, has not come to pass. Verily, we cannot invalidate the assailed law
based on assumptions and conjectures. Without adequate proof, the presumption of
constitutionality must prevail. IV At this juncture, we note that the Dissent modified its
original arguments by including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of private property without any
distinction. It does not state that there should be profit before the taking of property is
subject to just compensation. The private property referred to for purposes of taking could
be inherited, donated, purchased, mortgaged, or as in this case, part of the gross sales of
private establishments. They are all private property and any taking should be attended by
26
corresponding payment of just compensation. The 20% discount granted to senior citizens
belong to private establishments, whether these establishments make a profit or suffer a
loss. In fact, the 20% discount applies to non-profit establishments like country, social, or golf
clubs which are open to the public and not only for exclusive membership. The issue of
profit or loss to the establishments is immaterial. 110
Two things may be said of this argument. First, it contradicts the rest of the arguments of
the Dissent. After it states that the issue of profit or loss is immaterial, the Dissent proceeds
to argue that the 20% discount is not a minimal loss 111 and that the 20% discount forces
business establishments to operate at a loss.112
Even the obiter in Central Luzon Drug Corporation, 113 which the Dissent essentially adopts
and relies on, is premised on the permanent reduction of total revenues and the loss that
business establishments will be forced to suffer in arguing that the 20% discount constitutes
a "taking" under the power of eminent domain. Thus, when the Dissent now argues that the
issue of profit or loss is immaterial, it contradicts itself because it later argues, in order to
justify that there is a "taking" under the power of eminent domain in this case, that the 20%
discount forces business establishments to suffer a significant loss or to operate at a loss.
Second, this argument suffers from the same flaw as the Dissent's original arguments. It is
an erroneous characterization of the 20% discount. According to the Dissent, the 20%
discount is part of the gross sales and, hence, private property belonging to business
establishments. However, as previously discussed, the 20% discount is not private property
actually owned and/or used by the business establishment. It should be distinguished from
properties like lands or buildings actually used in the operation of a business establishment
which, if appropriated for public use, would amount to a "taking" under the power of
eminent domain. Instead, the 20% discount is a regulatory measure which impacts the
pricing and, hence, the profitability of business establishments. At the time the discount is
imposed, no particular property of the business establishment can be said to be "taken."
That is, the State does not acquire or take anything from the business establishment in the
way that it takes a piece of private land to build a public road. While the 20% discount may
form part of the potential profits or income/gross sales 114 of the business establishment, as
similarly characterized by Justice Bersamin in his Concurring Opinion, potential profits or
income/gross sales are not private property, specifically cash or money, already belonging to
the business establishment. They are a mere expectancy because they are potential fruits of
the successful conduct of the business. Prior to the sale of goods or services, a business
establishment may be subject to State regulations, such as the 20% senior citizen discount,
which may impact the level or amount of profits or income/gross sales that can be
generated by such establishment. For this reason, the validity of the discount is to be
determined based on its overall effects on the operations of the business establishment.
Again, as previously discussed, the 20% discount does not automatically result in a 20%
reduction in profits, or, to align it with the term used by the Dissent, the 20% discount does
not mean that a 20% reduction in gross sales necessarily results. Because (1) the profit
margin of a product is not necessarily less than 20%, (2) not all customers of a business
establishment are senior citizens, and (3) the establishment may revise its pricing strategy,
such reduction in profits or income/gross sales may be prevented or, in the alternative,
mitigated so that the business establishment continues to operate profitably. Thus, even if
we gratuitously assume that some degree of reduction in profits or income/gross sales
occurs because of the 20% discount, it does not follow that the regulation is unreasonable,
oppressive or confiscatory because the business establishment may make the necessary
adjustments to continue to operate profitably. No evidence was presented by petitioners to
show otherwise. In fact, no evidence was presented by petitioners at all. Justice Leonen, in
his Concurring and Dissenting Opinion, characterizes "profits" (or income/gross sales) as an
inchoate right. Another way to view it, as stated by Justice Velasco in his Concurring
Opinion, is that the business establishment merely has a right to profits. The Constitution
adverts to it as the right of an enterprise to a reasonable return on investment. 115
Undeniably, this right, like any other right, may be regulated under the police power of the
State to achieve important governmental objectives like protecting the interests and
improving the welfare of senior citizens. It should be noted though that potential profits or
income/gross sales are relevant in police power and eminent domain analyses because they
may, in appropriate cases, serve as an indicia when a regulation has gone "too far" as to
amount to a "taking" under the power of eminent domain. When the deprivation or
reduction of profits or income/gross sales is shown to be unreasonable, oppressive or
confiscatory, then the challenged governmental regulation may be nullified for being a
"taking" under the power of eminent domain. In such a case, it is not profits or income/gross
sales which are actually taken and appropriated for public use. Rather, when the regulation
causes an establishment to incur losses in an unreasonable, oppressive or confiscatory
manner, what is actually taken is capital and the right of the business establishment to a
reasonable return on investment. If the business losses are not halted because of the
continued operation of the regulation, this eventually leads to the destruction of the
business and the total loss of the capital invested therein. But, again, petitioners in this case
failed to prove that the subject regulation is unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of return on investment
control laws to justify the senior citizen discount law. According to the Dissent, only profits
from industries imbued with public interest may be regulated because this is a condition of
their franchises. Profits of establishments without franchises cannot be regulated
permanently because there is no law regulating their profits. The Dissent concludes that the
permanent reduction of total revenues or gross sales of business establishments without
franchises is a taking of private property under the power of eminent domain. In making this
argument, it is unfortunate that the Dissent quotes only a portion of the ponencia – The
subject regulation may be said to be similar to, but with substantial distinctions from, price
control or rate of return on investment control laws which are traditionally regarded as
police power measures. These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to protect consumers from
27
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate
of return on investment of these corporations considering that they have a monopoly over
the goods or services that they provide to the general public. The subject regulation differs
therefrom in that (1) the discount does not prevent the establishments from adjusting the
level of prices of their goods and services, and (2) the discount does not apply to all
customers of a given establishment but only to the class of senior citizens. x x x 116
The above paragraph, in full, states –
The subject regulation may be said to be similar to, but with substantial distinctions from,
price control or rate of return on investment control laws which are traditionally regarded as
police power measures. These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate
of return on investment of these corporations considering that they have a monopoly over
the goods or services that they provide to the general public. The subject regulation differs
therefrom in that (1) the discount does not prevent the establishments from adjusting the
level of prices of their goods and services, and (2) the discount does not apply to all
customers of a given establishment but only to the class of senior citizens.
Nonetheless, to the degree material to the resolution of this case, the 20% discount may be
properly viewed as belonging to the category of price regulatory measures which affects the
profitability of establishments subjected thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the past, regulated prices
and profits of business establishments. In other words, this type of regulatory measures is
traditionally recognized as police power measures so that the senior citizen discount may be
considered as a police power measure as well. What is more, the substantial distinctions
between price and rate of return on investment control laws vis-à-vis the senior citizen
discount law provide greater reason to uphold the validity of the senior citizen discount law.
As previously discussed, the ability to adjust prices allows the establishment subject to the
senior citizen discount to prevent or mitigate any reduction of profits or income/gross sales
arising from the giving of the discount. In contrast, establishments subject to price and rate
of return on investment control laws cannot adjust prices accordingly. Certainly, there is no
intention to say that price and rate of return on investment control laws are the justification
for the senior citizen discount law. Not at all. The justification for the senior citizen discount
law is the plenary powers of Congress. The legislative power to regulate business
establishments is broad and covers a wide array of areas and subjects. It is well within
Congress’ legislative powers to regulate the profits or income/gross sales of industries and
enterprises, even those without franchises. For what are franchises but mere legislative
enactments? There is nothing in the Constitution that prohibits Congress from regulating the
profits or income/gross sales of industries and enterprises without franchises. On the
contrary, the social justice provisions of the Constitution enjoin the State to regulate the
"acquisition, ownership, use, and disposition" of property and its increments. 117
This may cover the regulation of profits or income/gross sales of all businesses, without
qualification, to attain the objective of diffusing wealth in order to protect and enhance the
right of all the people to human dignity. 118
Thus, under the social justice policy of the Constitution, business establishments may be
compelled to contribute to uplifting the plight of vulnerable or marginalized groups in our
society provided that the regulation is not arbitrary, oppressive or confiscatory, or is not in
breach of some specific constitutional limitation. When the Dissent, therefore, states that
the "profits of private establishments which are non-franchisees cannot be regulated
permanently, and there is no such law regulating their profits permanently," 119 it is assuming
what it ought to prove. First, there are laws which, in effect, permanently regulate profits or
income/gross sales of establishments without franchises, and RA 9257 is one such law. And,
second, Congress can regulate such profits or income/gross sales because, as previously
noted, there is nothing in the Constitution to prevent it from doing so. Here, again, it must
be emphasized that petitioners failed to present any proof to show that the effects of the
assailed law on their operations has been unreasonable, oppressive or confiscatory. The
permanent regulation of profits or income/gross sales of business establishments, even
those without franchises, is not as uncommon as the Dissent depicts it to be. For instance,
the minimum wage law allows the State to set the minimum wage of employees in a given
region or geographical area. Because of the added labor costs arising from the minimum
wage, a permanent reduction of profits or income/gross sales would result, assuming that
the employer does not increase the prices of his goods or services. To illustrate, suppose it
costs a company ₱5.00 to produce a product and it sells the same at ₱10.00 with a 50%
profit margin. Later, the State increases the minimum wage. As a result, the company incurs
greater labor costs so that it now costs ₱7.00 to produce the same product. The profit per
product of the company would be reduced to ₱3.00 with a profit margin of 30%. The net
effect would be the same as in the earlier example of granting a 20% senior citizen discount.
As can be seen, the minimum wage law could, likewise, lead to a permanent reduction of
profits. Does this mean that the minimum wage law should, likewise, be declared
unconstitutional on the mere plea that it results in a permanent reduction of profits? Taking
it a step further, suppose the company decides to increase the price of its product in order
to offset the effects of the increase in labor cost; does this mean that the minimum wage
law, following the reasoning of the Dissent, is unconstitutional because the consuming
public is effectively made to subsidize the wage of a group of laborers, i.e., minimum wage
earners? The same reasoning can be adopted relative to the examples cited by the Dissent
which, according to it, are valid police power regulations. Article 157 of the Labor Code,
Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law would
effectively increase the labor cost of a business establishment.1âwphi1 This would, in turn,
be integrated as part of the cost of its goods or services. Again, if the establishment does
not increase its prices, the net effect would be a permanent reduction in its profits or
income/gross sales. Following the reasoning of the Dissent that "any form of permanent
taking of private property (including profits or income/gross sales) 120 is an exercise of
eminent domain that requires the State to pay just compensation," 121 then these statutory
provisions would, likewise, have to be declared unconstitutional. It does not matter that
28
these benefits are deemed part of the employees’ legislated wages because the net effect is
the same, that is, it leads to higher labor costs and a permanent reduction in the profits or
income/gross sales of the business establishments. 122
The point then is this – most, if not all, regulatory measures imposed by the State on
business establishments impact, at some level, the latter’s prices and/or profits or
income/gross sales.123
If the Court were to sustain the Dissent’s theory, then a wholesale nullification of such
measures would inevitably result. The police power of the State and the social justice
provisions of the Constitution would, thus, be rendered nugatory. There is nothing
sacrosanct about profits or income/gross sales. This, we made clear in Carlos Superdrug
Corporation:124
one laid down in Alalayan v. National Power Corporation 126 and followed in Carlos Superdurg
Corporation127 consistent with long standing principles in police power and eminent domain
analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be clearly
shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of
this case, such determination can only be made upon the presentation of competent proof
which petitioners failed to do. A law, which has been in operation for many years and
promotes the welfare of a group accorded special concern by the Constitution, cannot and
should not be summarily invalidated on a mere allegation that it reduces the profits or
income/gross sales of business establishments.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit.
SO ORDERED.

Police power as an attribute to promote the common good would be diluted considerably if
on the mere plea of petitioners that they will suffer loss of earnings and capital, the
questioned provision is invalidated. Moreover, in the absence of evidence demonstrating
the alleged confiscatory effect of the provision in question, there is no basis for its
nullification in view of the presumption of validity which every law has in its favor.

xxxx

The Court is not oblivious of the retail side of the pharmaceutical industry and the
competitive pricing component of the business. While the Constitution protects property
rights petitioners must the realities of business and the State, in the exercise of police
power, can intervene in the operations of a business which may result in an impairment of
property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the percept for the protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts and public utilities,
continously serve as a reminder for the promotion of public good.

Undeniably, the success of the senior citizens program rests largely on the support imparted
by petitioners and the other private establishments concerned. This being the case, the
means employed in invoking the active participation of the private sector, in order to
achieve the purpose or objective of the law, is reasonably and directly related. Without
sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably detrimental to petitioners, the Court
will refrain form quashing a legislative act.125

In conclusion, we maintain that the correct rule in determining whether the subject
regulatory measure has amounted to a "taking" under the power of eminent domain is the

29
 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ST. LUKE’S MEDICAL CENTER, INC.,
respondent.

Taxation; Tax Exemptions; For an institution to be completely exempt from income tax,
Section 30(E) and (G) of the 1997 National Internal Revenue Code (NIRC) requires said
institution to operate exclusively for charitable or social welfare purpose.—A careful review
of the pleadings reveals that there is no countervailing consideration for the Court to revisit
its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke’s Medical Center, Inc., 682 SCRA 66 [2012]). Thus, under the doctrine of stare
decisis, which states that “[o]nce a case has been decided in one way, any other case
involving exactly the same point at issue x x x should be decided in the same manner,” the
Court finds that SLMC is subject to 10% income tax insofar as its revenues from paying
patients are concerned. To be clear, for an institution to be completely exempt from income
tax, Section 30(E) and (G) of the 1997 NIRC requires said institution to operate exclusively
for charitable or social welfare purpose. But in case an exempt institution under Section
30(E) or (G) of the said Code earns income from its for-profit activities, it will not lose its tax
exemption. However, its income from for-profit activities will be subject to income tax at the
preferential 10% rate pursuant to Section 27(B) thereof.

Same; Compromise Penalty; As to whether St. Luke’s Medical Center, Inc. (SLMC) is liable
for compromise penalty under Section 248(A) of the 1997 National Internal Revenue Code
(NIRC) for its alleged failure to file its quarterly income tax returns, this has also been
resolved in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke’s
Medical Center, Inc., 682 SCRA 66 [2012]), where the imposition of surcharges and interest
under Sections 248 and 249 of the 1997 NIRC were deleted on the basis of good faith and
honest belief on the part of SLMC that it is not subject to tax.—As to whether SLMC is liable
for compromise penalty under Section 248(A) of the 1997 NIRC for its alleged failure to file
itsquarterly income tax returns, this has also been resolved in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke’s Medical Center, Inc., 682 SCRA 66 [2012]),
where the imposition of surcharges and interest under Sections 248 and 249 of the 1997
NIRC were deleted on the basis of good faith and honest belief on the part SLMC that it is
not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is not liable
to pay compromise penalty under Section 248(A) of the 1997 NIRC. Commissioner of
Internal Revenue vs. St. Luke’s Medical Center, Inc., 817 SCRA 347, G.R. No. 203514 February
13, 2017

The doctrine of stare decisis dictates that "absent any powerful countervailing
considerations, like cases ought to be decided alike." 1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the
May 9, 2012 Decision3 and the September 17, 2012 Resolution4 of the Court of Tax
Appeals (CTA) in CTA EB Case No. 716.
G.R. No. 203514. February 13, 2017.
Factual Antecedents
30
On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received from the Add: Increments
Large Taxpayers Service-Documents Processing and Quality Assurance Division of the
Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-000096 5 and 25% Surcharge 12,479,874.10
QA-07-000097,6 assessing respondent SLMC deficiency income tax under Section 27(B) 7 of
20% Interest Per Annum (4115/06-
the 1997 National Internal Revenue Code (NIRC), as amended, for taxable year 2005 in the 19,995,151.71
4/15/08)
amount of ₱78,617,434.54 and for taxable year 2006 in the amount of ₱57,119,867.33.
Compromise Penalty for Late Payment 25,000.00
On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative protest8assailing the assessments. SLMC claimed that as a non-stock, non- Total increments 32,500,025.81
profit charitable and social welfare organization under Section 30(E) and (G) 9 of the 1997 Total Amount Due ?82,419,522.21
NIRC, as amended, it is exempt from paying income tax.

For Taxable Year 2006:

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable year 2005
tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, computed as ASSESSMENT NO. QA-07-000097
follows:

For Taxable Year 2005: PARTICULARS [AMOUNT]

ASSESSMENT NO. QA-07-000096

Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00

PARTICULARS Less: Cost of Sales/Services 2,760,518,437.00

AMOUNT Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
Total Gross Income 1,055,403,803.00
Less: Cost of Sales/Services 2,643,049, 769.00
Less: Deductions 640,147,719.00
Gross Income From Operation 980,461,847.00
Net Income Subject to Tax 415,256,084.00
Add: Non-Operating & Other Income -
XTaxRate 10%
Total Gross Income 980,461,847.00
Tax.Due 41,525,608.40
Less: Deductions 481,266,883 .00
Less: Tax Credits -
Net Income Subject to Tax 499, 194,964.00
Deficiency Income Tax 41,525,608.40
XTaxRate 10%
Add: Increments -
Tax Due 49,919,496.40
25% Surcharge 10,381,402.10
Less: Tax Credits -
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Deficiency Income Tax 49,919,496.40
Compromise Penalty for Late Payment 25,000.00

31
 Total increments 18,734,277.54
Total Amount Due ?60,259,885.9411
Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review, docketed as CTA
12
Case No. 7789.
Ruling of the Court of Tax Appeals Division
On August 26, 2010, the CTA Division rendered a Decision 13 finding SLMC not liable for
deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is exempt
from paying income tax under Section 30(E) and (G) of the same Code. Thus:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097,
assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and
2006, respectively, are hereby CANCELLED and SET ASIDE.
SO ORDERED.14
CIR moved for reconsideration but the CTA Division denied the same in its December 28,
2010 Resolution.15
This prompted CIR to file a Petition for Review 16 before the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA
Division that SLMC complies with all the requisites under Section 30(E) and (G) of the 1997
NIRC and thus, entitled to the tax exemption provided therein. 17
On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
Issue
Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the
CTA erred in exempting SLMC from the payment of income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and
195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc., 18 finding
SLMC not entitled to the tax exemption under Section 30(E) and (G) of the NIRC of 1997 as it
does not operate exclusively for charitable or social welfare purposes insofar as its revenues
from paying patients are concerned. Thus, the Court disposed of the case in this manner:
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909is
PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November
2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's
Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10%
preferential income tax rate under Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such deficiency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision
and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section I, Rule 45 of the Rules of Court.
SO ORDERED.19
Considering the foregoing, SLMC then filed a Manifestation and Motion 20 informing the
Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable years
1998, 2000-2002, and 2004-2007, as evidenced by the payment confirmation 21 from the BIR,
and that it did not pay any surcharge, interest, and compromise penalty in accordance with
the above-mentioned Decision of the Court. In view of the payment it made, SLMC moved
for the dismissal of the instant case on the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the
quarter/sand/or year/s said payment covers.22
In reply,23 SLMC submitted a copy of the Certification 24 issued by the Large Taxpayers Service
of the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency income tax for
taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed, this Office considers
the cases closed due to the payment made on April 30, 2013." SLMC likewise submitted a
letter25 from the BIR dated November 26, 2013 with attached Certification of Payment 26and
application for abatement,27 which it earlier submitted to the Court in a related case, G.R.
No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc. 28
Thereafter, the parties submitted their respective memorandum.
CIR 's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under
Section 27(B) of the 1997 NIRC. 29 It likewise asserts that SLMC is liable to pay compromise
32
penalty pursuant to Section 248(A) 30 of the 1997 NIRC for failing to file its quarterly income
tax returns.31
As to the alleged payment of the basic tax, CIR contends that this does not render the
instant case moot as the payment confirmation submitted by SLMC is not a competent
proof of payment of its tax liabilities. 32
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.)33 positing that earning a profit by a charitable, benevolent hospital or educational
institution does not result in the withdrawal of its tax exempt privilege. 34 SLMC further
claims that the income it derives from operating a hospital is not income from "activities
conducted for profit."35 Also, it maintains that in accordance with the ruling of the Court in
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),36 it is not liable for compromise penalties.37
In any case, SLMC insists that the instant case should be dismissed in view of its payment of
the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30,
2013.38
Our Ruling
SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC
insofar as its revenues from paying patients are concerned has been settled in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),39 where the Court ruled that:
x x x We hold that Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the removal of
such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable
income of two specific institutions, namely, proprietary non-profit educational institutions
and proprietary non-profit hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under
the last paragraph of Section 30 in relation to Section 27(A)(l).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be proprietary and non-profit.
'Proprietary' means private, following the definition of a 'proprietary educational institution'
as 'any private school maintained and administered by private individuals or groups' with a
government permit. 'Non-profit' means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club
Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized for
recreation and entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. The club was non-profit because of its purpose and
there was no evidence that it was engaged in a profit-making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. Tue
Court defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting
them to establish themselves in life or [by] otherwise lessening the burden of government.'
A nonprofit club for the benefit of its members fails this test. An organization may be
considered as non-profit if it does not distribute any part of its income to stockholders or
members. However, despite its being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of
charity in Lung Center. The issue in Lung Center concerns exemption from real property tax
and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been
funded by appropriations from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax exemptions,
subject to the constitutional provision that '[n]o law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of Congress.' The
33
requirements for a tax exemption are strictly construed against the taxpayer because an
exemption restricts the collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan and Jesus Sacred Heart College which says that receiving
income from paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so long
as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution.
For real property taxes, the incidental generation of income is permissible because the test
of exemption is the use of the property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use property in a certain
way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt
from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution 'actually, directly and
exclusively' use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as 'one where no part of
its income is distributable as dividends to its members, trustees, or officers' and that any
profit 'obtain[ed] as an incident to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was
organized.' However, under Lung Center, any profit by a charitable institution must not only
be plowed back 'whenever necessary or proper,' but must be 'devoted or used altogether
to the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section
30(E) of the NIRC requires that these operations be exclusive to charity. There is also a
specific requirement that 'no part of [the] net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.' The use of lands, buildings
and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This
only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a
charitable institution is not ipso facto tax exempt. To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a charitable institution use the
property 'actually, directly and exclusively' for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution must be
'organized and operated exclusively' for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution be 'operated
exclusively' for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and
operated exclusively' by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts 'any' activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that
34
the '[n]on-stock corporation or association [must be] organized and operated exclusively
for . . . charitable . . . purposes . . . . ' It likewise qualifies the requirement in Section 30(G)
that the civic organization must be 'operated exclusively' for the promotion of social
welfare.
Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit'
without losing its tax exempt status for its not-for-profit activities. The only consequence is
that the 'income of whatever kind and character' of a charitable institution 'from any of its
activities conducted for profit, regardless of the disposition made of such income, shall be
subject to tax.' Prior to the introduction of Section 27(B), the tax rate on such income from
for-profit activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately ₱l.73 billion from paying
patients is not an institution 'operated exclusively' for charitable purposes. Clearly, revenues
from paying patients are income received from 'activities conducted for profit.' Indeed, St.
Luke's admits that it derived profits from its paying patients. St. Luke's declared
₱l,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free Services'
expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the
following 'calculation' to support its claim that 65.20% of its 'income after expenses was
allocated to free or charitable services' in 1998.
x x xx
In Lung Center, this Court declared:
'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying
a privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot be substituted
for the words 'used exclusively' without doing violence to the Constitution and thelaw.
Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without violating
the NIRC. Services to paying patients are activities conducted for profit. They cannot be
considered any other way. There is a 'purpose to make profit over and above the cost' of
services. The ₱l.73 billion total revenues from paying patients is not even incidental to St.
Luke's charity expenditure of ₱2l8,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is 'devoted or used altogether to the
charitable object which it is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit
is taxable 'regardless of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official legislative record explaining the
phrase 'any activity conducted for profit.' However, it quoted a deposition of Senator
Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate,
which introduced the phrase 'or from any activity conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree V d que
es una actividad esencial dicho hospital para el funcionamiento def colegio de medicina
de dicha universidad?
x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos
de buena posicion social economica, lo que se paga por estos enfermos debe estar sujeto a
'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase
'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution like the
College of Medicine of the University of Santo Tomas.1awp++i1 Senator Cuenco answered
that if the hospital has paid rooms generally occupied by people of good economic standing,
then it should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an educational institution. However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to
focus on the activities of charitable institutions. Activities for profit should not escape the
reach of taxation. Being a non-stock and non-profit corporation does not, by this reason
alone, completely exempt an institution from tax. An institution cannot use its corporate
form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting tax
exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and
(G) of the NIRC requires that an institution be 'operated exclusively' for charitable or social
welfare purposes to be completely exempt from income tax. An institution under Section
35
30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities.
Such income from for-profit activities, under the last paragraph of Section 30, is merely
subject to income tax, previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be lin1ited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the government and other
taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to
its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's,
as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the
BIR, which opined that St. Luke's is 'a corporation for purely charitable and social welfare
purposes' and thus exempt from income tax. In Michael J Lhuillier, Inc. v. Commissioner of
Internal Revenue, the Court said that 'good faith and honest belief that one is not subject to
tax on the basis of previous interpretation of government agencies tasked to implement the
tax law, are sufficient justification to delete the imposition of surcharges and interest.' 40
A careful review of the pleadings reveals that there is no countervailing consideration for
the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis,
which states that "[o]nce a case has been decided in one way, any other case involving
exactly the same point at issue x x x should be decided in the same manner," 41 the Court
finds that SLMC is subject to 10% income tax insofar as its revenues from paying patients are
concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and
(G) of the 1997 NIRC requires said institution to operate exclusively for charitable or social
welfare purpose. But in case an exempt institution under Section 30(E) or (G) of the said
Code earns income from its for-profit activities, it will not lose its tax exemption. However,
its income from for-profit activities will be subject to income tax at the preferential 10% rate
pursuant to Section 27(B) thereof.
SLMC is not liable for Compromise
Penalty.
As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC
for its alleged failure to file its quarterly income tax returns, this has also been resolved in
G.R Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),42 where the imposition of surcharges and interest under Sections 248 43 and 24944 of the
1997 NIRC were deleted on the basis of good faith and honest belief on the part of SLMC
that it is not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is
not liable to pay compromise penalty under Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the
payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the
instant Petition has become moot.1avvphi1
While the Court agrees with the CIR that the payment confirmation from the BIR presented
by SLMC is not a competent proof of payment as it does not indicate the specific taxable
period the said payment covers, the Court finds that the Certification issued by the Large
Taxpayers Service of the BIR dated May 27, 2013, and the letter from the BIR dated
November 26, 2013 with attached Certification of Payment and application for abatement
are sufficient to prove payment especially since CIR never questioned the authenticity of
these documents. In fact, in a related case, G.R. No. 200688, entitled Commissioner of
Internal Revenue v. St. Luke's Medical Center, lnc., 45 the Court dismissed the petition based on
a letter issued by CIR confirming SLMC's payment of taxes, which is the same letter
submitted by SLMC in the instant case.
In fine, the Court resolves to dismiss the instant Petition as the same has been rendered
moot by the payment made by SLMC of the basic taxes for the taxable years 2005 and 2006,
in the amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively.46
WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED.
36
VALUE ADDED TAX

G.R. No. 183505. February 26, 2010.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SM PRIME HOLDINGS, INC. and

FIRST ASIA REALTY DEVELOPMENT CORPORATION, respondents.

Taxation; Value-Added Tax (VAT); Statutory Construction; A cursory reading of Section 108
of the National Internal Revenue Code of 1997 clearly shows that the enumeration of the
“sale or exchange of services” subject to Value-Added Tax (VAT) is not exhaustive—the
words, “including,” “similar services,” and “shall likewise include,” indicate that the
enumeration is by way of example only.—Section 108 of the NIRC of the 1997 reads: x x x A
cursory reading of the foregoing provision clearly shows that the enumeration of the “sale
or exchange of services” subject to VAT is not exhaustive. The words, “including,” “similar
services,” and “shall likewise include,” indicate that the enumeration is by way of example
only. Among those included in the enumeration is the “lease of motion picture films, films,
tapes and discs.” This, however, is not the same as the showing or exhibition of motion
pictures or films. As pointed out by the CTA En Banc: “Exhibition” in Black’s Law Dictionary is
defined as “To show or display. x x x To produce anything in public so that it may be taken
into possession” (6th ed., p. 573). While the word “lease” is defined as “a contract by which
one owning such property grants to another the right to possess, use and enjoy it on
specified period of time in exchange for periodic payment of a stipulated price, referred to
as rent (Black’s Law Dictionary, 6th ed., p. 889). x x x Since the activity of showing motion
pictures, films or movies by cinema/ theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine whether such activity falls
under the phrase “similar services.” The intent of the legislature must therefore be
ascertained.

Same; Same; Cinema Houses; Several amendments were made to expand the coverage of
Value Added Tax but none pertain to cinema/theater operators or proprietors—at present,
only lessors or distributors of cinematographic films are subject to Value-Added Tax (VAT).—
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the
NIRC of 1997 was signed into law. Several amendments were made to expand the coverage
of VAT. However, none pertain to cinema/theater operators or proprietors. At present, only

37
lessors or distributors of cinematographic films are subject to VAT. While persons subject to
amusement tax under the NIRC of 1997 are exempt from the coverage of VAT.
Same; Same; Same; Legal Research; Historically, the activity of showing motion pictures,
films or movies by cinema/theater operators or proprietors has always been considered as
a form of entertainment subject to amusement tax; Only lessors or distributors of
cinematographic films are included in the coverage of Value-Added Tax (VAT).—Based on
the foregoing, the following facts can be established: (1) Historically, the activity of showing
motion pictures, films or movies by cinema/theater operators or proprietors has always
been considered as a form of entertainment subject to amusement tax. (2) Prior to the Local
Tax Code, all forms of amusement tax were imposed by the national government. (3) When
the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred
to the local government. (4) Under the NIRC of 1977, the national government imposed
amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs,
Jai-Alai and race tracks. (5) The VAT law was enacted to replace the tax on original and
subsequent sales tax and percentage tax on certain services. (6) When the VAT law was
implemented, it exempted persons subject to amusement tax under the NIRC from the
coverage of VAT. (7) When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements. (8) Amendments
to the VAT law have been consistent in exempting persons subject to amusement tax under
the NIRC from the coverage of VAT. (9) Only lessors or distributors of cinematographic films
are included in the coverage of VAT. These reveal the legislative intent not to impose VAT on
persons already covered by the amusement tax. This holds true even in the case of
cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain services. The mere fact that they are
taxed by the local government unit and not by the national government is immaterial. The
Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater
operators or proprietor from admission tickets to the local government, did not intend to
treat cinema/theater houses as a separate class. No distinction must, therefore, be made
between the places of amusement taxed by the national government and those taxed by
the local government.
Same; Same; Same; 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.”—To hold otherwise would impose an unreasonable
burden on cinema/theater houses operators or proprietors, who would be paying an
additional 10% VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of
1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under
the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We
need not belabor that a literal application of a law must be rejected if it will operate unjustly
or lead to absurd results. Thus, we are convinced that the legislature never intended to
include cinema/theater operators or proprietors in the coverage of VAT. On this point, it is
apropos to quote the case of Roxas v. Court of Tax Appeals, 23 SCRA 276 (168) to wit: 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.
Same; Same; Same; Local Government Code; Statutory Construction; The repeal of the
Local Tax Code by the Local Government Code (LGC) of 1991 is not a legal basis for the
imposition of Value-Added Tax (VAT) on the gross receipts of cinema/theater operators or
proprietors derived from admission tickets; A law will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously; The power to impose amusement
tax on cinema/theater operators or proprietors remains with the local government.—The
repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
on the gross receipts of cinema/theater operators or proprietors derived from admission
tickets. The removal of the prohibition under the Local Tax Code did not grant nor restore to
the national government the power to impose amusement tax on cinema/theater operators
or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law
will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. As it is, the power to impose amusement tax on cinema/theater operators
or proprietors remains with the local government.
Same; Administrative Law; Revenue Memorandum Circulars (RMCs); Revenue
Memorandum Circulars (RMCs) must not override, supplant, or modify the law, but must
remain consistent and in harmony with, the law they seek to apply and implement.—
Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001
which imposes VAT on the gross receipts from admission to cinema houses must be struck
down. We cannot overemphasize that RMCs must not override, supplant, or modify the law,
but must remain consistent and in harmony with, the law they seek to apply and implement.
Same; The rule that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied against him—
unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the
equally well-settled rule that the imposition of a tax cannot be presumed.—Contrary to the
view of petitioner, respondents need not prove their entitlement to an exemption from the
38
coverage of VAT. The rule that tax exemptions should be construed strictly against the
taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him.
The reason is obvious: it is both illogical and impractical to determine who are exempted
without first determining who are covered by the provision. Thus, unless a statute imposes a
tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that
the imposition of a tax cannot be presumed. In fact, in case of doubt, tax laws must be
construed strictly against the government and in favor of the taxpayer.
When the intent of the law is not apparent as worded, or when the application of the law
would lead to absurdity or injustice, legislative history is all important. In such cases, courts
may take judicial notice of the origin and history of the law, 1 the deliberations during the
enactment,2 as well as prior laws on the same subject matter 3 to ascertain the true intent or
spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to
Republic Act (RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision 5 and the June 24,
2008 Resolution6 of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development
Corporation (First Asia) are domestic corporations duly organized and existing under the
laws of the Republic of the Philippines. Both are engaged in the business of operating
cinema houses, among others.7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the
amount of ₱119,276,047.40 for taxable year 2000. 8 In response, SM Prime filed a letter-
protest dated December 15, 2003.9
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged
VAT deficiency, which the latter protested in a letter dated January 14, 2004. 10
On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay
the VAT deficiency for taxable year 2000 in the amount of ₱124,035,874.12.11
On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA
Case No. 7079.12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia
protested the PAN in a letter dated July 9, 2002.14
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency
which was protested by First Asia in a letter dated December 12, 2002. 15
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First
Asia to pay the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7085.17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales
for taxable year 2000 in the amount of ₱35,840,895.78. First Asia protested the PAN
through a letter dated April 22, 2004.18
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency. 19 First Asia
protested the same in a letter dated July 9, 2004.20
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT
deficiency in the amount of ₱35,840,895.78 for taxable year 2000.21
This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004.
The case was docketed as CTA Case No. 7111.22
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total
amount of ₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia
filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of
Demand, which was protested by First Asia on December 14, 2004. 23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for
the taxable year 2003 was issued by the BIR against First Asia. In a letter dated September
39
23, 2004, First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by
the BIR to First Asia, which the latter protested through a letter dated November 11, 2004. 24
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to
pay the amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years
2002 and 2003, respectively.25
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7272.26
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM
Prime and First Asia.27
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272
with CTA Case No. 7079 on the grounds that the issues raised therein are identical and that
SM Prime is a majority shareholder of First Asia. The motion was granted. 28
Upon submission of the parties’ respective memoranda, the consolidated cases were
submitted for decision on the sole issue of whether gross receipts derived from admission
tickets by cinema/theater operators or proprietors are subject to VAT. 29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision granting the
Petition for Review. Resorting to the language used and the legislative history of the law, it
ruled that the activity of showing cinematographic films is not a service covered by VAT
under the National Internal Revenue Code (NIRC) of 1997, as amended, but an activity
subject to amusement tax under RA 7160, otherwise known as the Local Government Code
(LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution Expressing the
True Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local
Film Industry Consistent with the State’s Policy to Have a Viable, Sustainable and
Competitive Theater and Film Industry as One of its Partners in National
Development,"30 the CTA First Division held that the House of Representatives resolved that
there should only be one business tax applicable to theaters and movie houses, which is the
30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held
that consistent with the State’s policy to have a viable, sustainable and competitive theater
and film industry, the national government should be precluded from imposing its own
business tax in addition to that already imposed and collected by local government units.
The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-
2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be
given force and effect because it failed to comply with the procedural due process for tax
issuances under RMC No. 20-86.31 Thus, it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondent’s Decisions denying petitioners’ protests against deficiency value-added taxes
are hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057,
VT-00-000122, 003-03 and 008-02 are ORDERED cancelled and set aside.
SO ORDERED.32
Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its
Resolution dated December 14, 2006.33
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc. 34 The case was docketed as CTA EB No.
244.35 The CTA En Banc however denied36 the Petition for Review and dismissed 37 as well
petitioner’s Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive
enumeration of what services are intended to be subject to VAT. And since the showing or
exhibition of motion pictures, films or movies by cinema operators or proprietors is not
among the enumerated activities contemplated in the phrase "sale or exchange of
services," then gross receipts derived by cinema/ theater operators or proprietors from
admission tickets in showing motion pictures, film or movie are not subject to VAT. It
reiterated that the exhibition or showing of motion pictures, films, or movies is instead
subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001,
the CTA En Banc agreed with its First Division that the same cannot be given force and effect
for failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema
houses from admission tickets [are] subject to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO
THE PAYING PUBLIC IS A SALE OF SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY
SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;
40
 (c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND
THE APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND
EXTRINSIC AIDS IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION
ARE APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY
APPLIED THE SAME AND PROMULGATED DANGEROUS PRECEDENTS;
(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING
RESPONDENTS’ SERVICES FROM THE VAT IMPOSED UNDER SECTION 108
OF THE NIRC OF 1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES
TO BE TRIED BY THE HONORABLE COURT; and
(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION
108 OF THE NIRC.
(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in
coverage;
(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is
merely subject to the amusement tax imposed by the Local Government Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001. 38
Simply put, the issue in this case is whether the gross receipts derived by operators or
proprietors of cinema/theater houses from admission tickets are subject to VAT.
Petitioner’s Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC
is not exhaustive because it covers all sales of services unless exempted by law. He claims
that the CTA erred in applying the rules on statutory construction and in using extrinsic aids
in interpreting Section 108 because the provision is clear and unambiguous. Thus, he
maintains that the exhibition of movies by cinema operators or proprietors to the paying
public, being a sale of service, is subject to VAT.
Respondents’ Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of
1997 shows that the gross receipts of proprietors or operators of cinemas/theaters derived
from public admission are not among the services subject to VAT. Respondents insist that
gross receipts from cinema/theater admission tickets were never intended to be subject to
any tax imposed by the national government. According to them, the absence of gross
receipts from cinema/theater admission tickets from the list of services which are subject to
the national amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative
intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency
assessments were based is an unpublished administrative ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods
or cargoes for hire and other domestic common carriers by land, air and water relative to
their transport of goods or cargoes; services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code; services of banks, non-bank financial intermediaries and
finance companies; and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services regardless
of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. The phrase "sale or exchange of services" shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
41
xxxx other places of amusements exclusively to the local government. Thus, when the NIRC of
197746 was enacted, the national government imposed amusement tax only on proprietors,
(7) The lease of motion picture films, films, tapes and discs; and lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks. 47

(8) The lease or the use of or the right to use radio, television, satellite transmission and On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the
cable television time. NIRC of 1977 by imposing a multi-stage VAT to replace the tax on original and subsequent
sales tax and percentage tax on certain services. It imposed VAT on sales of services under
x x x x (Emphasis supplied) Section 102 thereof, which provides:

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale SECTION 102. Value-added tax on sale of services. — (a) Rate and base of tax. — There shall
or exchange of services" subject to VAT is not exhaustive. The words, "including," "similar be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross
services," and "shall likewise include," indicate that the enumeration is by way of example receipts derived by any person engaged in the sale of services. The phrase "sale of services"
only.39 means the performance of all kinds of services for others for a fee, remuneration or
consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of
Among those included in the enumeration is the "lease of motion picture films, films, tapes
personal property; lessors or distributors of cinematographic films; persons engaged in
and discs." This, however, is not the same as the showing or exhibition of motion pictures or
milling, processing, manufacturing or repacking goods for others; and similar services
films. As pointed out by the CTA En Banc:
regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties: Provided That the following services performed in the
"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce Philippines by VAT-registered persons shall be subject to 0%:
anything in public so that it may be taken into possession" (6th ed., p. 573). While the word
"lease" is defined as "a contract by which one owning such property grants to another the
(1) Processing manufacturing or repacking goods for other persons doing business
right to possess, use and enjoy it on specified period of time in exchange for periodic
outside the Philippines which goods are subsequently exported, x x x
payment of a stipulated price, referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x
x x40
xxxx
Since the activity of showing motion pictures, films or movies by cinema/ theater operators
or proprietors is not included in the enumeration, it is incumbent upon the court to the "Gross receipts" means the total amount of money or its equivalent
determine whether such activity falls under the phrase "similar services." The intent of the representing the contract price, compensation or service fee, including the
legislature must therefore be ascertained. amount charged for materials supplied with the services and deposits or
advance payments actually or constructively received during the taxable
quarter for the service performed or to be performed for another person,
The legislature never intended operators
excluding value-added tax.
or proprietors of cinema/theater houses to be covered by VAT
(b) Determination of the tax. — (1) Tax billed as a separate item in the
invoice. — If the tax is billed as a separate item in the invoice, the tax shall
Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, be based on the gross receipts, excluding the tax.
lessees, or operators of theaters, cinematographs, concert halls, circuses, boxing
exhibitions, and other places of amusement, including cockpits, race tracks, and cabaret. 42 In
(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not
the case of theaters or cinematographs, the taxes were first deducted, withheld, and paid
billed separately or is billed erroneously in the invoice, the tax shall be determined
by the proprietors, lessees, or operators of such theaters or cinematographs before the
by multiplying the gross receipts (including the amount intended to cover the tax or
gross receipts were divided between the proprietors, lessees, or operators of the theaters
the tax billed erroneously) by 1/11. (Emphasis supplied)
or cinematographs and the distributors of the cinematographic films. Section 11 43 of the
Local Tax Code,44 however, amended this provision by transferring the power to impose
amusement tax45 on admission from theaters, cinematographs, concert halls, circuses and
42
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.49
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which
clarified that the power to impose amusement tax on gross receipts derived from admission
tickets was exclusive with the local government units and that only the gross receipts of
amusement places derived from sources other than from admission tickets were subject to
amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on
gross receipts arising from admission to places of amusement has been transferred to the
local governments to the exclusion of the national government.
xxxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal Revenue Code, including the value
added tax law under Executive Order No. 273, has amended the provisions of Section 11 of
the Local Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on
admission receipts in places of amusement rests exclusively on the local government, to the
exclusion of the national government. Since the Bureau of Internal Revenue is an agency of
the national government, then it follows that it has no legal mandate to levy amusement tax
on admission receipts in the said places of amusement.
Considering the foregoing legal background, the provisions under Section 123 of the
National Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old
NIRC) pertaining to amusement taxes on places of amusement shall be implemented in
accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated
November 5, 1986 to wit:
"x x x Accordingly, only the gross receipts of the amusement places derived from sources
other than from admission tickets shall be subject to x x x amusement tax prescribed
under Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O.
273). The tax on gross receipts derived from admission tickets shall be levied and collected
by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended x
x x" or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known
as the Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the
power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more
than thirty percent (30%) of the gross receipts from admission fees under Section 140
thereof.50 In the case of theaters or cinemas, the tax shall first be deducted and withheld by
their proprietors, lessees, or operators and paid to the local government before the gross
receipts are divided between said proprietors, lessees, or operators and the distributors of
the cinematographic films. However, the provision in the Local Tax Code expressly excluding
the national government from collecting tax from the proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses and other places of amusements was no
longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the
NIRC of 199751 was signed into law. Several amendments 52 were made to expand the
coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At
present, only lessors or distributors of cinematographic films are subject to VAT. While
persons subject to amusement tax 53 under the NIRC of 1997 are exempt from the coverage
of VAT.54
Based on the foregoing, the following facts can be established:
(1) Historically, the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been considered as a form of
entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the
national government.
(3) When the Local Tax Code was enacted, amusement tax on admission tickets
from theaters, cinematographs, concert halls, circuses and other places of
amusements were transferred to the local government.
(4) Under the NIRC of 1977, the national government imposed amusement tax only
on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and
race tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent sales tax
and percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to
amusement tax under the NIRC from the coverage of VAT.1auuphil
(7) When the Local Tax Code was repealed by the LGC of 1991, the local government
continued to impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements.
43
 (8) Amendments to the VAT law have been consistent in exempting persons subject
to amusement tax under the NIRC from the coverage of VAT.
(9) Only lessors or distributors of cinematographic films are included in the
coverage of VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the
amusement tax. This holds true even in the case of cinema/theater operators taxed under
the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax
on certain services. The mere fact that they are taxed by the local government unit and not
by the national government is immaterial. The Local Tax Code, in transferring the power to
tax gross receipts derived by cinema/theater operators or proprietor from admission tickets
to the local government, did not intend to treat cinema/theater houses as a separate class.
No distinction must, therefore, be made between the places of amusement taxed by the
national government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses
operators or proprietors, who would be paying an additional 10% 55 VAT on top of the 30%
amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such
imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a
better position than those taxed under the LGC of 1991. We need not belabor that a literal
application of a law must be rejected if it will operate unjustly or lead to absurd
results.56 Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals, 57 to wit:
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.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of
VAT
Petitioner, in issuing the assessment notices for deficiency VAT against respondents,
ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to
amusement tax under Section 260 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code of 1939, computed on the amount paid for admission. With
the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated June 28,
1973, the power of imposing taxes on gross receipts from admission of persons to
cinema/theater and other places of amusement had, thereafter, been transferred to the
provincial government, to the exclusion of the national or municipal government (Sections
11 & 13, Local Tax Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed and/or deleted by
Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991,
enacted into law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus,
eliminating the statutory prohibition on the national government to impose business tax on
gross receipts from admission of persons to places of amusement, led the way to the valid
imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as
amended by the Expanded VAT Law (RA No. 7716) and which was implemented beginning
January 1, 1996.58(Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of
VAT on the gross receipts of cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition under the Local Tax Code did not grant nor
restore to the national government the power to impose amusement tax on cinema/theater
operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of
a tax is a burden on the taxpayer, it cannot be presumed nor can it be extended by
implication. A law will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously.59 As it is, the power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001
which imposes VAT on the gross receipts from admission to cinema houses must be struck
down. We cannot overemphasize that RMCs must not override, supplant, or modify the law,
but must remain consistent and in harmony with, the law they seek to apply and
implement.60
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied
with the procedural due process for tax issuances as prescribed under RMC No. 20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their entitlement
to an exemption from the coverage of VAT. The rule that tax exemptions should be
construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to
the tax being levied against him. 61 The reason is obvious: it is both illogical and impractical to
44
determine who are exempted without first determining who are covered by the
provision.62 Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what
applies is the equally well-settled rule that the imposition of a tax cannot be presumed. 63 In
fact, in case of doubt, tax laws must be construed strictly against the government and in
favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the
Court of Tax Appeals En Banc holding that gross receipts derived by respondents from
admission tickets in showing motion pictures, films or movies are not subject to value-added
tax under Section 108 of the National Internal Revenue Code of 1997, as amended, and its
June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.

SO ORDERED.
G.R. No. 166829. April 19, 2010.*

TFS, INCORPORATED, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

Civil Procedure; Appeals; Court of Tax Appeals; Jurisdiction; Jurisdiction to review

decisions or resolutions issued by the Division of the Court of Tax Appeals is no longer with
the Court of Appeals but with the Court of Tax Appeals En Banc.—Jurisdiction to review
decisions or resolutions issued by the Divisions of the CTA is no longer with the CA but with
the CTA En Banc. This rule is embodied in Section 11 of RA 9282, which provides that:
“SECTION 11. Section 18 of the same Act is hereby amended as follows: SEC.  18. Appeal to
the Court of Tax Appeals En Banc.—No civil proceeding involving matters arising under the
National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code
shall be maintained, except as herein provided, until and unless an appeal has been
previously filed with the CTA and disposed of in accordance with the provisions of this Act. A
party adversely affected by a resolution of a Division of the CTA on a motion for
reconsideration or new trial, may file a petition for review with the CTA en banc.

Same; Same; Same; Same; An appeal must be perfected within the reglementary period
provided by law—Supreme Court excused the late filing of the notices of appeal because
at the time the said notices of appeal were filed, the new rules applicable therein had just
been recently issued.—It is settled that an appeal must be perfected within the
reglementary period provided by law; otherwise, the decision becomes final and executory.
However, as in all cases, there are exceptions to the strict application of the rules for
perfecting an appeal. We are aware of our rulings in Mactan Cebu International Airport
Authority v. Mangubat, 312 SCRA 463 (1999), and in Alfonso v. Sps. Andres, 390 SCRA 465
(2002), wherein we excused the late filing of the notices of appeal because at the time the
said notices of appeal were filed, the new rules applicable therein had just been recently
issued. We noted that judges and lawyers need time to familiarize themselves with recent
rules.

45
Attorneys; Although a client is bound by the acts of his counsel, including the latter’s
mistakes and negligence, a departure from this rule is warranted where such mistake or
neglect would result in serious injustice to the client.—Although a client is bound by the
acts of his counsel, including the latter’s mistakes and negligence, a departure from this rule
is warranted where such mistake or neglect would result in serious injustice to the client.
Procedural rules may thus be relaxed for persuasive reasons to relieve a litigant of an
injustice not commensurate with his failure to comply with the prescribed procedure. Such
is the situation in this case.
respectively, for the taxable year 1998. Insisting that there was no basis for the issuance of
PAN, petitioner through a letter4 dated January 28, 2002 requested the Bureau of Internal
Revenue (BIR) to withdraw and set aside the assessments.
In a letter-reply5 dated February 7, 2002, respondent Commissioner of Internal Revenue
(CIR) informed petitioner that a Final Assessment Notice (FAN) 6 was issued on January 25,
2002, and that petitioner had until February 22, 2002 within which to file a protest letter.
On February 20, 2002, petitioner protested the FAN in a letter 7 dated February 19, 2002.

Civil Procedure; Appeals; Although strict compliance with the rules for perfecting an
appeal is indispensable for the prevention of needless delays and for the orderly and
expeditious dispatch of judicial business, strong compelling reasons such as serving the
ends of justice and preventing a grave miscarriage may nevertheless warrant the
suspension of the rules.—In fine, although strict compliance with the rules for perfecting an
appeal is indispensable for the prevention of needless delays and for the orderly and
expeditious dispatch of judicial business, strong compelling reasons such as serving the ends
of justice and preventing a grave miscarriage may nevertheless warrant the suspension of
the rules. In the instant case, we are constrained to disregard procedural rules because we
cannot in conscience allow the government to collect deficiency VAT from petitioner
considering that the government has no right at all to collect or to receive the same.
Besides, dismissing this case on a mere technicality would lead to the unjust enrichment of
the government at the expense of petitioner, which we cannot permit. Technicalities should
never be used as a shield to perpetrate or commit an injustice. TFS, Incorporated vs.
Commissioner of Internal Revenue, 618 SCRA 346, G.R. No. 166829<br/> April 19, 2010
DEL CASTILLO, J.:
There being no action taken by the CIR, petitioner filed a Petition for Review 8 with the CTA
on September 11, 2002, docketed as CTA Case No. 6535.
During trial, petitioner offered to compromise and to settle the assessment for deficiency
EWT with the BIR. Hence, on September 24, 2003, it filed a Manifestation and Motion
withdrawing its appeal on the deficiency EWT, leaving only the issue of VAT on pawnshops
to be threshed out. Since no opposition was made by the CIR to the Motion, the same was
granted by the CTA on November 4, 2003.
Ruling of the Court of the Tax Appeals
On April 29, 2004, the CTA rendered a Decision9 upholding the assessment issued against
petitioner in the amount of ₱11,905,696.32, representing deficiency VAT for the year 1998,
inclusive of 25% surcharge and 20% deficiency interest, plus 20% delinquency interest from
February 25, 2002 until full payment, pursuant to Sections 248 and 249(B) of the National
Internal Revenue Code of 1997 (NIRC). The CTA ruled that pawnshops are subject to VAT
under Section 108(A) of the NIRC as they are engaged in the sale of services for a fee,
remuneration or consideration.10

Only in highly meritorious cases, as in the instant case, may the rules for perfecting an
Aggrieved, petitioner moved for reconsideration 11 but the motion was denied by the CTA in
appeal be brushed aside.
its Resolution dated July 20, 2004,12 which was received by petitioner on July 30, 2004.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside
Ruling of the Court of Appeals
the November 18, 20041 Resolution of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB
No. 29 which dismissed petitioner’s Petition for Review for having been filed out of time.
On August 16, 2004, petitioner filed before the Court of Appeals (CA) a Motion for Extension
Also assailed is the January 24, 20052 Resolution denying the motion for reconsideration.
of Time to File Petition for Review. 13 On August 24, 2004, it filed a Petition for Review 14 but it
was dismissed by the CA in its Resolution 15dated August 31, 2004, for lack of jurisdiction in
Factual Antecedents
view of the enactment of Republic Act No. 9282 (RA 9282). 16

Petitioner TFS, Incorporated is a duly organized domestic corporation engaged in the

Ruling of the Court of Tax Appeals En Banc
pawnshop business. On January 15, 2002, petitioner received a Preliminary Assessment
Notice (PAN)3 for deficiency value added tax (VAT), expanded withholding tax (EWT), and
Realizing its error, petitioner filed a Petition for Review 17 with the CTA En Banc on September
compromise penalty in the amounts of ₱11,764,108.74, ₱183,898.02 and ₱25,000.00,
16, 2004. The petition, however, was dismissed for having been filed out of time per
46
Resolution dated November 18, 2004. Petitioner filed a Motion for Reconsideration but it
was denied in a Resolution dated January 24, 2005.
Hence, this petition.
Issues
In its Memorandum, petitioner interposes the following issues:
18
WHETHER THE HONORABLE COURT OF TAX APPEALS EN BANC SHOULD HAVE
GIVEN DUE COURSE TO THE PETITION FOR REVIEW AND NOT STRICTLY APPLIED
THE TECHNICAL RULES OF PROCEDURE TO THE DETRIMENT OF JUSTICE.
WHETHER OR NOT PETITIONER IS SUBJECT TO THE 10% VAT. 19
Petitioner’s Arguments
Petitioner admits that it failed to timely file its Petition for Review with the proper court
(CTA). However, it attributes the procedural lapse to the inadvertence or honest oversight
of its counsel, who believed that at the time the petition was filed on August 24, 2004, the
CA still had jurisdiction since the rules and regulations to implement the newly enacted RA
9282 had not yet been issued and the membership of the CTA En Banc was not complete. In
view of these circumstances, petitioner implores us to reverse the dismissal of its petition
and consider the timely filing of its petition with the CA, which previously exercised
jurisdiction over appeals from decisions/resolutions of the CTA, as substantial compliance
with the then recently enacted RA 9282.
Petitioner also insists that the substantive merit of its case outweighs the procedural
infirmity it committed. It claims that the deficiency VAT assessment issued by the BIR has no
legal basis because pawnshops are not subject to VAT as they are not included in the
enumeration of services under Section 108(A) of the NIRC.
Respondent’s Arguments
The CIR, on the other hand, maintains that since the petition was filed with the CTA beyond
the reglementary period, the Decision had already attained finality and can no longer be
opened for review. As to the issue of VAT on pawnshops, he opines that petitioner’s liability
is a matter of law; and in the absence of any provision providing for a tax exemption,
petitioner’s pawnshop business is subject to VAT.
Our Ruling
The petition is meritorious.
Jurisdiction to review decisions or resolutions issued by the Divisions of the CTA is no longer
with the CA but with the CTA En Banc. This rule is embodied in Section 11 of RA 9282, which
provides that:
SECTION 11. Section 18 of the same Act is hereby amended as follows:
SEC. 18. Appeal to the Court of Tax Appeals En Banc. – No civil proceeding involving matters
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein provided, until and unless an appeal
has been previously filed with the CTA and disposed of in accordance with the provisions of
this Act.
A party adversely affected by a resolution of a Division of the CTA on a motion for
reconsideration or new trial, may file a petition for review with the CTA en banc. (Emphasis
supplied)
Procedural rules may be relaxed in the interest of substantial justice
It is settled that an appeal must be perfected within the reglementary period provided by
law; otherwise, the decision becomes final and executory. 20 However, as in all cases, there
are exceptions to the strict application of the rules for perfecting an appeal. 21
We are aware of our rulings in Mactan Cebu International Airport Authority v.
Mangubat22 and in Alfonso v. Sps. Andres,23 wherein we excused the late filing of the notices
of appeal because at the time the said notices of appeal were filed, the new
rules24 applicable therein had just been recently issued. We noted that judges and lawyers
need time to familiarize themselves with recent rules.
However, in Cuevas v. Bais Steel Corporation 25 we found that the relaxation of rules was
unwarranted because the delay incurred therein was inexcusable. The subject SC Circular 39-
98 therein took effect on September 1, 1998, but the petitioners therein filed their petition
for certiorari five months after the circular took effect.
In the instant case, RA 9282 took effect on April 23, 2004, while petitioner
filed its Petition for Review on Certiorari with the CA on August 24, 2004, or four months
after the effectivity of the law. By then, petitioner’s counsel should have been aware of and
familiar with the changes introduced by RA 9282. Thus, we find petitioner’s argument on the
newness of RA 9282 a bit of a stretch.
Petitioner likewise cannot validly claim that its erroneous filing of the petition with the CA
was justified by the absence of the CTA rules and regulations and the incomplete
membership of the CTA En Banc as these did not defer the effectivity 26 and implementation
47
of RA 9282. In fact, under Section 2 of RA 9282,27 the presence of four justices already
constitutes a quorum for En Banc sessions and the affirmative votes of four members of the
CTA En Banc are sufficient to render judgment.28 Thus, to us, the petitioner’s excuse of
"inadvertence or honest oversight of counsel" deserves scant consideration.
However, we will overlook this procedural lapse in the interest of substantial justice.
Although a client is bound by the acts of his counsel, including the latter’s mistakes and
negligence, a departure from this rule is warranted where such mistake or neglect would
result in serious injustice to the client. 29 Procedural rules may thus be relaxed for persuasive
reasons to relieve a litigant of an injustice not commensurate with his failure to comply with
the prescribed procedure.30 Such is the situation in this case.
Imposition of VAT on pawnshops for the tax years 1996 to 2002 was deferred
Petitioner disputes the assessment made by the BIR for VAT deficiency in the amount of
₱11,905,696.32 for taxable year 1998 on the ground that pawnshops are not included in the
coverage of VAT.
We agree.
In First Planters Pawnshop, Inc. v. Commissioner of Internal Revenue, 31 we ruled that:
x x x Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax
years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-
bank financial intermediaries being specifically deferred by law, then petitioner is not
liable for VAT during these tax years. But with the full implementation of the VAT system on
non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for
said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is
no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5%, as
the case may be. (Emphasis in the original text)1avvphi1
Guided by the foregoing, petitioner is not liable for VAT for the year 1998. Consequently, the
VAT deficiency assessment issued by the BIR against petitioner has no legal basis and must
therefore be cancelled. In the same vein, the imposition of surcharge and interest must be
deleted.32
In fine, although strict compliance with the rules for perfecting an appeal is indispensable
for the prevention of needless delays and for the orderly and expeditious dispatch of judicial
business, strong compelling reasons such as serving the ends of justice and preventing a
grave miscarriage may nevertheless warrant the suspension of the rules. 33 In the instant
case, we are constrained to disregard procedural rules because we cannot in conscience
allow the government to collect deficiency VAT from petitioner considering that the
government has no right at all to collect or to receive the same. Besides, dismissing this case
on a mere technicality would lead to the unjust enrichment of the government at the
expense of petitioner, which we cannot permit. Technicalities should never be used as a
shield to perpetrate or commit an injustice.
WHEREFORE, the Petition is GRANTED. The assailed November 18, 2004 Resolution of the
Court of Tax Appeals En Banc in C.T.A. EB No. 29 which dismissed petitioner’s Petition for
Review for having been filed out of time, and the January 24, 2005 Resolution which denied
the motion for reconsideration, are hereby REVERSED and SET ASIDE. The assessment for
deficiency Value Added Tax for the taxable year 1998, including surcharges, deficiency
interest and delinquency interest, are hereby CANCELLED and SET ASIDE.
SO ORDERED.
G.R. No. 177127. October 11, 2010.*
J.R.A. PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.
Taxation; Value Added Tax; Failure to print words “zero-rated sales” on receipts fatal to
claim for refund of value-added tax (VAT).—Section 4.108-1 of RR 7-95 proceeds from the
rule-making authority granted to the Secretary of Finance under Section 245 of the 1977
NIRC (Presidential Decree 1158) for the efficient enforcement of the tax code and of course
its amendments. The requirement is reasonable and is in accord with the efficient collection
of VAT from the covered sales of goods and services. As aptly explained by the CTA’s First
Division, the appearance of the word “zero-rated” on the face of invoices covering zero-
rated sales prevents buyers from falsely claiming input VAT from their purchases when no
VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the
government would be refunding money it did not collect. Further, the printing of the word
“zero-rated” on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from
those sales that are zero-rated. Unable to submit the proper invoices, petitioner Panasonic
has been unable to substantiate its claim for refund.
Same; Same; Failure to print the word “zero-rated” on the invoices/receipts is fatal to a
claim for credit/refund of input value-added tax (VAT) on zero-rated sales.—Consistent
with the foregoing jurisprudence, petitioner’s claim for credit/refund of input VAT for the
taxable quarters of 2000 must be denied. Failure to print the word “zero-rated” on the
invoices/receipts is fatal to a claim for credit/refund of input VAT on zero-rated sales.
DEL CASTILLO, J.:
Stare decisis et non quieta movere.
48
Courts are bound by prior decisions. Thus, once a case has been decided one way, courts
have no choice but to resolve subsequent cases involving the same issue in the same
manner.1 We ruled then, as we rule now, that failure to print the word "zero-rated" in the
invoices/receipts is fatal to a claim for credit/refund of input value-added tax (VAT) on zero-
rated sales.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside
the January 15, 2007 Decision2 and the March 16, 2007
Resolution3 of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Petitioner J.R.A. Philippines, Inc., a domestic corporation, is engaged in the manufacture and
wholesale export of jackets, pants, trousers, overalls, shirts, polo shirts, ladies’ wear,
dresses and other wearing apparel.4 It is registered with the Bureau of Internal Revenue
(BIR) as a VAT taxpayer5 and as an Ecozone Export Enterprise with the Philippine Economic
Zone Authority (PEZA).6
On separate dates, petitioner filed with the Revenue District Office (RDO) No. 54 of the BIR,
Trece Martires City, applications for tax credit/refund of unutilized input VAT on its zero-
rated sales for the taxable quarters of 2000 in the total amount of ₱8,228,276.34, broken
down as follows:
1st quarter ₱ 2,369,060.97
2nd quarter 2,528,126.02
3rd quarter 1,918,015.38
4th quarter 1,413,073.977
The claim for credit/refund, however, remained unacted by the respondent. Hence,
petitioner was constrained to file a petition before the CTA.
Proceedings before the Second Division of the Court of Tax Appeals
On April 16, 2002, petitioner filed a Petition for Review with the CTA for the refund/credit of
8 Motion for lack of merit in a Resolution 17 dated October 5, 2005. This prompted petitioner to
the same input VAT which was docketed as CTA Case No.
6454 and raffled to the Second Division of the CTA.
In his Answer,9 respondent interposed the following special and affirmative defenses, to wit:
4. Petitioner’s alleged claim for refund is subject to administrative routinary
investigation/examination by the Bureau;
5. Being allegedly registered with the Philippine Economic Zone Authority as an
export enterprise, petitioner’s business is not subject to VAT pursuant to Section 24
of R.A. No. 7916 in relation to Section 109 (q) of the Tax Code. Hence, it is not
entitled to tax credit of input taxes pursuant to Section 4.103-1 of Revenue
Regulations No. 7-95;
6. The amount of ₱8,228,276.34 being claimed by petitioner as alleged unutilized
VAT input taxes for the year 2000 was not properly documented;
7. In an action for refund, the burden of proof is on the taxpayer to establish its
right to refund, and failure to [do so] is fatal to the claim for refund/ credit;
8. Petitioner must show that it has complied with the provisions of Section 204 (c)
and 229 of the Tax Code on the prescriptive period for claiming tax refund/credit;
9. Claims for refund are construed strictly against the claimant for the same partake
the nature of exemption from taxation.10
After trial, the Second Division of the CTA rendered a Decision 11 denying petitioner’s claim
for refund/credit of input VAT attributable to its zero-rated sales due to the failure of
petitioner to indicate its Taxpayer’s Identification Number-VAT (TIN-V) and the word "zero-
rated" on its invoices.12 Thus, the fallo reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and,
accordingly,DISMISSED for lack of merit.
SO ORDERED.13
Aggrieved by the Decision, petitioner filed a Motion for Reconsideration 14 to which
respondent filed an Opposition.15 Petitioner, in turn, tendered a Reply.16
The Second Division of the CTA, however, stood firm on its Decision and denied petitioner’s
elevate the matter to the CTA En Banc.18
Ruling of the CTA En Banc
49
On January 15, 2007, the CTA En Banc denied the petition, reiterating that failure to comply
with invoicing requirements results in the denial of a claim for refund. 19 Hence, it disposed of
the petition as follows:
WHEREFORE, the petition for review is DENIED for lack of merit. ACCORDINGLY, the
Decision dated June 30, 2005 and Resolution dated October 5, 2005 of Second Division of
the Court of Tax Appeals in C.T.A Case No. 6454 are hereby AFFIRMED.
SO ORDERED.20
Presiding Justice Ernesto D. Acosta (Presiding Justice Acosta) concurred with the findings of
the majority that there was failure on the part of petitioner to comply with the invoicing
requirements;21 he dissented, however, to the outright denial of petitioner’s claim since
there are other pieces of evidence proving petitioner’s transactions and VAT status. 22
Petitioner sought reconsideration23 of the Decision but the CTA En Banc
denied the same in a Resolution24 dated March 16, 2007. Presiding Justice Acosta maintained
his dissent.
Issue
Hence, the instant Petition with the solitary issue of whether the failure to print the word
"zero-rated" on the invoices/receipts is fatal to a claim for credit/ refund of input VAT on
zero-rated sales.
Petitioner’s Arguments
Petitioner submits that:
THE COURT OF TAX APPEALS ERRED BY DECIDING QUESTIONS OF SUBSTANCE IN A
MANNER THAT IS NOT IN ACCORD WITH LAW AND JURISPRUDENCE, IN THAT:
A. THE INVOICING REQUIREMENTS UNDER THE 1997 TAX CODE DO NOT
REQUIRE THAT INVOICES AND/OR RECEIPTS ISSUED BY A VAT-REGISTERED
TAXPAYER, SUCH AS THE PETITIONER, SHOULD BE IMPRINTED WITH THE
WORD "ZERO-RATED."
B. THE INVOICING REQUIREMENTS PRESCRIBED BY THE 1997 TAX CODE
AND THE REQUIREMENT THAT THE WORDS "ZERO-RATED" BE IMPRINTED
ON THE SALES INVOICES/OFFICIAL RECEIPTS UNDER REVENUE
REGULATIONS NO. 7-95 ARE NOT EVIDENTIARY RULES AND THE ABSENCE
THEREOF IS NOT FATAL TO A TAXPAYER’S CLAIM FOR REFUND.
C. RESPONDENT’S REGULATIONS ARE INVALID BECAUSE THEY DO NOT
IMPLEMENT THE 1997 TAX CODE BUT INSTEAD, [EXCEED] THE
LIMITATIONS OF THE LAW.
D. PETITIONER PRESENTED SUBSTANTIAL EVIDENCE THAT
UNEQUIVOCALLY PROVED PETITIONER’S ZERO-RATED TRANSACTIONS
FOR THE YEAR 2000.
E. NO PREJUDICE CAN RESULT TO THE GOVERNMENT BY REASON OF THE
FAILURE OF PETITIONER TO IMPRINT THE WORD "ZERO-RATED" ON ITS
INVOICES. PETITIONER’S CLIENTS FOR ITS ZERO-RATED TRANSACTIONS
CANNOT UNDULY BENEFIT FROM ITS "OMISSION" CONSIDERING THAT
THEY ARE NON-RESIDENT FOREIGN CORPORATIONS [that] ARE NOT
COVERED BY THE PHILIPPINE VAT SYSTEM.
F. IN CIVIL CASE[S], SUCH AS CLAIMS FOR REFUND, STRICT COMPLIANCE
WITH TECHNICAL RULES OF EVIDENCE IS NOT REQUIRED. MOREOVER, A
MERE PREPONDERANCE OF EVIDENCE WILL SUFFICE TO JUSTIFY THE
GRANT OF A CLAIM.25
Respondent’s Arguments
Emphasizing that tax refunds are in the nature of tax exemptions which are strictly
construed against the claimant, respondent seeks the affirmance of the assailed Decision
and Resolution of the CTA En Banc. 26 He insists that the denial of petitioner’s claim for tax
credit/refund is justified because it failed to comply with the invoicing requirements under
Section 4.108-127 of Revenue Regulations No. 7-95.
Our Ruling
The petition is bereft of merit.
The absence of the word "zero-rated" on the invoices/receipts is fatal to a claim for
credit/refund of input VAT
The question of whether the absence of the word "zero-rated" on the invoices/receipts is
fatal to a claim for credit/refund of input VAT is not novel. This has been squarely resolved
in Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita
Business Machine Corporation of the Philippines) v. Commissioner of Internal Revenue. 28 In that
case, we sustained the denial of petitioner’s claim for tax credit/refund for non-compliance
with Section 4.108-1 of Revenue Regulations No. 7-95, which requires the word "zero rated"
to be printed on the invoices/receipts covering zero-rated sales. We explained that:
50
Zero-rated transactions generally refer to the export sale of goods and services. The tax rate
in this case is set at zero. When applied to the tax base or the selling price of the goods or
services sold, such zero rate results in no tax chargeable against the foreign buyer or
customer. But, although the seller in such transactions charges no output tax, he can claim a
refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero
rating, which allows him to recover the input taxes he paid relating to the export sales,
making him internationally competitive.
For the effective zero rating of such transactions, however, the taxpayer has to be VAT-
registered and must comply with invoicing requirements. x x x
xxxx
part of the tax code. This conversion from regulation to law did not diminish the binding
force of such regulation with respect to acts committed prior to the enactment of that law.
Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary
of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient
enforcement of the tax code and of course its amendments. The requirement is reasonable
and is in accord with the efficient collection of VAT from the covered sales of goods and
services. As aptly explained by the CTA’s First Division, the appearance of the word "zero-
rated" on the face of invoices covering zero-rated sales prevents buyers from falsely
claiming input VAT from their purchases when no VAT was actually paid. If, absent such
word, a successful claim for input VAT is made, the government would be refunding money
it did not collect.

Petitioner Panasonic points out, however, that in requiring the printing on its sales invoices
of the word "zero-rated," the Secretary of Finance unduly expanded, amended, and
modified by a mere regulation (Section 4.108-1 of RR 7-95) the letter and spirit of Sections 113
and 237 of the 1997 NIRC, prior to their amendment by R.A. 9337. Panasonic argues that the
1997 NIRC, which applied to its payments – specifically Sections 113 and 237 – required the
VAT-registered taxpayer’s receipts or invoices to indicate only the following information:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer’s
identification number (TIN);
(2) The total amount which the purchaser [paid] or is obligated to pay to the seller
with the indication that such amount includes the value-added tax;
(3) The date of transaction, quantity, unit cost and description of the goods or
properties or nature of the service; and
Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are
subject to 10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the
proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund. 29
Consistent with the foregoing jurisprudence, petitioner’s claim for credit/ refund of input
VAT for the taxable quarters of 2000 must be denied. Failure to print the word "zero-rated"
on the invoices/receipts is fatal to a claim for credit/ refund of input VAT on zero-rated sales.
WHEREFORE, the petition is hereby DENIED. The assailed Decision dated January 15, 2007
and the Resolution dated March 16, 2007 of the Court of Tax Appeals En Banc are
hereby AFFIRMED.
SO ORDERED.

(4) The name, business style, if any, address and taxpayer's identification number
(TIN) of the purchaser, customer or client.

Petitioner Panasonic points out that Sections 113 and 237 did not require the inclusion of the
word "zero-rated" for zero-rated sales covered by its receipts or invoices. The BIR
incorporated this requirement only after the enactment of R.A. 9337 on November 1, 2005, a
law that did not yet exist at the time it issued its invoices.

But when petitioner Panasonic made the export sales subject of this case, i.e., from April
1998 to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known
as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on
December 9, 1995 and [which] took effect on January 1, 1996.1avvphil It already required the
printing of the word "zero-rated" on the invoices covering zero-rated sales. When R.A. 9337
amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a
51
G.R. No. 184823. October 6, 2010.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AICHI FORGING COMPANY OF

ASIA, INC., respondent.

Taxation; Value Added Tax (VAT); Prescription; Tax Refunds; Section 112(A) of the National
Internal Revenue Code (NIRC) is the applicable provision in determining the start of the
two-year period for claiming a refund/credit of unutilized input Value Added Tax (VAT), and
that Sections 204(C) and 229 of the NIRC are inapplicable as “both provisions apply only to
instances of erroneous payment or illegal collection of internal revenue taxes.”—The
pivotal question of when to reckon the running of the two-year prescriptive period,
however, has already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao
Corporation, 565 SCRA 154 (2008), where we ruled that Section 112(A) of the NIRC is the
applicable provision in determining the start of the two-year period for claiming a
refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of the NIRC are
inapplicable as “both provisions apply only to instances of erroneous payment or illegal
collection of internal revenue taxes.”

Same; Same; Same; Words and Phrases; As between the Civil Code, which provides that a
year is equivalent to 365 days, and the Administrative Code of 1987, which states that a
year is composed of 12 calendar months, it is the latter that must prevail following the legal
maxim, Lex posteriori derogat priori.—In Commissioner of Internal Revenue v. Primetown
Property Group, Inc., 531 SCRA 436 (2007), we said that as between the Civil Code, which
provides that a year is equivalent to 365 days, and the Administrative Code of 1987, which
states that a year is composed of 12 calendar months, it is the latter that must prevail
following the legal maxim, Lex posteriori derogat priori. Thus: Both Article 13 of the Civil
Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the
same subject matter—the computation of legal periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative
Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under
the Administrative Code of 1987, the number of days is irrelevant. There obviously exists a
52
manifest incompatibility in the manner of computing legal periods under the Civil Code and
the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book
I of the Administrative Code of 1987, being the more recent law, governs the computation of
legal periods. Lex posteriori derogat priori.
Same; Same; Same; Where the taxpayer did not wait for the decision of the Commission of
Internal Revenue or the lapse of the 120-day period, it having simultaneously filed the
administrative and the judicial claims, the filing of said judicial claim with the Court of Tax
Appeals is premature.—Section 112(D) of the NIRC clearly provides that the CIR has “120
days, from the date of the submission of the complete documents in support of the
application [for tax refund/credit],” within which to grant or deny the claim. In case of full or
partial denial by the CIR, the taxpayer’s recourse is to file an appeal before the CTA within 30
days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails
to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the
inaction of the CIR to CTA within 30 days. In this case, the administrative and the judicial
claims were simultaneously filed on September 30, 2004. Obviously, respondent did not wait
for the decision of the CIR or the lapse of the 120-day period. For this reason, we find the
filing of the judicial claim with the CTA premature.
Same; Same; Same; Words and Phrases; The phrase “within two (2) years x x x apply for
the issuance of a tax credit certificate or refund” in Section 112(A) of the National Internal
Revenue Code (NIRC) refers to applications for refund/credit filed with the Commission of
Internal Revenue (CIR) and not to appeals made to the Court of Tax Appeals (CTA)—
applying the two-year period to judicial claims would render nugatory Section 112(D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal
the decision or inaction of the CIR.—There is nothing in Section 112 of the NIRC to support
respondent’s view. Subsection (A) of the said provision states that “any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may, within two years after the
close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales.” The
phrase “within two (2) years x x x apply for the issuance of a tax credit certificate or refund”
refers to applications for refund/credit filed with the CIR and not to appeals made to the
CTA. This is apparent in the first paragraph of subsection (D) of the same provision, which
states that the CIR has “120 days from the submission of complete documents in support of
the application filed in accordance with Subsections (A) and (B)” within which to decide on
the claim. In fact, applying the two-year period to judicial claims would render nugatory
Section 112(D) of the NIRC, which already provides for a specific period within which a
taxpayer should appeal the decision or inaction of the CIR. The second paragraph of Section
112(D) of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR before
the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In
both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we
see it then, the 120-day period is crucial in filing an appeal with the CTA.
A taxpayer is entitled to a refund either by authority of a statute expressly granting such
right, privilege, or incentive in his favor, or under the principle of solutio indebiti requiring
the return of taxes erroneously or illegally collected. In both cases, a taxpayer must prove
not only his entitlement to a refund but also his compliance with the procedural due process
as non-observance of the prescriptive periods within which to file the administrative and the
judicial claims would result in the denial of his claim.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside
the July 30, 2008 Decision1 and the October 6, 2008 Resolution 2 of the Court of Tax Appeals
(CTA) En Banc.
Factual Antecedents
Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing
under the laws of the Republic of the Philippines, is engaged in the manufacturing,
producing, and processing of steel and its by-products. 3 It is registered with the Bureau of
Internal Revenue (BIR) as a Value-Added Tax (VAT) entity4 and its products, "close
impression die steel forgings" and "tool and dies," are registered with the Board of
Investments (BOI) as a pioneer status.5
On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the
period July 1, 2002 to September 30, 2002 in the total amount of ₱3,891,123.82 with the
petitioner Commissioner of Internal Revenue (CIR), through the Department of Finance
(DOF) One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center. 6
Proceedings before the Second Division of the CTA
On even date, respondent filed a Petition for Review 7 with the CTA for the refund/credit of
the same input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the
Second Division of the CTA.
In the Petition for Review, respondent alleged that for the period July 1, 2002 to September
30, 2002, it generated and recorded zero-rated sales in the amount of
₱131,791,399.00,8 which was paid pursuant to Section 106(A) (2) (a) (1), (2) and (3) of the
National Internal Revenue Code of 1997 (NIRC); 9 that for the said period, it incurred and paid
input VAT amounting to ₱3,912,088.14 from purchases and importation attributable to its
zero-rated sales;10and that in its application for refund/credit filed with the DOF One-Stop
Shop Inter-Agency Tax Credit and Duty Drawback Center, it only claimed the amount of
₱3,891,123.82.11
53
In response, petitioner filed his Answer 12 raising the following special and affirmative
defenses, to wit:
4. Petitioner’s alleged claim for refund is subject to administrative investigation by
the Bureau;
5. Petitioner must prove that it paid VAT input taxes for the period in question;
6. Petitioner must prove that its sales are export sales contemplated under Sections
106(A) (2) (a), and 108(B) (1) of the Tax Code of 1997;
7. Petitioner must prove that the claim was filed within the two (2) year period
prescribed in Section 229 of the Tax Code;
8. In an action for refund, the burden of proof is on the taxpayer to establish its
right to refund, and failure to sustain the burden is fatal to the claim for refund; and
9. Claims for refund are construed strictly against the claimant for the same partake
of the nature of exemption from taxation.13
Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a
Decision partially granting respondent’s claim for refund/credit. Pertinent portions of the
Decision read:
For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112
(A) of the NIRC of 1997, as amended, provides:
SEC. 112. Refunds or Tax Credits of Input Tax. –
(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied against output tax: x x x
Pursuant to the above provision, petitioner must comply with the following requisites: (1)
the taxpayer is engaged in sales which are zero-rated or effectively zero-rated; (2) the
taxpayer is VAT-registered; (3) the claim must be filed within two years after the close of the
taxable quarter when such sales were made; and (4) the creditable input tax due or paid
must be attributable to such sales, except the transitional input tax, to the extent that such
input tax has not been applied against the output tax.
The Court finds that the first three requirements have been complied [with] by petitioner.
With regard to the first requisite, the evidence presented by petitioner, such as the Sales
Invoices (Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it
is engaged in sales which are zero-rated.
The second requisite has likewise been complied with. The Certificate of Registration with
OCN 1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT
taxpayer.
In compliance with the third requisite, petitioner filed its administrative claim for refund on
September 30, 2004 (Exhibit "N") and the present Petition for Review on September 30,
2004, both within the two (2) year prescriptive period from the close of the taxable quarter
when the sales were made, which is from September 30, 2002.
As regards, the fourth requirement, the Court finds that there are some documents and
claims of petitioner that are baseless and have not been satisfactorily substantiated.
xxxx
In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax
credit certificate representing unutilized excess input VAT payments for the period July 1,
2002 to September 30, 2002, which are attributable to its zero-rated sales for the same
period, but in the reduced amount of ₱3,239,119.25, computed as follows:
Amount of Claimed Input VAT ₱ 3,891,123.82
Less:
Exceptions as found by the ICPA 41,020.37
Net Creditable Input VAT ₱ 3,850,103.45
Less:
Output VAT Due 610,984.20
Excess Creditable Input VAT ₱ 3,239,119.25
WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION TWO
HUNDRED THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100 PESOS
(₱3,239,119.25), representing the unutilized input VAT incurred for the months of July to
September 2002.
SO ORDERED.14
54
Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,15 insisting that the administrative and the judicial claims were filed beyond
the two-year period to claim a tax refund/credit provided for under Sections 112(A) and 229
of the NIRC. He reasoned that since the year 2004 was a leap year, the filing of the claim for
tax refund/credit on September 30, 2004 was beyond the two-year period, which expired on
September 29, 2004.16 He cited as basis Article 13 of the Civil Code, 17 which provides that
when the law speaks of a year, it is equivalent to 365 days. In addition, petitioner argued
that the simultaneous filing of the administrative and the judicial claims contravenes
Sections 112 and 229 of the NIRC. 18 According to the petitioner, a prior filing of an
administrative claim is a "condition precedent" 19 before a judicial claim can be filed. He
explained that the rationale of such requirement rests not only on the doctrine of
exhaustion of administrative remedies but also on the fact that the CTA is an appellate body
which exercises the power of judicial review over administrative actions of the BIR. 20
The Second Division of the CTA, however, denied petitioner’s Motion for Partial
Reconsideration for lack of merit. Petitioner thus elevated the matter to the CTA En Banc via
a Petition for Review.21
Ruling of the CTA En Banc
On July 30, 2008, the CTA En Banc affirmed the Second Division’s Decision allowing the
partial tax refund/credit in favor of respondent. However, as to the reckoning point for
counting the two-year period, the CTA En Banc ruled:
Petitioner argues that the administrative and judicial claims were filed beyond the period
allowed by law and hence, the honorable Court has no jurisdiction over the same. In
addition, petitioner further contends that respondent's filing of the administrative and
judicial [claims] effectively eliminates the authority of the honorable Court to exercise
jurisdiction over the judicial claim.
We are not persuaded.
Section 114 of the 1997 NIRC, and We quote, to wit:
SEC. 114. Return and Payment of Value-added Tax. –
(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall
file a quarterly return of the amount of his gross sales or receipts within twenty-five (25)
days following the close of each taxable quarter prescribed for each taxpayer: Provided,
however, That VAT-registered persons shall pay the value-added tax on a monthly basis.
[x x x x ]
Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of
each taxable quarter within which to file a quarterly return of the amount of his gross sales
or receipts. In the case at bar, the taxable quarter involved was for the period of July 1, 2002
to September 30, 2002. Applying Section 114 of the 1997 NIRC, respondent has until October
25, 2002 within which to file its quarterly return for its gross sales or receipts [with] which it
complied when it filed its VAT Quarterly Return on October 20, 2002.
In relation to this, the reckoning of the two-year period provided under Section 229 of the
1997 NIRC should start from the payment of tax subject claim for refund. As stated above,
respondent filed its VAT Return for the taxable third quarter of 2002 on October 20, 2002.
Thus, respondent's administrative and judicial claims for refund filed on September 30, 2004
were filed on time because AICHI has until October 20, 2004 within which to file its claim for
refund.
In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires
the previous filing of an administrative claim for refund prior to the judicial claim. This should
not be the case as the law does not prohibit the simultaneous filing of the administrative
and judicial claims for refund. What is controlling is that both claims for refund must be filed
within the two-year prescriptive period.
In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion
spelled out in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the
CTA Second Division. What the instant petition seeks is for the Court En Banc to view and
appreciate the evidence in their own perspective of things, which unfortunately had already
been considered and passed upon.
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008
Resolution of the CTA Second Division in CTA Case No. 7065 entitled, "AICHI Forging
Company of Asia, Inc. petitioner vs. Commissioner of Internal Revenue, respondent" are
hereby AFFIRMED in toto.
SO ORDERED.22
Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for
Reconsideration.
Issue
Hence, the present recourse where petitioner interposes the issue of whether respondent’s
judicial and administrative claims for tax refund/credit were filed within the two-year
prescriptive period provided in Sections 112(A) and 229 of
55
the NIRC.24
Petitioner’s Arguments
Petitioner maintains that respondent’s administrative and judicial claims for tax
refund/credit were filed in violation of Sections 112(A) and 229 of the NIRC. 25 He posits that
pursuant to Article 13 of the Civil Code, 26 since the year 2004 was a leap year, the filing of the
claim for tax refund/credit on September 30, 2004 was beyond the two-year period, which
expired on September 29, 2004.27
Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance
requirements in the payment of VAT. 28 He asserts that it is Section 112, paragraph (A), of the
same Code that should apply because it specifically provides for the period within which a
claim for tax refund/ credit should be made. 29
Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the
judicial claim with the CTA were filed on the same day. 30 He opines that the simultaneous
filing of the administrative and the judicial claims contravenes Section 229 of the NIRC,
which requires the prior filing of an administrative claim. 31 He insists that such procedural
requirement is based on the doctrine of exhaustion of administrative remedies and the fact
that the CTA is an appellate body exercising judicial review over administrative actions of the
CIR.32
Respondent’s Arguments
For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT
for the period July 1, 2002 to September 30, 2002 as a matter of right because it has
substantially complied with all the requirements provided by law. 33 Respondent likewise
defends the CTA En Banc in applying Section 114(A) of the NIRC in computing the prescriptive
period for the claim for tax refund/credit. Respondent believes that Section 112(A) of the
NIRC must be read together with Section 114(A) of the same Code. 34
As to the alleged simultaneous filing of its administrative and judicial claims, respondent
contends that it first filed an administrative claim with the One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the DOF before it filed a judicial claim with the CTA. 35 To
prove this, respondent points out that its Claimant Information Sheet No. 49702 36 and BIR
Form No. 1914 for the third quarter of 2002, 37 which were filed with the DOF, were attached
as Annexes "M" and "N," respectively, to the Petition for Review filed with the
CTA.38 Respondent further contends that the non-observance of the 120-day period given to
the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal because what is
important is that both claims are filed within the two-year prescriptive period. 39 In support
thereof, respondent cites Commissioner of Internal Revenue v. Victorias Milling Co.,
Inc.40 where it was ruled that "[i]f, however, the [CIR] takes time in deciding the claim, and
the period of two years is about to end, the suit or proceeding must be started in the [CTA]
before the end of the two-year period without awaiting the decision of the [CIR]." 41 Lastly,
respondent argues that even if the period had already lapsed, it may be suspended for
reasons of equity considering that it is not a jurisdictional requirement. 42
Our Ruling
The petition has merit.
Unutilized input VAT must be claimed within two years after the close of the taxable quarter
when the sales were made
In computing the two-year prescriptive period for claiming a refund/credit of unutilized
input VAT, the Second Division of the CTA applied Section 112(A) of the NIRC, which states:
SEC. 112. Refunds or Tax Credits of Input Tax. –
(A) Zero-rated or Effectively Zero-rated Sales – Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2)
and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in
zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid cannot be directly
and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales. (Emphasis supplied.)
The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the
NIRC, which read:
SEC. 114. Return and Payment of Value-Added Tax. –
(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall
file a quarterly return of the amount of his gross sales or receipts within twenty-five (25)
days following the close of each taxable quarter prescribed for each taxpayer: Provided,
however, That VAT-registered persons shall pay the value-added tax on a monthly basis.
56
Any person, whose registration has been cancelled in accordance with Section 236, shall file
a return and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, That only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office and all branches.
xxxx
SEC. 229. Recovery of tax erroneously or illegally collected. –
No suit or proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid.
(Emphasis supplied.)
Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not
from the close of the taxable quarter when the sales were made. 43
The pivotal question of when to reckon the running of the two-year prescriptive period,
however, has already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao
Corporation,44 where we ruled that Section 112(A) of the NIRC is the applicable provision in
determining the start of the two-year period for claiming a refund/credit of unutilized input
VAT, and that Sections 204(C) and 229 of the NIRC are inapplicable as "both provisions apply
only to instances of erroneous payment or illegal collection of internal revenue taxes." 45 We
explained that:
The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms
that unutilized input VAT payments not otherwise used for any internal revenue tax due
the taxpayer must be claimed within two years reckoned from the close of the taxable
quarter when the relevant sales were made pertaining to the input VAT regardless of
whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously applied the
aforequoted Sec. 112 (A), "[P]rescriptive period commences from the close of the taxable
quarter when the sales were made and not from the time the input VAT was paid nor from
the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input
VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for
refund or tax credit of the unutilized creditable input VAT. The reckoning frame would
always be the end of the quarter when the pertinent sales or transaction was made,
regardless when the input VAT was paid. Be that as it may, and given that the last creditable
input VAT due for the period covering the progress billing of September 6, 1996 is the third
quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable input VAT
refund or tax credit for said quarter prescribed two years after September 30, 1996 or, to be
precise, on September 30, 1998. Consequently, MPC’s claim for refund or tax credit filed on
December 10, 1999 had already prescribed.
Reckoning for prescriptive period under
Secs. 204(C) and 229 of the NIRC inapplicable
To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC
which, for the purpose of refund, prescribes a different starting point for the two-year
prescriptive limit for the filing of a claim therefor. Secs. 204(C) and 229 respectively provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.
– The Commissioner may –
xxxx
(c) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the tax
or penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.
xxxx
Sec. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, of any sum alleged to have been excessively or in
any manner wrongfully collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may be maintained, whether
or not such tax, penalty, or sum has been paid under protest or duress.
57
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid.
Notably, the above provisions also set a two-year prescriptive period, reckoned from date of
payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably
too, both provisions apply only to instances of erroneous payment or illegal collection of
internal revenue taxes.
the two-year period to file a claim for tax refund/ credit for the period July 1, 2002 to
September 30, 2002 expired on September 29, 2004.48
We do not agree.
In Commissioner of Internal Revenue v. Primetown Property Group, Inc., 49 we said that as
between the Civil Code, which provides that a year is equivalent to 365 days, and the
Administrative Code of 1987, which states that a year is composed of 12 calendar months, it
is the latter that must prevail following the legal maxim, Lex posteriori derogat
priori.50 Thus:

MPC’s creditable input VAT not erroneously paid
For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can
be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or
services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-
tax exempt client, resulting in a zero-rated or effectively zero-rated transaction, does not,
standing alone, deprive the taxpayer of its right to a refund for any unutilized creditable
input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the
equation.
xxxx
Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a
two-year prescriptive period reckoned from the close of the taxable quarter when the
relevant sales or transactions were made pertaining to the creditable input VAT, applies to
the instant case, and not to the other actions which refer to erroneous payment of
taxes.46 (Emphasis supplied.)
In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A)
and 229 of the NIRC in computing the two-year prescriptive period for claiming refund/credit
of unutilized input VAT. To be clear, Section 112 of the NIRC is the pertinent provision for the
refund/credit of input VAT. Thus, the two-year period should be reckoned from the close of
the taxable quarter when the sales were made.
Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative
Code of 1987 deal with the same subject matter – the computation of legal periods. Under
the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year.
Under the Administrative Code of 1987, however, a year is composed of 12 calendar months.
Needless to state, under the Administrative Code of 1987, the number of days is irrelevant.
There obviously exists a manifest incompatibility in the manner of
computing legal periods under the Civil Code and the Administrative Code of 1987. For this
reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987,
being the more recent law, governs the computation of legal periods. Lex posteriori derogat
priori.
Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the
two-year prescriptive period (reckoned from the time respondent filed its final adjusted
return on April 14, 1998) consisted of 24 calendar months, computed as follows:
Year 1 1st calendar month April 15, 1998 to May 14, 1998
2nd calendar month May 15, 1998 to June 14, 1998
3rd calendar month June 15, 1998 to July 14, 1998
4th calendar month July 15, 1998 to August 14, 1998

The administrative claim was timely filed 5th calendar month August 15, 1998 to September 14, 1998
6th calendar month September 15, 1998 to October 14, 1998
Bearing this in mind, we shall now proceed to determine whether the administrative claim
was timely filed. 7th calendar month October 15, 1998 to November 14, 1998
8th calendar month November 15, 1998 to December 14, 1998
Relying on Article 13 of the Civil Code, 47 which provides that a year is equivalent to 365 days,
and taking into account the fact that the year 2004 was a leap year, petitioner submits that 9th calendar month December 15, 1998 to January 14, 1999

58
 10th calendar month
11th calendar month
12th calendar month
Year 2 13th calendar month
14th calendar month
15th calendar month
16th calendar month
17th calendar month
18th calendar month
19th calendar month
20th calendar month
21st calendar month
22nd calendar month
23rd calendar month
24th calendar month
January 15, 1999 to February 14, 1999
February 15, 1999 to March 14, 1999
March 15, 1999 to April 14, 1999
April 15, 1999 to May 14, 1999
May 15, 1999 to June 14, 1999
June 15, 1999 to July 14, 1999
July 15, 1999 to August 14, 1999
August 15, 1999 to September 14, 1999
September 15, 1999 to October 14, 1999
October 15, 1999 to November 14, 1999
November 15, 1999 to December 14, 1999
December 15, 1999 to January 14, 2000
January 15, 2000 to February 14, 2000
February 15, 2000 to March 14, 2000
March 15, 2000 to April 14, 2000
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases,
the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals. (Emphasis supplied.)
Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the
submission of the complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In case of full or partial denial by
the CIR, the taxpayer’s recourse is to file an appeal before the CTA within 30 days from
receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act on
the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of
the CIR to CTA within 30 days.
In this case, the administrative and the judicial claims were simultaneously filed on
September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or the
lapse of the 120-day period. For this reason, we find the filing of the judicial claim with the
CTA premature.

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last Respondent’s assertion that the non-observance of the 120-day period is not fatal to the
day of the 24th calendar month from the day respondent filed its final adjusted return. filing of a judicial claim as long as both the administrative and the judicial claims are filed
Hence, it was filed within the reglementary period.51 within the two-year prescriptive period52 has no legal basis.

Applying this to the present case, the two-year period to file a claim for tax refund/credit for
the period July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence,
respondent’s administrative claim was timely filed.
The filing of the judicial claim was premature
However, notwithstanding the timely filing of the administrative claim, we
are constrained to deny respondent’s claim for tax refund/credit for having been filed in
violation of Section 112(D) of the NIRC, which provides that:
There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of
the said provision states that "any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales." The phrase "within two (2) years x x x apply
for the issuance of a tax credit certificate or refund" refers to applications for refund/credit
filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph
of subsection (D) of the same provision, which states that the CIR has "120 days from the
submission of complete documents in support of the application filed in accordance with
Subsections (A) and (B)" within which to decide on the claim.

SEC. 112. Refunds or Tax Credits of Input Tax. – In fact, applying the two-year period to judicial claims would render nugatory Section 112(D)
of the NIRC, which already provides for a specific period within which a taxpayer should
xxxx appeal the decision or inaction of the CIR. The second paragraph of Section 112(D) of the

59
NIRC envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the
120-day period; and (2) when no decision is made after the 120-day period. In both instances,
the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the
120-day period is crucial in filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is
Section 306, now Section 229 of the NIRC. And as already discussed, Section 229 does not
apply to refunds/credits of input VAT, such as the instant case.

In fine, the premature filing of respondent’s claim for refund/credit of input VAT before the
CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the
October 6, 2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET
ASIDE. The Court of Tax Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065
for having been prematurely filed.

SO ORDERED.

G.R. No. 173425. September 4, 2012.*

FORT BONIFACIO DEVELOPMENT CORPORATION, petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG
and PATEROS, BUREAU OF INTERNAL REVENUE, respondents.

Taxation; Value-Added Tax (VAT); Transitional Input Tax Credit; Prior payment of taxes is
not required to avail of the transitional input tax credit because it is not a tax refund per se
but a tax credit.—Prior payment of taxes is not required to avail of the transitional input tax
credit because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to
tax refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned
by the taxing authority. Tax credit, on the other hand, is an amount subtracted directly from
one’s total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an
incentive to encourage investment. Thus, unlike a tax refund, prior payment of taxes is not a
prerequisite to avail of a tax credit. In fact, in Commissioner of Internal Revenue v. Central
Luzon Drug Corp., 456 SCRA 414 (2005), we declared that prior payment of taxes is not
required in order to avail of a tax credit.

60
Carpio, J., Dissenting Opinion:
Taxation; Tax Credits; Tax Refunds; View that a taxpayer cannot claim a refund or credit of
a tax that was never paid because the law never imposed the tax in the first place, as in the
present case.—It is hornbook doctrine that a taxpayer cannot claim a refund or credit of a
tax that was never paid because the law never imposed the tax in the first place, as in the
present case. A tax refund or credit assumes a tax was previously paid, which means there
was a law that imposed the tax. The source of the tax refund or credit is the tax that was
previously paid, and this previously paid tax is simply being returned to the taxpayer due to
double, excessive, erroneous, advance or creditable tax payment.
Same; Same; Same; View that any tax refund or credit in favor of a specific taxpayer for a
tax that was never paid will have to be sourced from government funds. This is clearly an
expenditure of public funds for a private purpose.—Without such previous tax payment as
source, the tax refund or credit will be an expenditure of public funds for the exclusive
benefit of a specific private individual or entity. This violates the fundamental principle, as
ruled by this Court in several cases, that public funds can be used only for a public purpose.
Section 4(2) of the Government Auditing Code of the Philippines mandates that
“Government funds or property shall be spent or used solely for public purposes.” Any tax
refund or credit in favor of a specific taxpayer for a tax that was never paid will have to be
sourced from government funds. This is clearly An expenditure of public funds for a private
purpose. Congress cannot validly enact a law transferring government funds, raised through
taxation, to the pocket of a private individual or entity. A well-recognized inherent limitation
on the constitutional power of the State to levy taxes is that taxes can only be used for a
public purpose.
Same; Same; Same; View that such refund or credit without prior tax payment is an
expenditure of public funds without an appropriation law. This violates Section 29(1),
Article VI of the Constitution, which mandates that “No money shall be paid out of the
Treasury except in pursuance of an appropriation made by law.”—Such refund or credit
without prior tax payment is an expenditure of public funds without an appropriation law.
This violates Section 29(1), Article VI of the Constitution, which mandates that “No money
shall be paid out of the Treasury except in pursuance of an appropriation made by law.”
Without any previous tax payment as source, a tax refund or credit will be paid out of the
general funds of the government, a payment that requires an appropriation law. The Tax
Code, particularly its provisions on the VAT, is a revenue measure, not an appropriation law.
Same; Same; View that a tax credit is allowed for taxes previously paid when the same
goods and services are sold further in the chain of transactions. The purpose of this tax
crediting system is to prevent double taxation in the subsequent sale of the same product
and services that were already previously taxed.—The VAT is a tax on transactions. The VAT
is levied on the value that is added to goods and services at every link in the chain of
transactions. However, a tax credit is allowed for taxes previously paid when the same
goods and services are sold further in the chain of transactions. The purpose of this tax
crediting system is to prevent double taxation in the subsequent sale of the same product
and services that were already previously taxed. Taxes previously paid are thus allowed as
input VAT credits, which may be deducted from the output VAT liability.
Same; Same; Tax Refunds; Value-Added Tax (VAT); View that under the Value-Added Tax
(VAT) system, a tax refund or credit requires that a previous tax was paid by a taxpayer, or
in the case of the transitional input tax, that the tax imposed by law is presumed to have
been paid.—Under the VAT system, a tax refund or credit requires that a previous tax was
paid by a taxpayer, or in the case of the transitional input tax, that the tax imposed by law is
presumed to have been paid. Not a single centavo of VAT was paid, or could have been paid,
by anyone in the sale by the National Government to petitioner of the Global City land for
two basic reasons. First, the National Government is not subject to any tax, including VAT,
when the law authorizes it to sell government property like the Global City land. Second, in
1995 the old VAT law did not yet impose VAT on the sale of land and thus no VAT on the sale
of land could have been paid by anyone.
Same; Same; Same; View that availing of a tax credit and filing for a tax refund are
alternative options allowed by the Tax Code. The choice of one option precludes the other.
—Availing of a tax credit and filing for a tax refund are alternative options allowed by the
Tax Code. The choice of one option precludes the other. A taxpayer may either (1) apply for
a tax refund by filing for a written claim with the BIR within the prescriptive period, or (2)
avail of a tax credit subject to verification and approval by the BIR. A claim for tax credit
requires that a person who becomes liable to VAT for the first time must submit a list of his
inventories existing on the date of commencement of his status as a VAT-registered taxable
person. Both claims for a tax refund and credit are in the nature of a claim for exemption
and should be construed in strictissimi juris against the person or entity claiming it. The
burden of proof to establish the factual basis or the sufficiency and competency of the
supporting documents of the claim for tax refund or tax credit rests on the claimant.
Taxation; Value-Added Tax (VAT); Expanded Value-Added Tax Law (R.A. No. 7716); View that
under RA 7716 or the Expanded Value-Added Tax Law, the VAT was expanded to include
land or real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business.—Under RA 7716 or the Expanded Value-Added Tax Law, the
VAT was expanded to include land or real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business. Before this law was enacted, only
improvements on land were subject to VAT. Since the Global City land was not yet subject to
VAT at the time of the sale in 1995, the Global City land cannot be considered as part of the
beginning inventory under Section 105. Clearly, the 8% transitional input tax credit should
only be applied to improvements on the land but not to the land itself.
ABAD, J., Concurring Opinion:
DEL CASTILLO,  J.:
61
Courts cannot limit the application or coverage of a law nor can it impose conditions not
provided therein. To do so constitutes judicial legislation.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the July 7,
2006 Decision1 of the Court Appeals (CA) in CA-G.R. SP No. 61416, the dispositive portion of
which reads:
WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Decision dated
October 12, 2000 of the Court of Tax Appeals in CTA Case No. 5735, denying petitioner’s
claim for refund in the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two
Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47), is hereby AFFIRMED.
SO ORDERED.
Factual Antecedents
Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered domestic
corporation engaged in the development and sale of real property. 3 The Bases Conversion
Development Authority (BCDA), a wholly owned government corporation created under
Republic Act (RA) No. 7227,4 owns 45% of petitioner’s issued and outstanding capital stock;
while the Bonifacio Land Corporation, a consortium of private domestic corporations, owns
the remaining 55%.5
On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40, 6 dated December 8,
1992, petitioner purchased from the national government a portion of the Fort Bonifacio
reservation, now known as the Fort Bonifacio Global City (Global City). 7
On January 1, 1996, RA 7716 8 restructured the Value-Added Tax (VAT) system by amending
certain provisions of the old National Internal Revenue Code (NIRC). RA 7716 extended the
coverage of VAT to real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business.9
On September 19, 1996, petitioner submitted to the Bureau of Internal Revenue (BIR)
Revenue District No. 44, Taguig and Pateros, an inventory of all its real properties, the book
value of which aggregated ₱ 71,227,503,200.10Based on this value, petitioner claimed that it
is entitled to a transitional input tax credit of ₱ 5,698,200,256,11pursuant to Section 10512 of
the old NIRC.
In October 1996, petitioner started selling Global City lots to interested buyers. 13
For the first quarter of 1997, petitioner generated a total amount of ₱ 3,685,356,539.50 from
its sales and lease of lots, on which the output VAT payable was ₱
368,535,653.95.14 Petitioner paid the output VAT by making cash payments to the BIR
totalling ₱ 359,652,009.47 and crediting its unutilized input tax credit on purchases of goods
and services of ₱ 8,883,644.48.15
Realizing that its transitional input tax credit was not applied in computing its output VAT
for the first quarter of 1997, petitioner on November 17, 1998 filed with the BIR a claim for
refund of the amount of ₱ 359,652,009.47 erroneously paid as output VAT for the said
period.16
Ruling of the Court of Tax Appeals
On February 24, 1999, due to the inaction of the respondent Commissioner of Internal
Revenue (CIR), petitioner elevated the matter to the Court of Tax Appeals (CTA) via a
Petition for Review.17
In opposing the claim for refund, respondents interposed the following special and
affirmative defenses:
xxxx
8. Under Revenue Regulations No. 7-95, implementing Section 105 of the Tax Code as
amended by E.O. 273, the basis of the presumptive input tax, in the case of real estate
dealers, is the improvements, such as buildings, roads, drainage systems, and other similar
structures, constructed on or after January 1, 1988.
9. Petitioner, by submitting its inventory listing of real properties only on September 19,
1996, failed to comply with the aforesaid revenue regulations mandating that for purposes
of availing the presumptive input tax credits under its Transitory Provisions, "an inventory as
of December 31, 1995, of such goods or properties and improvements showing the quantity,
description, and amount should be filed with the RDO no later than January 31, 1996. x x x" 18
On October 12, 2000, the CTA denied petitioner’s claim for refund. According to the CTA,
"the benefit of transitional input tax credit comes with the condition that business taxes
should have been paid first." 19 In this case, since petitioner acquired the Global City property
under a VAT-free sale transaction, it cannot avail of the transitional input tax credit. 20 The
CTA likewise pointed out that under Revenue Regulations No. (RR) 7-95, implementing
Section 105 of the old NIRC, the 8% transitional input tax credit should be based on the value
of the improvements on land such as buildings, roads, drainage system and other similar
structures, constructed on or after January 1, 1998, and not on the book value of the real
property.21 Thus, the CTA disposed of the case in this manner:
WHEREFORE, in view of all the foregoing, the claim for refund representing alleged overpaid
value-added tax covering the first quarter of 1997 is hereby DENIED for lack of merit.
62
SO ORDERED.22 3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the
purpose of the transitional/presumptive input tax provided for in Section 105 of the National
Ruling of the Court of Appeals Internal Revenue Code.

Aggrieved, petitioner filed a Petition for Review 23 under Rule 43 of the Rules of Court before 3.05.g. Whether the economic and social objectives in the acquisition of the subject property
the CA. by petitioner from the Government should be taken into consideration. 29

On July 7, 2006, the CA affirmed the decision of the CTA. The CA agreed that petitioner is not
entitled to the 8% transitional input tax credit since it did not pay any VAT when it purchased
the Global City property.24 The CA opined that transitional input tax credit is allowed only
when business taxes have been paid and passed-on as part of the purchase price. 25 In
arriving at this conclusion, the CA relied heavily on the historical background of transitional
input tax credit.26 As to the validity of RR 7-95, which limited the 8% transitional input tax to
the value of the improvements on the land, the CA said that it is entitled to great weight as it
was issued pursuant to Section 24527 of the old NIRC.28
Issues
Hence, the instant petition with the principal issue of whether petitioner is entitled to a
refund of ₱ 359,652,009.47 erroneously paid as output VAT for the first quarter of 1997, the
resolution of which depends on:
Petitioner’s Arguments
Petitioner claims that it is entitled to recover the amount of ₱ 359,652,009.47 erroneously
paid as output VAT for the first quarter of 1997 since its transitional input tax credit of ₱
5,698,200,256 is more than sufficient to cover its output VAT liability for the said period. 30
Petitioner assails the pronouncement of the CA that prior payment of taxes is required to
avail of the 8% transitional input tax credit. 31 Petitioner contends that there is nothing in
Section 105 of the old NIRC to support such conclusion. 32
Petitioner further argues that RR 7-95, which limited the 8% transitional input tax credit to
the value of the improvements on the land, is invalid because it goes against the express
provision of Section 105 of the old NIRC, in relation to Section 100 33 of the same Code, as
amended by RA 7716.34

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue Respondents’ Arguments
Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input tax
credit which may be claimed under Section 105 of the National Internal Revenue Code to the Respondents, on the other hand, maintain that petitioner is not entitled to a transitional
"improvements" on real properties. input tax credit because no taxes were paid in the acquisition of the Global City
property.35 Respondents assert that prior payment of taxes is inherent in the nature of a
3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of transitional input tax.36 Regarding RR 7-95, respondents insist that it is valid because it was
the National Internal Revenue Code. issued by the Secretary of Finance, who is mandated by law to promulgate all needful rules
and regulations for the implementation of Section 105 of the old NIRC. 37
3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal
Revenue, and declaration of validity of said Regulations by the Court of Tax Appeals and Our Ruling
Court of Appeals, were in violation of the fundamental principle of separation of powers.
The petition is meritorious.
3.05.d. Whether there is basis and necessity to interpret and construe the provisions of
Section 105 of the National Internal Revenue Code. The issues before us are no longer new or novel as these have been resolved in the related
case of Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue.38
3.05.e. Whether there must have been previous payment of business tax by petitioner on its
land before it may claim the input tax credit granted by Section 105 of the National Internal Prior payment of taxes is not required
Revenue Code. for a taxpayer to avail of the 8%
transitional input tax credit

Section 105 of the old NIRC reads:

63
SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall, subject to the filing of an
inventory as prescribed by regulations, be allowed input tax on his beginning inventory of
goods, materials and supplies equivalent to 8% of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies, whichever is higher, which shall
be creditable against the output tax. (Emphasis supplied.)
Contrary to the view of the CTA and the CA, there is nothing in the above-quoted provision
to indicate that prior payment of taxes is necessary for the availment of the 8% transitional
input tax credit. Obviously, all that is required is for the taxpayer to file a beginning
inventory with the BIR.
To require prior payment of taxes, as proposed in the Dissent is not only tantamount to
judicial legislation but would also render nugatory the provision in Section 105 of the old
NIRC that the transitional input tax credit shall be "8% of the value of [the beginning]
inventory or the actual [VAT] paid on such goods, materials and supplies, whichever is
higher" because the actual VAT (now 12%) paid on the goods, materials, and supplies would
always be higher than the 8% (now 2%) of the beginning inventory which, following the view
of Justice Carpio, would have to exclude all goods, materials, and supplies where no taxes
were paid. Clearly, limiting the value of the beginning inventory only to goods, materials,
and supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it
would have specifically stated that the beginning inventory excludes goods, materials, and
supplies where no taxes were paid. As retired Justice Consuelo Ynares-Santiago has pointed
out in her Concurring Opinion in the earlier case of Fort Bonifacio:
If the intent of the law were to limit the input tax to cases where actual VAT was paid, it
could have simply said that the tax base shall be the actual value-added tax paid. Instead,
the law as framed contemplates a situation where a transitional input tax credit is claimed
even if there was no actual payment of VAT in the underlying transaction. In such cases, the
tax base used shall be the value of the beginning inventory of goods, materials and
supplies.39
Moreover, prior payment of taxes is not required to avail of the transitional input tax credit
because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax
refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned by
the taxing authority.40 Tax credit, on the other hand, is an amount subtracted directly from
one’s total tax liability.41 It is any amount given to a taxpayer as a subsidy, a refund, or an
incentive to encourage investment. Thus, unlike a tax refund, prior payment of taxes is not a
prerequisite to avail of a tax credit. In fact, in Commissioner of Internal Revenue v. Central
Luzon Drug Corp.,42 we declared that prior payment of taxes is not required in order to avail
of a tax credit.43 Pertinent portions of the Decision read:
While a tax liability is essential to the availment or use of any tax credit, prior tax payments
are not. On the contrary, for the existence or grant solely of such credit, neither a tax
liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions
granting or allowing tax credits, even though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to
certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is
a similar provision for donor’s taxes -- again when paid to a foreign country -- in computing
for the donor’s tax due. The tax credits in both instances allude to the prior payment of
taxes, even if not made to our government.
Under Section 110, a VAT (Value-Added Tax) - registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable
portion of any input tax not directly attributable to either activity. This input tax may either
be the VAT on the purchase or importation of goods or services that is merely due from --
not necessarily paid by -- such VAT-registered person in the course of trade or business; or
the transitional input tax determined in accordance with Section 111(A). The latter type may
in fact be an amount equivalent to only eight percent of the value of a VAT-registered
person’s beginning inventory of goods, materials and supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the said items. Clearly from this provision,
the tax credit refers to an input tax that is either due only or given a value by mere
comparison with the VAT actually paid -- then later prorated. No tax is actually paid prior to
the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is
allowed. For the purchase of primary agricultural products used as inputs -- either in the
processing of sardines, mackerel and milk, or in the manufacture of refined sugar and
cooking oil -- and for the contract price of public works contracts entered into with the
government, again, no prior tax payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-
rated may, under Section 112(A), apply for the issuance of a tax credit certificate for the
amount of creditable input taxes merely due -- again not necessarily paid to -- the
government and attributable to such sales, to the extent that the input taxes have not been
applied against output taxes. Where a taxpayer is engaged in zero-rated or effectively zero-
rated sales and also in taxable or exempt sales, the amount of creditable input taxes due
that are not directly and entirely attributable to any one of these transactions shall be
proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax
credit for VAT purposes, this provision -- as well as the one earlier mentioned -- shows that
the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this
provision, the imposition of a final withholding tax rate on cash and/or property dividends
received by a nonresident foreign corporation from a domestic corporation is subjected to
the condition that a foreign tax credit will be given by the domiciliary country in an amount
64
equivalent to taxes that are merely deemed paid. Although true, this provision actually
refers to the tax credit as a condition only for the imposition of a lower tax rate, not as a
deduction from the corresponding tax liability. Besides, it is not our government but the
domiciliary country that credits against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as
credits, against the income tax imposable under Title II, the amount of income taxes merely
incurred -- not necessarily paid -- by a domestic corporation during a taxable year in any
foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred but not
paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall
simply give a bond with sureties satisfactory to and approved by petitioner, in such sum as
may be required; and further conditioned upon payment by the taxpayer of any tax found
due, upon petitioner’s redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax treaties and
special laws that grant or allow tax credits, even though no prior tax payments have been
made.
Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in the state of residence,
but the tax paid in the former is merely allowed as a credit against the tax levied in the
latter. Apparently, payment is made to the state of source, not the state of residence. No
tax, therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit incentives.
To illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five
percent of the net value earned, or five or ten percent of the net local content of export. In
order to avail of such credits under the said law and still achieve its objectives, no prior tax
payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not indispensable
to the availment of a tax credit. Thus, the CA correctly held that the availment under RA
7432 did not require prior tax payments by private establishments concerned. However, we
do not agree with its finding that the carry-over of tax credits under the said special law to
succeeding taxable periods, and even their application against internal revenue taxes, did
not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment or use,
not the existence or grant, of a tax credit. Regarding this matter, a private establishment
reporting a net loss in its financial statements is no different from another that presents a
net income. Both are entitled to the tax credit provided for under RA 7432, since the law
itself accords that unconditional benefit. However, for the losing establishment to
immediately apply such credit, where no tax is due, will be an improvident usance. 44
In this case, when petitioner realized that its transitional input tax credit was not applied in
computing its output VAT for the 1st quarter of 1997, it filed a claim for refund to recover the
output VAT it erroneously or excessively paid for the 1st quarter of 1997. In filing a claim for
tax refund, petitioner is simply applying its transitional input tax credit against the output
VAT it has paid. Hence, it is merely availing of the tax credit incentive given by law to first
time VAT taxpayers. As we have said in the earlier case of Fort Bonifacio, the provision on
transitional input tax credit was enacted to benefit first time VAT taxpayers by mitigating
the impact of VAT on the taxpayer. 45 Thus, contrary to the view of Justice Carpio, the
granting of a transitional input tax credit in favor of petitioner, which would be paid out of
the general fund of the government, would be an appropriation authorized by law,
specifically Section 105 of the old NIRC.
The history of the transitional input tax credit likewise does not support the ruling of the
CTA and CA. In our Decision dated April 2, 2009, in the related case of Fort Bonifacio, we
explained that:
If indeed the transitional input tax credit is integrally related to previously paid sales taxes,
the purported causal link between those two would have been nonetheless extinguished
long ago. Yet Congress has reenacted the transitional input tax credit several times; that fact
simply belies the absence of any relationship between such tax credit and the long-
abolished sales taxes.
Obviously then, the purpose behind the transitional input tax credit is not confined to the
transition from sales tax to VAT.
There is hardly any constricted definition of "transitional" that will limit its possible meaning
to the shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the
transition one undergoes from not being a VAT-registered person to becoming a VAT-
registered person. Such transition does not take place merely by operation of law, E.O. No.
273 or Rep. Act No. 7716 in particular. It could also occur when one decides to start a
business. Section 105 states that the transitional input tax credits become available either to
(1) a person who becomes liable to VAT; or (2) any person who elects to be VAT-registered.
The clear language of the law entitles new trades or businesses to avail of the tax credit
once they become VAT-registered. The transitional input tax credit, whether under the Old
NIRC or the New NIRC, may be claimed by a newly-VAT registered person such as when a
business as it commences operations. If we view the matter from the perspective of a
starting entrepreneur, greater clarity emerges on the continued utility of the transitional
input tax credit.
65
Following the theory of the CTA, the new enterprise should be able to claim the transitional
input tax credit because it has presumably paid taxes, VAT in particular, in the purchase of
the goods, materials and supplies in its beginning inventory. Consequently, as the CTA held
below, if the new enterprise has not paid VAT in its purchases of such goods, materials and
supplies, then it should not be able to claim the tax credit. However, it is not always true
that the acquisition of such goods, materials and supplies entail the payment of taxes on the
part of the new business. In fact, this could occur as a matter of course by virtue of the
operation of various provisions of the NIRC, and not only on account of a specially legislated
exemption.
Let us cite a few examples drawn from the New NIRC. If the goods or properties are not
acquired from a person in the course of trade or business, the transaction would not be
subject to VAT under Section 105. The sale would be subject to capital gains taxes under
Section 24 (D), but since capital gains is a tax on passive income it is the seller, not the buyer,
who generally would shoulder the tax.
If the goods or properties are acquired through donation, the acquisition would not be
subject to VAT but to donor’s tax under Section 98 instead. It is the donor who would be
liable to pay the donor’s tax, and the donation would be exempt if the donor’s total net gifts
during the calendar year does not exceed ₱ 100,000.00.
If the goods or properties are acquired through testate or intestate succession, the transfer
would not be subject to VAT but liable instead for estate tax under Title III of the New NIRC.
If the net estate does not exceed ₱ 200,000.00, no estate tax would be assessed.
The interpretation proffered by the CTA would exclude goods and properties which are
acquired through sale not in the ordinary course of trade or business, donation or through
succession, from the beginning inventory on which the transitional input tax credit is based.
This prospect all but highlights the ultimate absurdity of the respondents’ position. Again,
nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or qualifies the
previous payment of VAT or any other taxes on the goods, materials and supplies as a pre-
requisite for inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered
persons, whether or not they previously paid taxes in the acquisition of their beginning
inventory of goods, materials and supplies. During that period of transition from non-VAT to
VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant
portion of the income it derived from its sales as output VAT. The transitional input tax
credit mitigates this initial diminution of the taxpayer's income by affording the opportunity
to offset the losses incurred through the remittance of the output VAT at a stage when the
person is yet unable to credit input VAT payments.
There is another point that weighs against the CTA’s interpretation. Under Section 105 of the
Old NIRC, the rate of the transitional input tax credit is "8% of the value of such inventory or
the actual value-added tax paid on such goods, materials and supplies, whichever is higher."
If indeed the transitional input tax credit is premised on the previous payment of VAT, then
it does not make sense to afford the taxpayer the benefit of such credit based on "8% of the
value of such inventory" should the same prove higher than the actual VAT paid. This intent
that the CTA alluded to could have been implemented with ease had the legislature shared
such intent by providing the actual VAT paid as the sole basis for the rate of the transitional
input tax credit.46
In view of the foregoing, we find petitioner entitled to the 8% transitional input tax credit
provided in Section 105 of the old NIRC. The fact that it acquired the Global City property
under a tax-free transaction makes no difference as prior payment of taxes is not a pre-
requisite.
Section 4.105-1 of RR 7-95 is
inconsistent with Section 105 of the old
NIRC
As regards Section 4.105-147 of RR 7-95 which limited the 8% transitional input tax credit to
the value of the improvements on the land, the same contravenes the provision of Section
105 of the old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716,
which defines "goods or properties," to wit:
SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – There
shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to 10% of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be paid by the
seller or transferor.
(1) The term "goods or properties" shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business; x x x
In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we
ruled that Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the
value of the improvement of the real properties, is a nullity. 48 Pertinent portions of the
Resolution read:
As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot
contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as
66
the definition of the term "goods" is concerned. This is a legislative act beyond the authority
of the CIR and the Secretary of Finance. The rules and regulations that administrative
agencies promulgate, which are the product of a delegated legislative power to create new
and additional legal provisions that have the effect of law, should be within the scope of the
statutory authority granted by the legislature to the objects and purposes of the law, and
should not be in contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions
of the enabling law.1âwphi1 An implementing rule or regulation cannot modify, expand, or
subtract from the law it is intended to implement. Any rule that is not consistent with the
statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue
regulations to implement statutes, they are without authority to limit the scope of the
statute to less than what it provides, or extend or expand the statute beyond its terms, or in
any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an
administrative agency for that matter cannot amend an act of Congress. Hence, in case of a
discrepancy between the basic law and an interpretative or administrative ruling, the basic
law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of

transitional input tax credit under Section 105 is a nullity. 49

As we see it then, the 8% transitional input tax credit should not be limited to the value of
the improvements on the real properties but should include the value of the real properties
as well.

In this case, since petitioner is entitled to a transitional input tax credit of ₱ 5,698,200,256,
which is more than sufficient to cover its output VAT liability for the first quarter of 1997, a
refund of the amount of ₱ 359,652,009.47 erroneously paid as output VAT for the said
quarter is in order.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July 7, 2006 of
the Court of Appeals in CA-G.R. SP No. 61436 is REVERSED and SET ASIDE. Respondent
Commissioner of Internal Revenue is ordered to refund to petitioner Fort Bonifacio
Development Corporation the amount of ₱ 359,652,009.47 paid as output VAT for the first
quarter of 1997 in light of the transitional input tax credit available to petitioner for the said
quarter, or in the alternative, to issue a tax credit certificate corresponding to such amount.
SO ORDERED.
G.R. No. 173425. January 22, 2013.*
FORT BONIFACIO DEVELOPMENT CORPORATION, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG
and PATEROS, BUREAU OF INTERNAL REVENUE, respondents.
Taxation; Transitional Input Tax Credit; Prior payment of taxes is not necessary before a
taxpayer could avail of the 8% transitional input tax credit.—It is argued that prior payment
of taxes is a prerequisite before a taxpayer could avail of the transitional input tax credit.
This argument has long been settled. To reiterate, prior payment of taxes is not necessary
67
before a taxpayer could avail of the 8% transitional input tax credit. This position is solidly
supported by law and jurisprudence.
Same; Same; Tax Refund; Words and Phrases; A transitional input tax credit is not a tax
refund per se but a tax credit; Tax refund is defined as the money that a taxpayer overpaid
and is thus returned by the taxing authority.—A transitional input tax credit is not a tax
refund per se but a tax credit. Logically, prior payment of taxes is not required before a
taxpayer could avail of transitional input tax credit. As we have declared in our September 4,
2012 Decision “[t]ax credit is not synonymous to tax refund. Tax refund is defined as the
money that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on
the other hand, is an amount subtracted directly from one’s total tax liability. It is any
amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment.”
Same; Same; Same; Section 112 of the Tax Code does not prohibit cash refund or tax credit
of transitional input tax in the case of zero-rated or effectively zero-rated Value-Added Tax
(VAT) registered taxpayers, who do not have any output VAT.—Section 112 of the Tax Code
does not prohibit cash refund or tax credit of transitional input tax in the case of zero-rated
or effectively zero-rated VAT registered taxpayers, who do not have any output VAT. The
phrase “except transitional input tax” in Section 112 of the Tax Code was inserted to
distinguish creditable input tax from transitional input tax credit. Transitional input tax
credits are input taxes on a taxpayer’s beginning inventory of goods, materials, and supplies
equivalent to 8% (then 2%) or the actual VAT paid on such goods, materials and supplies,
whichever is higher. It may only be availed of once by first-time VAT taxpayers. Creditable
input taxes, on the other hand, are input taxes of VAT taxpayers in the course of their trade
or business, which should be applied within two years after the close of the taxable quarter
when the sales were made.
Same; Same; Same; As regards Section 110 of the Tax Code, while the law only provides for
a tax credit, a taxpayer who erroneously or excessively pays his output tax is still entitled
to recover the payments he made either as a tax credit or a tax refund.—As regards
Section 110, while the law only provides for a tax credit, a taxpayer who erroneously or
excessively pays his output tax is still entitled to recover the payments he made either as a
tax credit or a tax refund. In this case, since petitioner still has available transitional input tax
credit, it filed a claim for refund to recover the output VAT it erroneously or excessively paid
for the 1st quarter of 1997. Thus, there is no reason for denying its claim for tax
refund/credit.
Same; Same; Same; The refund or tax credit would not be unconstitutional because it is
precisely pursuant to Section 105 of the old National Internal Revenue Code which allows
refund/tax credit.—It is argued that the refund or issuance of tax credit certificate violates
the mandate in Section 4(2) of the Government Auditing Code of the Philippines that
“Government funds or property shall be spent or used solely for public purposes.” Again,
this is inaccurate. On the contrary, the grant of a refund or issuance of tax credit certificate
in this case would not contravene the above provision. The refund or tax credit would not
be unconstitutional because it is precisely pursuant to Section 105 of the old NIRC which
allows refund/tax credit.
CARPIO, J., Dissenting Opinion:
Taxation; Tax Credit; Tax Refund; Value-Added Tax (VAT); View that since petitioner does
not have any input Value-Added Tax (VAT) from its purchase of the Global City land, it
cannot ask for refund or credit of any input VAT from the same transaction.—In the
present case, the law never imposed an input VAT on the sale of the Global City land by the
National Government to petitioner. Not a single centavo of input VAT was paid, or could
have been paid, by anyone in the sale of the Global City land since (1) the National
Government is not subject to any tax, including VAT, when the law authorizes it to sell
government property like the Global City land; and (2) in 1995, the old VAT law did not yet
impose VAT on the sale of land and thus no VAT on the sale of the Global City land could
have been paid by anyone. Thus, since petitioner does not have any input VAT from its
purchase of the Global City land, it cannot ask for refund or credit of any input VAT from the
same transaction.
Same; Same; Same; View that a tax refund or credit of input Value-Added Tax (VAT)
assumes a tax was previously paid, or in the case of the transitional input tax, that the tax
is assumed to have been paid, whether actually paid or not.—A tax refund or credit of input
VAT assumes a tax was previously paid, or in the case of the transitional input tax, that the
tax is assumed to have been paid, whether actually paid or not. In either case, there must be
a law imposing the input VAT. This can be inferred from the provision in Section 105 that a
taxpayer is “allowed input tax on his beginning inventory . . . equivalent to 8% . . ., or the
actual value-added tax paid . . ., whichever is higher.” The phrase “actual value-added tax
paid” means there was a law imposing the VAT. Thus, the 8% transitional input tax credit in
Section 105 assumes that a previous tax was paid, which in turn assumes there was a law
imposing the tax. Since there was still no VAT on the sale of land at the time, indisputably
there could not have been any actual tax payment of input VAT on the sale of the Global City
land. Without a law imposing VAT on the sale of the Global City land, there is no possibility of
an actual or even assumed tax payment of input VAT on such sale. Hence, there can be no
refund or credit of input VAT for no input VAT was, or could have been, paid.
Same; Same; Same; View that unlike a tax refund or credit under Section 229 of the Tax
Code, the input tax under the Value-Added Tax (VAT) system is not an erroneously, illegally
or improperly collected tax but a correctly collected tax.—Any excess input tax can only be
carried over to the “succeeding quarter or quarters.” Unlike a tax refund or credit under
Section 229 of the Tax Code, the input tax under the VAT system is not an erroneously,
illegally or improperly collected tax but a correctly collected tax. Being a correctly collected
tax, the taxpayer has no right to refund or credit unless expressly allowed by law. Section
68
110(B) does not allow a cash refund, but merely a credit of the input VAT against output VAT,
and any excess of the input VAT can only be carried over to succeeding quarters until totally
credited or used up. To repeat, the Tax Code does not allow a cash refund of excess input
VAT, a cash refund that the Decision of 4 September 2012 actually erroneously granted to
petitioner.
Same; Same; Same; Transitional Input Tax Credit; View that the Tax Code expressly
prohibits any cash refund or tax credit of transitional input tax in the case of zero-rated or
effectively zero-rated Value-Added Tax (VAT) registered taxpayers, who do not have any
output VAT.—The transitional input tax is a tax assumed to have been paid, whether
actually paid or not. The Tax Code always requires substantiation for any refund or credit of
a tax, that is, the taxpayer must prove that he actually paid the tax. The only exception is the
transitional input tax, which is assumed to have been paid, whether actually paid or not. The
transitional input tax is credited against output tax in the concept of a reduction of tax
liability, either to minimize the tax burden or as a tax incentive. However, the transitional
input tax cannot be refunded in cash because such cash refund will be a use of public funds
for a private purpose. If the taxpayer has no output tax, the taxpayer cannot ask a tax credit
for the unused transitional input tax because the transitional input tax merely serves to
reduce the output tax, if there is any. Thus, the Tax Code expressly prohibits any cash refund
or tax credit of transitional input tax in the case of zero-rated or effectively zero-rated VAT
registered taxpayers, who do not have any output VAT.
Same; Same; Same; View that a taxpayer who has not actually paid a tax cannot ask for its
refund or credit.—The law is clear: a transitional input tax, which is merely an assumed
payment of tax and not an actual payment of tax, cannot give rise to a cash refund, or even
to a tax credit where the taxpayer has no output tax. The reason is plain common sense. A
taxpayer who has not actually paid a tax cannot ask for its refund or credit. Likewise, a
taxpayer who has no output tax to offset a tax credit arising from an assumed tax payment
cannot ask the government for a cash refund or credit, for to do so will require the
government to actually pay out public funds for a private purpose.
Same; Government Auditing Code of the Philippines; View that a well-recognized inherent
limitation on the constitutional power of the State to levy taxes is that taxes can only be
used for a public purpose.—Without any previous tax payment as source of the tax refund
or credit, the tax refund or credit will be an expenditure of public funds for the exclusive
benefit of a specific private individual or entity. As ruled by this Court in several cases, this
violates the fundamental principle that public funds can be used only for a public purpose.
Section 4(2) of the Government Auditing Code of the Philippines mandates that
“Government funds or property shall be spent or used solely for public purposes.” Any tax
refund or credit in favor of a specific taxpayer for a tax that was never paid will have to be
sourced from government funds. This is clearly an expenditure of public funds for a private
purpose. Congress cannot validly enact a law transferring government funds, raised through
taxation, to the pocket of a private individual or entity. A well-recognized inherent limitation
on the constitutional power of the State to levy taxes is that taxes can only be used for a
public purpose.
DEL CASTILLO, J.:
This resolves respondents' Motion for Reconsideration. 1 Respondents raise the
following arguments: "1) Prior payment of tax is inherent in the nature and payment of
the 8% transitional input tax; 2 2) Revenue Regulations No. 7-95 providing for 8%
transitional input tax based on the value of the improvements on the real properties is a
valid legislative rule;3 3) For failure to clearly prove its entitlement to the transitional
input tax credit, petitioner's claim for tax refund must fail in light of the basic doctrine
that tax refund partakes of the nature of a tax exemption which should be construed
strictissimi juris against the taxpayer."4
We deny with finality the Motion for Reconsideration filed by respondents; the basic
issues presented have already been passed upon and no substantial argument has been
adduced to warrant the reconsideration sought.
In his Dissent, Justice Carpio cites four grounds as follows: "first, petitioner is not
entitled to any refund of input [Value-added tax] VAT, since the sale by the national
government of the Global City land to petitioner was not subject to any input VAT;
second, the Tax Code does not allow any cash refund of input VAT, only a tax credit;
third, even for zero-rated or effectively zero-rated VAT-registered taxpayers, the Tax
Code does not allow any cash refund or credit of transitional input tax; and fourth, the
cash refund, not being supported by any prior actual tax payment, is unconstitutional
since public funds will be used to pay for the refund which is for the exclusive benefit of
petitioner, a private entity."5
At the outset, it must be pointed out that all these arguments have already been
extensively discussed and argued, not only during the deliberations but likewise in the
exchange of comments/opinions.
Nevertheless, we will discuss them again for emphasis. First argument: "Petitioner is not
entitled to any refund of input VAT since the sale by the national government of the
Global City land to petitioner was not subject to any input VAT." 6
Otherwise stated, it is argued that prior payment of taxes is a prerequisite before a
taxpayer could avail of the transitional input tax credit.
This argument has long been settled. To reiterate, prior payment of taxes is not
necessary before a taxpayer could avail of the 8% transitional input tax credit. This
position is solidly supported by law and jurisprudence, viz:
69
First. Section 105 of the old National Internal Revenue Code (NIRC) clearly
provides that for a taxpayer to avail of the 8% transitional input tax credit, all
that is required from the taxpayer is to file a beginning inventory with the
Bureau of Internal Revenue (BIR). It was never mentioned in Section 105 that
prior payment of taxes is a requirement. For clarity and reference, Section 105 is
reproduced below:
SEC. 105. Transitional input tax credits. – A person who becomes liable
to value-added tax or any person who elects to be a VAT-registered
person shall, subject to the filing of an inventory as prescribed by
regulations, be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent to 8% of the value of such inventory
or the actual value-added tax paid onsuch goods, materials and
supplies, whichever is higher, which shall be creditable against the
output tax. (Emphasis supplied.)
Second. Since the law (Section 105 of the NIRC) does not provide for prior
payment of taxes, to require it now would be tantamount to judicial legislation
which, to state the obvious, is not allowed.
Third. A transitional input tax credit is not a tax refund per se but a tax credit.
Logically, prior payment of taxes is not required before a taxpayer could avail of
transitional input tax credit. As we have declared in our September 4, 2012
Decision,7 "tax credit is not synonymous to tax refund. Tax refund is defined as
the money that a taxpayer overpaid and is thus returned by the taxing
authority. Tax credit, on the other hand, is an amount subtracted directly from
one’s total tax liability. It is any amount given to a taxpayer as a subsidy, a
refund, or an incentive to encourage investment."8
Fourth. The issue of whether prior payment of taxes is necessary to avail of
transitional input tax credit is no longer novel. It has long been settled by
jurisprudence. In fact, in the earlier case of Fort Bonifacio Development
Corporation v. Commissioner of Internal Revenue, 9 this Court had already ruled
that—
x x x. If the intent of the law were to limit the input tax to cases where actual
VAT was paid, it could have simply said that the tax base shall be the actual
value-added tax paid. Instead, the law as framed contemplates a situation
where a transitional input tax credit is claimed even if there was no actual
payment of VAT in the underlying transaction. In such cases, the tax base used
shall be the value of the beginning inventory of goods, materials and supplies. 10
Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug
Corp.,11 this Court had already declared that prior payment of taxes is not
required in order to avail of a tax credit. 12 Pertinent portions of the Decision
read:
While a tax liability is essential to the availment or use of any tax credit, prior tax
payments are not. On the contrary, for the existence or grant solely of such credit,
neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete
with provisions granting or allowing tax credits, even though no taxes have been
previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit‒subject
to certain limitations‒for estate taxes paid to a foreign country. Also found in Section
101(C) is a similar provision for donor’s taxes‒again when paid to a foreign country–in
computing for the donor’s tax due. The tax credits in both instances allude to the prior
payment of taxes, even if not made to our government.
Under Section 110, a VAT (Value-Added Tax)-registered person engaging in transactions–
whether or not subject to the VAT–is also allowed a tax credit that includes a ratable
portion of any input tax not directly attributable to either activity. This input tax may
either be the VAT on the purchase or importation of goods or services that is merely due
from–not necessarily paid by–such VAT-registered person in the course of trade or
business; or the transitional input tax determined in accordance with Section 111(A). The
latter type may in fact be an amount equivalent to only eight percent of the value of a
VAT-registered person’s beginning inventory of goods, materials and supplies, when
such amount‒as computed‒is higher than the actual VAT paid on the said items. Clearly
from this provision, the tax credit refers to an input tax that is either due only or given a
value by mere comparison with the VAT actually paid–then later prorated. No tax is
actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is
allowed. For the purchase of primary agricultural products used as inputs–either in the
processing of sardines, mackerel and milk, or in the manufacture of refined sugar and
cooking oil–and for the contract price of public works contracts entered into with the
government, again, no prior tax payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-
rated may, under Section 112(A), apply for the issuance of a tax credit certificate for the
amount of creditable input taxes merely due–again not necessarily paid to–the
government and attributable to such sales, to the extent that the input taxes have not
been applied against output taxes. Where a taxpayer is engaged in zero-rated or
effectively zero-rated sales and also in taxable or exempt sales, the amount of
70
creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of
sales. Indeed, in availing of such tax credit for VAT purposes, this provision–as well as
the one earlier mentioned–shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this
provision, the imposition of a final withholding tax rate on cash and/or property
dividends received by a nonresident foreign corporation from a domestic corporation is
subjected to the condition that a foreign tax credit will be given by the domiciliary
country in an amount equivalent to taxes that are merely deemed paid. Although true,
this provision actually refers to the tax credit as a condition only for the imposition of a
lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is not
our government but the domiciliary country that credits against the income tax payable
to the latter by the foreign corporation, the tax to be foregone or spared.
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as
credits, against the income tax imposable under Title II, the amount of income taxes
merely incurred–not necessarily paid–by a domestic corporation during a taxable year in
any foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred
but not paid, a tax credit may be allowed, subject to the condition precedent that the
taxpayer shall simply give a bond with sureties satisfactory to and approved by
petitioner, in such sum as may be required; and further conditioned upon payment by
the taxpayer of any tax found due, upon petitioner’s redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax treaties and
special laws that grant or allow tax credits, even though no prior tax payments have
been made.
Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in the state of
residence, but the tax paid in the former is merely allowed as a credit against the tax
levied in the latter. Apparently, payment is made to the state of source, not the state of
residence. No tax, therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit
incentives. To illustrate, the incentives provided for in Article 48 of Presidential Decree
No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391, include tax credits
equivalent to either five percent of the net value earned, or five or ten percent of the
net local content of export. In order to avail of such credits under the said law and still
achieve its objectives, no prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not
indispensable to the availment of a tax credit. Thus, the CA correctly held that the
availment under RA 7432 did not require prior tax payments by private establishments
concerned. However, we do not agree with its finding that the carry-over of tax credits
under the said special law to succeeding taxable periods, and even their application
against internal revenue taxes, did not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment or
use, not the existence or grant, of a tax credit. Regarding this matter, a private
establishment reporting a net loss in its financial statements is no different from
another that presents a net income. Both are entitled to the tax credit provided for
under RA 7432, since the law itself accords that unconditional benefit. However, for the
losing establishment to immediately apply such credit, where no tax is due, will be an
improvident usance.13
Second and third arguments: "The Tax Code does not allow any cash refund of input
VAT, only a tax credit;" and "even for zero-rated or effectively zero-rated VAT-registered
taxpayers, the Tax Code does not allow any cash refund or credit of transitional input
tax."14
Citing Sections 110 and 112 of the Tax Code, it is argued that the Tax Code does not allow
a cash refund, only a tax credit.
This is inaccurate.
First. Section 112 of the Tax Code speaks of zero-rated or effectively zero-rated sales.
Notably, the transaction involved in this case is not zero-rated or effectively zero-rated
sales.
Second. A careful reading of Section 112 of the Tax Code would show that it allows
either a cash refund or a tax credit for input VAT on zero-rated or effectively zero-rated
sales. For reference, Section 112 is herein quoted, viz:
Sec. 112. Refunds or Tax Credits of Input Tax. –
(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied
against output tax: x x x. (Emphasis supplied.)
71
Third. Contrary to the Dissent, Section 112 of the Tax Code does not prohibit cash refund
or tax credit of transitional input tax in the case of zero-rated or effectively zero-rated
VAT registered taxpayers, who do not have any output VAT. The phrase "except
transitional input tax" in Section 112 of the Tax Code was inserted to distinguish
creditable input tax from transitional input tax credit. Transitional input tax credits are
input taxes on a taxpayer’s beginning inventory of goods, materials, and supplies
equivalent to 8% (then 2%) or the actual VAT paid on such goods, materials and supplies,
whichever is higher. It may only be availed of once by first-time VAT taxpayers.
Creditable input taxes, on the other hand, are input taxes of VAT taxpayers in the course
of their trade or business, which should be applied within two years after the close of
the taxable quarter when the sales were made.
Fourth. As regards Section 110, while the law only provides for a tax credit, a taxpayer
who erroneously or excessively pays his output tax is still entitled to recover the
payments he made either as a tax credit or a tax refund. In this case, since petitioner still
has available transitional input tax credit, it filed a claim for refund to recover the output
VAT it erroneously or excessively paid for the 1st quarter of 1997. Thus, there is no
reason for denying its claim for tax refund/credit.
Fifth. Significantly, the dispositive portion of our September 4, 2012 Decision 15 directed
the respondent Commissioner of Internal Revenue (CIR) to either refund the amount
paid as output VAT for the 1st quarter of 1997 or to issue a tax credit certificate. We did
not outrightly direct the cash refund of the amount claimed, thus:
WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July 7, 2006
of the Court of Appeals in CA-G.R. SP No. 61436 is REVERSED and SET ASIDE.
Respondent Commissioner of Internal Revenue is ordered to refund to petitioner Fort
Bonifacio Development Corporation the amount of ₱359,652,009.47 paid as output VAT
for the first quarter of 1997 in light of the transitional input tax credit available to
petitioner for the said quarter, or in the alternative, to issue a tax credit certificate
corresponding to such amount.
SO ORDERED.16
Sixth. Notably, in the earlier case of Fort Bonifacio, we likewise directed the respondent
to either refund or issue a tax credit certificate. It bears emphasis that this Decision
already became final and executory and entry of judgment was made in due course. The
dispositive portion of our Decision in said case reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax
Appeals and the Court of Appeals are REVERSED and SET ASIDE. Respondents are
hereby (1) restrained from collecting from petitioner the amount of ₱28,413,783.00
representing the transitional input tax credit due it for the fourth quarter of 1996; and
(2) directed to refund to petitioner the amount of ₱347,741,695.74 paid as output VAT
for the third quarter of 1997 in light of the persisting transitional input tax credit
available to petitioner for the said quarter, or to issue a tax credit corresponding to such
amount. No pronouncement as to costs.17
Clearly, the CIR has the option to return the amount claimed either in the form of tax
credit or refund.
Fourth argument. "The cash refund, not being supported by any prior actual tax
payment, is unconstitutional since public funds will be used to pay for the refund which
is for the exclusive benefit of petitioner, a private entity." 18
Otherwise stated, it is argued that the refund or issuance of tax credit certificate
violates the mandate in Section 4(2) of the Government Auditing Code of the
Philippines that "Government funds or property shall be spent or used solely for public
purposes." Again, this is inaccurate. On the contrary, the grant of a refund or issuance
of tax credit certificate in this case would not contravene the above provision. The
refund or tax credit would not be unconstitutional because it is precisely pursuant to
Section 105 of the old NIRC which allows refund/tax credit.
Final Note
As earlier mentioned, the issues in this case are not novel. These same issues had been
squarely ruled upon by this Court in the earlier Fort Bonifacio case. This earlier Fort
Bonifacio case already attained finality and entry of judgment was already made in due
course. To reverse our Decision in this case would logically affect our Decision in the
earlier Fort Bonifacio case. Once again, this Court will become an easy target for
charges of "flip-flopping."
ACCORDINGLY, the Motion for Reconsideration is DENIED with FINALITY, the basic
issues presented having been passed upon and no substantial argument having been
adduced to warrant the reconsideration sought. No further pleadings or motions shall
be entertained in this case. Let entry of final judgment be made in due course.
SO ORDERED.
72
G.R. No. 175097. February 5, 2010.* CTA commences from the date of receipt of the decision of the CIR on the disputed
assessment, not from the date the assessment was issued.
ALLIED BANKING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent. DEL CASTILLO, J.:

Taxation; Assessment; Tax Protest; Pursuant to Section 228 of the National Internal The key to effective communication is clarity.
Revenue Code (NIRC), the proper recourse of petitioners was to dispute the assessment by
filing an administrative protest within 30 days from receipt thereof.—In the instant case, The Commissioner of Internal Revenue (CIR) as well as his duly authorized representative
petitioner timely filed a protest after receiving the PAN. In response thereto, the BIR issued must indicate clearly and unequivocally to the taxpayer whether an action constitutes a final
a Formal Letter of Demand with Assessment Notices. Pursuant to Section 228 of the NIRC, determination on a disputed assessment. 1 Words must be carefully chosen in order to avoid
the proper recourse of petitioner was to dispute the assessments by filing an administrative any confusion that could adversely affect the rights and interest of the taxpayer.
protest within 30 days from receipt thereof. Petitioner, however, did not protest the final
assessment notices. Instead, it filed a Petition for Review with the CTA. Thus, if we strictly Assailed in this Petition for Review on Certiorari2 under Section 12 of Republic Act (RA) No.
apply the rules, the dismissal of the Petition for Review by the CTA was proper. 9282,3 in relation to Rule 45 of the Rules of Court, are the August 23, 2006 Decision 4 of the
Court of Tax Appeals (CTA) and its October 17, 2006 Resolution 5 denying petitioner’s Motion
Same; Same; Same; Instant case is an exception to the rule on exhaustion of administrative for Reconsideration.
remedies.—A careful reading of the Formal Letter of Demand with Assessment Notices
leads us to agree with petitioner that the instant case is an exception to the rule on Factual Antecedents
exhaustion of administrative remedies, i.e., estoppel on the part of the administrative
agency concerned.
On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment
Notice (PAN) to petitioner Allied Banking Corporation for deficiency Documentary Stamp
Same; Same; Same; Court have time and again reminded the Commissioner of Internal Tax (DST) in the amount of ₱12,050,595.60 and Gross Receipts Tax (GRT) in the amount of
Revenue (CIR) to indicate in a clear and unequivocal language whether his action on a ₱38,995,296.76 on industry issue for the taxable year 2001. 6 Petitioner received the PAN on
disputed assessment constitute his final determination thereon in order for the taxpayer May 18, 2004 and filed a protest against it on May 27, 2004. 7
concerned to determined when his or her right to appeal to tax count accrues.—In this
case, records show that petitioner disputed the PAN but not the Formal Letter of Demand
On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment Notices to
with Assessment Notices. Nevertheless, we cannot blame petitioner for not filing a protest
petitioner, which partly reads as follows:8
against the Formal Letter of Demand with Assessment Notices since the language used and
the tenor of the demand letter indicate that it is the final decision of the respondent on the
It is requested that the above deficiency tax be paid immediately upon receipt hereof,
matter. We have time and again reminded the CIR to indicate, in a clear and unequivocal
inclusive of penalties incident to delinquency. This is our final decision based on
language, whether his action on a disputed assessment constitutes his final determination
investigation. If you disagree, you may appeal the final decision within thirty (30) days from
thereon in order for the taxpayer concerned to determine when his or her right to appeal to
receipt hereof, otherwise said deficiency tax assessment shall become final, executory and
the tax court accrues. Viewed in the light of the foregoing, respondent is now estopped
demandable.
from claiming that he did not intend the Formal Letter of Demand with Assessment Notices
to be a final decision.
Petitioner received the Formal Letter of Demand with Assessment Notices on August 30,
2004.9
Same; Same; Same; It is the Formal Letter of Demand and Assessment Notice that must be
administratively protested or disputed within 30 days and not the Preliminary Assessment
Notice (PAN).—We are not disregarding the rules of procedure under Section 228 of the Proceedings before the CTA First Division
NIRC, as implemented by Section 3 of BIR Revenue Regulations No. 12-99. It is the Formal
Letter of Demand and Assessment Notice that must be administratively protested or On September 29, 2004, petitioner filed a Petition for Review 10 with the CTA which was
disputed within 30 days, and not the PAN. Neither are we deviating from our raffled to its First Division and docketed as CTA Case No. 7062. 11
pronouncement in St. Stephen’s Chinese Girl’s School v. Collector of Internal Revenue, 104
Phil. 314 (1958) that the counting of the 30 days within which to institute an appeal in the
73
On December 7, 2004, respondent CIR filed his Answer. 12 On July 28, 2005, he filed a Motion
to Dismiss13 on the ground that petitioner failed to file an administrative protest on the
Formal Letter of Demand with Assessment Notices. Petitioner opposed the Motion to
Dismiss on August 18, 2005.14
On October 12, 2005, the First Division of the CTA rendered a Resolution 15 granting
respondent’s Motion to Dismiss. It ruled:
Clearly, it is neither the assessment nor the formal demand letter itself that is appealable to
this Court. It is the decision of the Commissioner of Internal Revenue on the disputed
assessment that can be appealed to this Court (Commissioner of Internal Revenue vs. Villa, 22
SCRA 3). As correctly pointed out by respondent, a disputed assessment is one wherein the
taxpayer or his duly authorized representative filed an administrative protest against the
formal letter of demand and assessment notice within thirty (30) days from date [of] receipt
thereof. In this case, petitioner failed to file an administrative protest on the formal letter of
demand with the corresponding assessment notices. Hence, the assessments did not
become disputed assessments as subject to the Court’s review under Republic Act No. 9282.
(See also Republic v. Liam Tian Teng Sons & Co., Inc., 16 SCRA 584.)
WHEREFORE, the Motion to Dismiss is GRANTED. The Petition for Review is hereby
DISMISSED for lack of jurisdiction.
SO ORDERED. 16
Aggrieved, petitioner moved for reconsideration but the motion was denied by the First
Division in its Resolution dated February 1, 2006.17
Proceedings before the CTA En Banc
On February 22, 2006, petitioner appealed the dismissal to the CTA En Banc. 18 The case was
docketed as CTA EB No. 167.
Finding no reversible error in the Resolutions dated October 12, 2005 and February 1, 2006 of
the CTA First Division, the CTA En Banc denied the Petition for Review19as well as petitioner’s
Motion for Reconsideration.20
The CTA En Banc declared that it is absolutely necessary for the taxpayer to file an
administrative protest in order for the CTA to acquire jurisdiction. It emphasized that an
administrative protest is an integral part of the remedies given to a taxpayer in challenging
the legality or validity of an assessment. According to the CTA En Banc, although there are
exceptions to the doctrine of exhaustion of administrative remedies, the instant case does
not fall in any of the exceptions.
Issue
Hence, the present recourse, where petitioner raises the lone issue of whether the Formal
Letter of Demand dated July 16, 2004 can be construed as a final decision of the CIR
appealable to the CTA under RA 9282.
Our Ruling
The petition is meritorious.
Section 7 of RA 9282 expressly provides that the CTA exercises exclusive appellate jurisdiction
to review by appeal decisions of the CIR in cases involving disputed assessments
The CTA, being a court of special jurisdiction, can take cognizance only of matters that are
clearly within its jurisdiction.21 Section 7 of RA 9282 provides:
Sec. 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code
or other laws administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code
or other laws administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period of action, in which case the
inaction shall be deemed a denial; (Emphasis supplied)
xxxx
The word "decisions" in the above quoted provision of RA 9282 has been interpreted to
mean the decisions of the CIR on the protest of the taxpayer against the
assessments.22 Corollary thereto, Section 228 of the National Internal Revenue Code (NIRC)
provides for the procedure for protesting an assessment. It states:
SECTION 228. Protesting of Assessment. – When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer
of his findings: Provided, however, That a preassessment notice shall not be required in the
following cases:
74
 (a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities
for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such as,
but not limited to, vehicles, capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the assessment
is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall
be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or
his duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and
manner as may be prescribed by implementing rules and regulations. Within sixty (60) days
from filing of the protest, all relevant supporting documents shall have been submitted;
otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision
or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of
the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise,
the decision shall become final, executory and demandable.
In the instant case, petitioner timely filed a protest after receiving the PAN. In response
thereto, the BIR issued a Formal Letter of Demand with Assessment Notices. Pursuant to
Section 228 of the NIRC, the proper recourse of petitioner was to dispute the assessments
by filing an administrative protest within 30 days from receipt thereof. Petitioner, however,
did not protest the final assessment notices. Instead, it filed a Petition for Review with the
CTA. Thus, if we strictly apply the rules, the dismissal of the Petition for Review by the CTA
was proper.
The case is an exception to the
rule on exhaustion of administrative remedies
However, a careful reading of the Formal Letter of Demand with Assessment Notices leads
us to agree with petitioner that the instant case is an exception to the rule on exhaustion of
administrative remedies, i.e., estoppel on the part of the administrative agency concerned.
In the case of Vda. De Tan v. Veterans Backpay Commission, 23 the respondent contended
that before filing a petition with the court, petitioner should have first exhausted all
administrative remedies by appealing to the Office of the President. However, we ruled that
respondent was estopped from invoking the rule on exhaustion of administrative remedies
considering that in its Resolution, it said, "The opinions promulgated by the Secretary of
Justice are advisory in nature, which may either be accepted or ignored by the office seeking
the opinion, and any aggrieved party has the court for recourse". The statement of the
respondent in said case led the petitioner to conclude that only a final judicial ruling in her
favor would be accepted by the Commission.
Similarly, in this case, we find the CIR estopped from claiming that the filing of the Petition
for Review was premature because petitioner failed to exhaust all administrative remedies.
The Formal Letter of Demand with Assessment Notices reads:
Based on your letter-protest dated May 26, 2004, you alleged the following:
1. That the said assessment has already prescribed in accordance with the
provisions of Section 203 of the Tax Code.
2. That since the exemption of FCDUs from all taxes found in the Old Tax Code has
been deleted, the wording of Section 28(A)(7)(b) discloses that there are no other
taxes imposable upon FCDUs aside from the 10% Final Income Tax.
Contrary to your allegation, the assessments covering GRT and DST for taxable year 2001 has
not prescribed for [sic] simply because no returns were filed, thus, the three year
prescriptive period has not lapsed.
With the implementation of the CTRP, the phrase "exempt from all taxes" was deleted.
Please refer to Section 27(D)(3) and 28(A)(7) of the new Tax Code. Accordingly, you were
assessed for deficiency gross receipts tax on onshore income from foreign currency
transactions in accordance with the rates provided under Section 121 of the said Tax Code.
Likewise, deficiency documentary stamp taxes was [sic] also assessed on Loan Agreements,
Bills Purchased, Certificate of Deposits and related transactions pursuant to Sections 180
and 181 of NIRC, as amended.
75
The 25% surcharge and 20% interest have been imposed pursuant to the provision of Section
248(A) and 249(b), respectively, of the National Internal Revenue Code, as amended.
It is requested that the above deficiency tax be paid immediately upon receipt hereof,
inclusive of penalties incident to delinquency. This is our final decision based on
investigation. If you disagree, you may appeal this final decision within thirty (30) days from
receipt hereof, otherwise said deficiency tax assessment shall become final, executory and
demandable.24 (Emphasis supplied)
It appears from the foregoing demand letter that the CIR has already made a final decision
on the matter and that the remedy of petitioner is to appeal the final decision within 30
days.
In Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, 25 we considered the
language used and the tenor of the letter sent to the taxpayer as the final decision of the
CIR.
In this case, records show that petitioner disputed the PAN but not the Formal Letter of
Demand with Assessment Notices. Nevertheless, we cannot blame petitioner for not filing a
protest against the Formal Letter of Demand with Assessment Notices since the language
used and the tenor of the demand letter indicate that it is the final decision of the
respondent on the matter. We have time and again reminded the CIR to indicate, in a clear
and unequivocal language, whether his action on a disputed assessment constitutes his final
determination thereon in order for the taxpayer concerned to determine when his or her
right to appeal to the tax court accrues. 26 Viewed in the light of the foregoing, respondent is
now estopped from claiming that he did not intend the Formal Letter of Demand with
Assessment Notices to be a final decision.
Moreover, we cannot ignore the fact that in the Formal Letter of Demand with Assessment
Notices, respondent used the word "appeal" instead of "protest", "reinvestigation", or
"reconsideration". Although there was no direct reference for petitioner to bring the matter
directly to the CTA, it cannot be denied that the word "appeal" under prevailing tax laws
refers to the filing of a Petition for Review with the CTA. As aptly pointed out by petitioner,
under Section 228 of the NIRC, the terms "protest", "reinvestigation" and "reconsideration"
refer to the administrative remedies a taxpayer may take before the CIR, while the term
"appeal" refers to the remedy available to the taxpayer before the CTA. Section 9 of RA
9282, amending Section 11 of RA 1125, 27 likewise uses the term "appeal" when referring to
the action a taxpayer must take when adversely affected by a decision, ruling, or inaction of
the CIR. As we see it then, petitioner in appealing the Formal Letter of Demand with
Assessment Notices to the CTA merely took the cue from respondent. Besides, any doubt in
the interpretation or use of the word "appeal" in the Formal Letter of Demand with
Assessment Notices should be resolved in favor of petitioner, and not the respondent who
caused the confusion.
To be clear, we are not disregarding the rules of procedure under Section 228 of the NIRC, as
implemented by Section 3 of BIR Revenue Regulations No. 12-99. 28 It is the Formal Letter of
Demand and Assessment Notice that must be administratively protested or disputed within
30 days, and not the PAN. Neither are we deviating from our pronouncement in St.
Stephen’s Chinese Girl’s School v. Collector of Internal Revenue, 29 that the counting of the
30 days within which to institute an appeal in the CTA commences from the date of receipt
of the decision of the CIR on the disputed assessment, not from the date the assessment
was issued.1avvphi1
What we are saying in this particular case is that, the Formal Letter of Demand with
Assessment Notices which was not administratively protested by the petitioner can be
considered a final decision of the CIR appealable to the CTA because the words used,
specifically the words "final decision" and "appeal", taken together led petitioner to believe
that the Formal Letter of Demand with Assessment Notices was in fact the final decision of
the CIR on the letter-protest it filed and that the available remedy was to appeal the same to
the CTA.
We note, however, that during the pendency of the instant case, petitioner availed of the
provisions of Revenue Regulations No. 30-2002 and its implementing Revenue
Memorandum Order by submitting an offer of compromise for the settlement of the GRT,
DST and VAT for the period 1998-2003, as evidenced by a Certificate of Availment dated
November 21, 2007.30 Accordingly, there is no reason to reinstate the Petition for Review in
CTA Case No. 7062.
WHEREFORE, the petition is hereby GRANTED. The assailed August 23, 2006 Decision and
the October 17, 2006 Resolution of the Court of Tax Appeals are REVERSED and SET ASIDE.
The Petition for Review in CTA Case No. 7062 is hereby DISMISSED based solely on the
Bureau of Internal Revenue’s acceptance of petitioner’s offer of compromise for the
settlement of the gross receipts tax, documentary stamp tax and value added tax, for the
years 1998-2003.
SO ORDERED.
76

G.R. No. 173854. March 15, 2010.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FAR EAST BANK & TRUST
COMPANY (NOW BANK OF THE PHILIPPINE ISLANDS), respondent.
This Petition for Review on Certiorari assails the January 31, 2006 Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 56773 which reversed and set aside the October 4, 1999
Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5487. Also assailed is the July 19,
2006 Resolution3 of the CA denying the motion for reconsideration.
The CTA found that respondent Far East Bank & Trust Company failed to prove that the
income derived from rentals and sale of real property from which the taxes were withheld
were reflected in its 1994 Annual Income Tax Return. The CA found otherwise.

Taxation; Tax Refund; Requisites for taxpayer claiming for a tax credit or refund of
creditable withholding tax.—A taxpayer claiming for a tax credit or refund of creditable
withholding tax must comply with the following requisites: 1) The claim must be filed with
the CIR within the two-year period from the date of payment of the tax; 2) It must be shown
on the return that the income received was declared as part of the gross income; and 3) The
fact of withholding must be established by a copy of a statement duly issued by the payor to
the payee showing the amount paid and the amount of the tax withheld.
Factual Antecedents
On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR) two Corporate
Annual Income Tax Returns, one for its Corporate Banking Unit (CBU) 4 and another for its
Foreign Currency Deposit Unit (FCDU),5 for the taxable year ending December 31, 1994. The
return for the CBU consolidated the respondent’s overall income tax liability for 1994, which
reflected a refundable income tax of ₱12,682,864.00, computed as follows:

Same; Same; It is incumbent upon the taxpayer to reflect in his return the income upon FCDU CBU
which any creditable tax is required to be withheld at the source.—Based on the entries in
the return, the income derived from rentals and sales of real property upon which the Gross Income ₱13,319,068 5,348,080,630
creditable taxes were withheld were not included in respondent’s gross income as reflected Less: Deductions 1,397,157 5,432,828,719
in its return. Since no income was reported, it follows that no tax was withheld. To reiterate,
it is incumbent upon the taxpayer to reflect in his return the income upon which any
creditable tax is required to be withheld at the source.
Net Income 11,921,911 [84,748,089]
Same; Same; It is not the duty of the government to disprove a taxpayer’s claim for refund; Tax Rate 35% 35%
the burden of establishing the factual basis of a claim for a refund rests on the taxpayer.—
The fact that the petitioner failed to present any evidence or to refute the evidence
presented by respondent does not ipso facto entitle the respondent to a tax refund. It is not Income Tax Due Thereon 4,172,669 NIL
the duty of the government to disprove a taxpayer’s claim for refund. Rather, the burden of
establishing the factual basis of a claim for a refund rests on the taxpayer.
Consolidated Tax Due for
Same; Same; There is no automatic grant of a tax refund.—And while the petitioner has the
power to make an examination of the returns and to assess the correct amount of tax, his Both CBU and FCDU Operations ₱ 4,172,669
failure to exercise such powers does not create a presumption in favor of the correctness of
the returns. The taxpayer must still present substantial evidence to prove his claim for
refund. As we have said, there is no automatic grant of a tax refund.
Less:
DEL CASTILLO, J.:

Entitlement to a tax refund is for the taxpayer to prove and not for the government to Quarterly Income Tax Payments
disprove.
CBU -1st Quarter 633,085
77
 -2nd Quarter 11,844,333
FCDU -1st Quarter 955, 280 Less:
-2nd Quarter 1,104,942 Prior year’s (1994) excess 12,682,864
income tax credit
Additional prior year’s excess 6,283,484
Less: income tax credit
Creditable Taxes 2,317,893 Creditable Taxes
Withheld at Source Withheld at Source 3,798,024
Refundable Income Tax [₱12,682,864] 6
Refundable Income Tax [₱17,443,133]8

Pursuant to Section 697 of the old National Internal Revenue Code (NIRC),
the amount of ₱12,682,864.00 was carried over and applied against respondent’s income
tax liability for the taxable year ending December 31, 1995. On April 15, 1996, respondent
filed its 1995 Annual Income Tax Return, which showed a total overpaid income tax in the
amount of ₱17,443,133.00, detailed as follows:
FCDU CBU
Out of the ₱17,433,133.00 refundable income tax, only ₱13,645,109.00 was sought to be
refunded by respondent. As to the remaining ₱3,798,024.00, respondent opted to carry it
over to the next taxable year.
On May 17, 1996, respondent filed a claim for refund of the amount of ₱13,645,109.00 with
the BIR. Due to the failure of petitioner Commissioner of Internal Revenue (CIR) to act on
the claim for refund, respondent was compelled to bring the matter to the CTA on April 8,
1997 via a Petition for Review docketed as CTA Case No. 5487.
After the filing of petitioner’s Answer, trial ensued.

Gross Income ₱16,531,038 7,076,497,628 To prove its entitlement to a refund, respondent presented the following documents:
Less: Deductions 1,327,549 7,086,821,354
Exhibits Nature and Description

Net Income 15,203,539 [10,423,728] A Corporate Annual Income Tax Return covering income of respondent’s CBU for
the year ended December 31, 1994 together with attachments
Tax Rate 35% 35%
Income Tax Due Thereon 5,321,239 B Corporate Annual Income Tax Return covering income of respondent’s FCDU for
the year ended December 31, 1994 together with attachments
NIL

C Corporate Annual Income Tax Return covering income of respondent’s CBU for
the year ended December 31, 1995 together with attachments

Consolidated Tax Due for

D Corporate Annual Income Tax Return covering income of respondent’s FCDU for
Both CBU and FCDU ₱ 5,321,239 the year ended December 31, 1995 together with attachments
Operations

78
 N to Z; Certificates of Creditable SO ORDERED.10

AA to UU Withholding Tax and Monthly Remittance Returns of Income Taxes Ruling of the Court of Appeals
Withheld issued by various withholding agents for the year ended December 31,
1994 On appeal, the CA reversed the Decision of the CTA. The CA found that respondent has duly
proven that the income derived from rentals and sale of real property upon which the taxes
VV Letter claim for refund dated May 8, 1996 filed with the Revenue District Office were withheld were included in the return as part of the gross income.
No. 33 on May 17, 19969
Hence, this present recourse.
Petitioner, on the other hand, did not present any evidence.
Issue
Ruling of the Court of Tax Appeals
The lone issue presented in this petition is whether respondent has proven its entitlement
On October 4, 1999, the CTA rendered a Decision denying respondent’s claim for refund on to the refund.11
the ground that respondent failed to show that the income derived from rentals and sale of
real property from which the taxes were withheld were reflected in its 1994 Annual Income Our Ruling
Tax Return.
We find that the respondent miserably failed to prove its entitlement to the refund.
On October 20, 1999, respondent filed a Motion for New Trial based on excusable Therefore, we grant the petition filed by the petitioner CIR for being meritorious.
negligence. It prayed that it be allowed to present additional evidence to support its claim
for refund. A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply
with the following requisites:
However, the motion was denied on December 16, 1999 by the CTA. It reasoned, thus:
1) The claim must be filed with the CIR within the two-year period from the date of
[Respondent] is reminded that this case was originally submitted for decision as early as payment of the tax;
September 22, 1998 (p. 497, CTA Records). In view, however, of the Urgent Motion to Admit
Memorandum filed on April 27, 1999 by Atty. Louella Martinez, who entered her appearance 2) It must be shown on the return that the income received was declared as part of
as collaborating counsel of Atty. Manuel Salvador allegedly due to the latter counsel’s the gross income; and
absences, this Court set aside its resolution of September 22, 1998 and considered this case
submitted for decision as of May 7, 1999. Nonetheless, it took [respondent] another five
3) The fact of withholding must be established by a copy of a statement duly issued
months after it was represented by a new counsel and after a decision unfavorable to it was
by the payor to the payee showing the amount paid and the amount of the tax
rendered before [respondent] realized that an additional material documentary evidence
withheld.12
has to be presented by way of a new trial, this time initiated by a third counsel coming from
the same law firm. x x x
The two-year period requirement is based on Section 229 of the NIRC of 1997 which provides
that:
Furthermore, in ascertaining whether or not the income upon which the taxes were
withheld were included in the returns of the [respondent], this Court based its findings on
SECTION 229. Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding
the income tax returns and their supporting schedules prepared and reviewed by the
shall be maintained in any court for the recovery of any national internal revenue tax
[respondent] itself and which, to Us, are enough to support the conclusion reached.1avvphi1
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of any sum alleged to have
WHEREFORE, in view of the foregoing, [respondent’s] Motion for New Trial is hereby
been excessive or in any manner wrongfully collected, until a claim for refund or credit has
DENIED for lack of merit.

79
been duly filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid. (Formerly
Section 230 of the old NIRC)
While the second and third requirements are found under Section 10 of Revenue Regulation
No. 6-85, as amended, which reads:
Section 10. Claims for tax credit or refund. — Claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is shown
on the return that the income payment received was declared as part of the gross income
and the fact of withholding is established by a copy of the statement duly issued by the
payer to the payee (BIR Form No. 1743.1) showing the amount paid and the amount of tax
withheld therefrom.
Respondent timely filed its claim for refund.
There is no dispute that respondent complied with the first requirement. The filing of
respondent’s administrative claim for refund on May 17, 1996 and judicial claim for refund on
April 8, 1997 were well within the two-year period from the date of the filing of the return on
April 10, 1995.13
Respondent failed to prove that the income derived from rentals and sale of real property
were included in the gross income as reflected in its return.
However, as to the second and third requirements, the tax court and the appellate court
arrived at different factual findings.
The CTA ruled that the income derived from rentals and sales of real property were not
included in respondent’s gross income. It noted that in respondent’s 1994 Annual Income
Tax Return, the phrase "NOT APPLICABLE" was printed on the space provided for rent, sale
of real property and trust income. The CTA also declared that the certifications issued by
respondent cannot be considered in the absence of the Certificates of Creditable Tax
Withheld at Source. The CTA ruled that:
x x x the Certificates of Creditable Tax Withheld at Source submitted by [respondent]
pertain to rentals of real property while the Monthly Remittance Returns of Income Taxes
Withheld refer to sales of real property. But, if we are to look at Schedules 3, 4, and 5 of the
Annual Income Tax Return of [respondent] for 1994 (Exhibit "A"), there was no showing
that the Rental Income and Income from Sale of Real Property were included as part of the
gross income appearing in Section A of the said return. In fact, under the said schedules, the
phrase "NOT APPLICABLE" was printed by [respondent]. Verily, the income of [respondent]
coming from rent and sale of real property upon which the creditable taxes withheld were
based were not duly reflected. As to the certifications issued by the [respondent] (Exh. UU),
the same cannot be considered in the absence of the requisite Certificates of Creditable Tax
Withheld at Source.
Based on the foregoing, [respondent] has failed to comply with two essential requirements
for a valid claim for refund. Consequently, the same cannot be given due
course. 14 (Emphasis supplied)
On the other hand, the CA found thus:
We disagree with x x x CTA’s findings. In the case of Citibank, N.A. vs. Court of Appeals (280
SCRA 459), the Supreme Court held that:
"a refund claimant is required to prove the inclusion of the income payments which were
the basis of the withholding taxes and the fact of withholding. However, a detailed proof of
the truthfulness of each and every item in the income tax return is not required. x x x
x x x The grant of a refund is founded on the assumption that the tax return is valid; that is,
the facts stated therein are true and correct. x x x"
In the case at bench, the BIR examined [respondent] Bank’s Corporate Annual Income Tax
Returns for the years 1994 and 1995 when they were filed on April 10, 1995 and April 15, 1996,
respectively. Presumably, the BIR found no false declaration in them because it did not
allege any false declaration thereof in its Answer (to the petition for review) filed before x x
x CTA. Nowhere in the Answer, did the BIR dispute the amount of tax refund being claimed
by [respondent] Bank as inaccurate or erroneous. In fact, the reason given by the BIR (in its
Answer to the petition for review) why the claimed tax refund should be denied was that "x
x x the amount of ₱13,645,109.00 was not illegally or erroneously collected, hence, the
petition for review has no basis" [see Record, p. 32]. The amount of ₱17,433,133.00 reflected
as refundable income tax in [respondent] Bank’s Corporate Annual Income Tax Return for
the year 1995 was not disputed by the BIR to be inaccurate because there were certain
income not included in the return of the [respondent]. Verily, this leads Us to a conclusion
that [respondent] Bank’s Corporate Annual Income Tax Returns submitted were accepted
as regular and even accurate by the BIR.
Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR is tasked to make an
examination of returns and assess the correct amount of tax, to wit:
80
"Sec. 16. Power of the Commissioner to make assessment and prescribe additional
requirements for tax administration and enforcement.
(a) After a return is filed as required under the provision of this Code, the Commissioner
shall examine it and assess the correct amount of tax. x x x"
which the [petitioner] Commissioner undeniably failed to do. Moreover, noteworthy is the
fact that during the hearing of the petition for review before the CTA, [petitioner]
Commissioner of the BIR submitted the case for decision "in view of the fact that he has no
evidence to present nor records to submit relative to the case" x x x
Thus, although it is a fact that [respondent] failed to indicate said income payments under
the appropriate Schedules 3, 4, and 5 of Section C of its 1994 Annual Income Tax Return
(Exhibit "A"), however, We give credence to [respondent] Bank’s assertion that it reported
the said income payments as part of its gross income when it included the same as part of
the "Other Income," "Trust Income," and "Interest Income" stated in the Schedule of
Income (referred to as an attachment in Section C of Exhibit "A", x x x and in the 1994
audited Financial Statements (FS) supporting [respondent’s] 1994 Annual Corporate Income
Tax Return. The reason why the phrase "NOT APPLICABLE" was indicated in schedules 3, 4,
and 5 of Section C of [respondent’s] 1994 Annual Income Tax Return is due to the fact that
[respondent] Bank already reported the subject rental income and income from sale of real
property in the Schedule of Income under the headings "Other Income/Earnings," "Trust
Income" and "Interest Income." Therefore, [respondent] Bank still complied with the
second requirement that the income upon which the taxes were withheld are included in
the return as part of the gross income.
xxxx
[Respondent] Bank’s various documentary evidence showing that it had satisfied all
requirements under the Tax Code vis-à-vis the Bureau of Internal Revenue’s failure to
adduce any evidence in support of their denial of the claim, [respondent] Bank should,
therefore, be granted the present claim for refund.15 (Emphasis supplied)
Between the decision of the CTA and the CA, it is the former’s that is based on the evidence
and in accordance with the applicable law and jurisprudence.
To establish the fact of withholding, respondent submitted Certificates of Creditable Tax
Withheld at Source and Monthly Remittance Returns of Income Taxes Withheld, which
pertain to rentals and sales of real property, respectively. However, a perusal of
respondent’s 1994 Annual Income Tax Return shows that the gross income was derived
solely from sales of services. In fact, the phrase "NOT APPLICABLE" was printed on the
schedules pertaining to rent, sale of real property, and trust income. 16 Thus, based on the
entries in the return, the income derived from rentals and sales of real property upon which
the creditable taxes were withheld were not included in respondent’s gross income as
reflected in its return. Since no income was reported, it follows that no tax was withheld. To
reiterate, it is incumbent upon the taxpayer to reflect in his return the income upon which
any creditable tax is required to be withheld at the source. 17
Respondent’s explanation that its income derived from rentals and sales of real properties
were included in the gross income but were classified as "Other Earnings" in its Schedule of
Income18 attached to the return is not supported by the evidence. There is nothing in the
Schedule of Income to show that the income under the heading "Other Earnings" includes
income from rentals and sales of real property. No documentary or testimonial evidence
was presented by respondent to prove this. In fact, respondent, upon realizing its omission,
filed a motion for new trial on the ground of excusable negligence with the CTA.
Respondent knew that it had to present additional evidence showing the breakdown of the
"Other Earnings" reported in its Schedule of Income attached to the return to prove that
the income from rentals and sales of real property were actually included under the heading
"Other Earnings."19 Unfortunately, the CTA was not convinced that there was excusable
negligence to justify the granting of a new trial.
Accordingly, the CA erred in ruling that respondent complied with the second requirement.
Respondent failed to present all the Certificates of Creditable Tax Withheld at Source.
The CA likewise failed to consider in its Decision the absence of several Certificates of
Creditable Tax Withheld at Source. It immediately granted the refund without first verifying
whether the fact of withholding was established by the Certificates of Creditable Tax
Withheld at Source as required under Section 10 of Revenue Regulation No. 6-85. As
correctly pointed out by the CTA, the certifications (Exhibit UU) issued by respondent cannot
be considered in the absence of the required Certificates of Creditable Tax Withheld at
Source.
The burden is on the taxpayer to prove its entitlement to the refund.
Moreover, the fact that the petitioner failed to present any evidence or to
refute the evidence presented by respondent does not ipso facto entitle the respondent to a
tax refund. It is not the duty of the government to disprove a taxpayer’s claim for refund.
Rather, the burden of establishing the factual basis of a claim for a refund rests on the
taxpayer.20
And while the petitioner has the power to make an examination of the returns and to assess
the correct amount of tax, his failure to exercise such powers does not create a
presumption in favor of the correctness of the returns. The taxpayer must still present
81
substantial evidence to prove his claim for refund. As we have said, there is no automatic
grant of a tax refund.21
Hence, for failing to prove its entitlement to a tax refund, respondent’s claim must be
denied. Since tax refunds partake of the nature of tax exemptions, which are
construed strictissimi juris against the taxpayer, evidence in support of a claim must likewise
be strictissimi scrutinized and duly proven.22
WHEREFORE, the petition is GRANTED. The assailed January 31, 2006 Decision of the Court
of Appeals in CA-G.R. SP No. 56773 and its July 19, 2006 Resolution are REVERSED and SET
ASIDE. The October 4, 1999 Decision of the Court of Tax Appeals denying respondent’s claim
for tax refund for failure to prove that the income derived from rentals and sale of real
property from which the taxes were withheld were reflected in its 1994 Annual Income Tax
Return, is REINSTATED and AFFIRMED.
SO ORDERED.
G.R. Nos. 179045-46. August 25, 2010.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SMART COMMUNICATION, INC.,**
respondent.
Taxation; Tax Refunds; Withholding Tax; Parties; The person entitled to claim a tax refund
is the taxpayer, but in case the taxpayer does not file a claim for refund, the withholding
agent may file the claim.—The person entitled to claim a tax refund is the taxpayer.
However, in case the taxpayer does not file a claim for refund, the withholding agent may
file the claim. In Commissioner of Internal Revenue v. Procter & Gamble Philippine
Manufacturing Corporation, 204 SCRA 377 (1991), a withholding agent was considered a
proper party to file a claim for refund of the withheld taxes of its foreign parent company.
Same; Same; Same; Same; Although the fact that the taxpayer and the withholding agent
are related parties is a factor that increases the latter’s legal interest to file a claim for
refund, there is nothing in Commissioner of Internal Revenue v. Procter & Gamble**
Sometimes referred to as Smart Communications, Inc. in other parts of the records.
Philippines Manufacturing Corporation, 204 SCRA 377 (1991), to suggest that such
relationship is required or that the lack of such relation deprives the withholding agent of
the right to file a claim for refund—what is clear in the decision is that a withholding agent
has a legal right to file a claim for refund.—Petitioner, however, submits that this ruling
applies only when the withholding agent and the taxpayer are related parties, i.e., where the
withholding agent is a wholly owned subsidiary of the taxpayer. We do not agree. Although
such relation between the taxpayer and the withholding agent is a factor that increases the
latter’s legal interest to file a claim for refund, there is nothing in the decision to suggest
that such relationship is required or that the lack of such relation deprives the withholding
agent of the right to file a claim for refund. Rather, what is clear in the decision is that a
withholding agent has a legal right to file a claim for refund for two reasons. First, he is
considered a “taxpayer” under the NIRC as he is personally liable for the withholding tax as
well as for deficiency assessments, surcharges, and penalties, should the amount of the tax
withheld be finally found to be less than the amount that should have been withheld under
law. Second, as an agent of the taxpayer, his authority to file the necessary income tax
return and to remit the tax withheld to the government impliedly includes the authority to
file a claim for refund and to bring an action for recovery of such claim.
Same; Same; Same; Same; Unjust Enrichment; While the withholding agent has the right to
recover the taxes erroneously or illegally collected, he nevertheless has the obligation to
remit the same to the principal taxpayer.—In this connection, it is however significant to
add that while the withholding agent has the right to recover the taxes erroneously or
illegally collected, he nevertheless has the obligation to remit the same to the principal
taxpayer. As an agent of the taxpayer, it is his duty to return what he has recovered;
otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer
from whom the taxes were withheld, and from whom he derives his legal right to file a claim
for refund.
Same; Same; RP-Malaysia Tax Treaty; Words and Phrases; “Royalties,” and “Permanent
Establishment,” Defined.—Under the RP-Malaysia Tax Treaty, the term royalties is defined
as payments of any kind received as consideration for: “(i) the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, any copyright of
literary, artistic or scientific work, or for the use of, or the right to use, industrial,
commercial, or scientific equipment, or for information concerning industrial, commercial or
scientific experience; (ii) the use of, or the right to use, cinematograph films, or tapes for
radio or television broadcasting.” These are taxed at the rate of 25% of the gross amount.
Under the same Treaty, the “business profits” of an enterprise of a Contracting State is
taxable only in that State, unless the enterprise carries on business in the other Contracting
State through a permanent establishment. The term “permanent establishment” is defined
as a fixed place of business where the enterprise is wholly or partly carried on. However,
even if there is no fixed place of business, an enterprise of a Contracting State is deemed to
have a permanent establishment in the other Contracting State if it carries on supervisory
activities in that other State for more than six months in connection with a construction,
installation or assembly project which is being undertaken in that other State. In the instant
case, it was established during the trial that Prism does not have a permanent establishment
in the Philippines. Hence, “business profits” derived from Prism’s dealings with respondent
are not taxable. The question is whether the payments made to Prism under the SDM, CM,
and SIM Application agreements are “business profits” and not royalties.
82
Same; Same; The government has no right to retain what does not belong to it.—The
government has no right to retain what does not belong to it. “No one, not even the State,
should enrich oneself at the expense of another.” Commissioner of Internal Revenue vs.
Smart Communication, Inc., 629 SCRA 342, G.R. Nos. 179045-46 August 25, 2010
The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes
comes with the responsibility to return the same to the principal taxpayer.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside
the Decision1 dated June 28, 2007 and the Resolution 2 dated July 31, 2007 of the Court of Tax
Appeals (CTA) En Banc.
Factual Antecedents
Respondent Smart Communications, Inc. is a corporation organized and existing under
Philippine law. It is an enterprise duly registered with the Board of Investments.
On May 25, 2001, respondent entered into three Agreements for Programming and
Consultancy Services3 with Prism Transactive (M) Sdn. Bhd. (Prism), a non-resident
corporation duly organized and existing under the laws of Malaysia. Under the agreements,
Prism was to provide programming and consultancy services for the installation of the
Service Download Manager (SDM) and the Channel Manager (CM), and for the installation
and implementation of Smart Money and Mobile Banking Service SIM Applications (SIM
Applications) and Private Text Platform (SIM Application).
On June 25, 2001, Prism billed respondent in the amount of US$547,822.45, broken down as
follows:
SDM Agreement US$236,000.00
CM Agreement 296,000.00
SIM Application Agreement 15,822.45
Total US$547,822.45 4 However, as to the claim for refund, the Second Division found respondent entitled only to a
Thinking that these payments constitute royalties, respondent withheld the amount of
US$136,955.61 or ₱7,008,840.43,5 representing the 25% royalty tax under the RP-Malaysia
Tax Treaty.6
On September 25, 2001, respondent filed its Monthly Remittance Return of Final Income
Taxes Withheld (BIR Form No. 1601-F)7 for the month of August 2001.
On September 24, 2003, or within the two-year period to claim a refund, respondent filed
with the Bureau of Internal Revenue (BIR), through the International Tax Affairs Division
(ITAD), an administrative claim for refund 8 of the amount of ₱7,008,840.43.
Proceedings before the CTA Second Division
Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act on the
claim for refund, respondent filed a Petition for Review 9 with the CTA, docketed as CTA Case
No. 6782 which was raffled to its Second Division.
In its Petition for Review, respondent claimed that it is entitled to a refund because the
payments made to Prism are not royalties10 but "business profits,"11 pursuant to the
definition of royalties under the RP-Malaysia Tax Treaty, 12and in view of the pertinent
Commentaries of the Organization for Economic Cooperation and Development (OECD)
Committee on Fiscal Affairs through the Technical Advisory Group on Treaty Characterization
of Electronic Commerce Payments.13 Respondent further averred that since under Article 7
of the RP-Malaysia Tax Treaty, "business profits" are taxable in the Philippines "only if
attributable to a permanent establishment in the Philippines, the payments made to Prism, a
Malaysian company with no permanent establishment in the Philippines," 14 should not be
taxed.15
On December 1, 2003, petitioner filed his Answer 16 arguing that respondent, as withholding
agent, is not a party-in-interest to file the claim for refund, 17 and that assuming for the sake
of argument that it is the proper party, there is no showing that the payments made to
Prism constitute "business profits."18
Ruling of the CTA Second Division
In a Decision19 dated February 23, 2006, the Second Division of the CTA upheld respondent’s
right, as a withholding agent, to file the claim for refund citing the cases of Commissioner of
Internal Revenue v. Wander Philippines, Inc., 20 Commissioner of Internal Revenue v. Procter &
Gamble Philippine Manufacturing Corporation 21and Commissioner of Internal Revenue v. The
Court of Tax Appeals.22
partial refund. Although it agreed with respondent that the payments for the CM and SIM
Application Agreements are "business profits," 23and therefore, not subject to tax24 under
the RP-Malaysia Tax Treaty, the Second Division found the payment for the SDM Agreement
a royalty subject to withholding tax. 25 Accordingly, respondent was granted refund in the
amount of ₱3,989,456.43, computed as follows:26
Particulars Amount (in US$)
83
 1. CM 296,000.00 The dispositive portion of the CTA En Banc Decision reads:

2. SIM Application 15,822.45 WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision
Total US$311,822.45 and Resolution are hereby AFFIRMED.

Particulars Amount SO ORDERED.35

Tax Base US$311,822.45
Only petitioner sought reconsideration36 of the Decision. The CTA En Banc, however, found
no cogent reason to reverse its Decision, and thus, denied petitioner’s motion for
Multiply by: Withholding Tax Rate 25% reconsideration in a Resolution37 dated July 31, 2007.

Unfazed, petitioner availed of the present recourse.

Final Withholding Tax US$ 77,955.61
Multiply by: Prevailing Exchange Rate 51.176 Issues

Tax Refund Due ₱3,989,456.43 The two issues to be resolved are: (1) whether respondent has the right to file the claim for
refund; and (2) if respondent has the right, whether the payments made to Prism constitute
The dispositive portion of the Decision of the CTA Second Division reads: "business profits" or royalties.

WHEREFORE, premises considered, the instant petition is partially GRANTED. Accordingly,
respondent Commissioner of Internal Revenue is hereby ORDERED to REFUND or ISSUE a
TAX CREDIT CERTIFICATE to petitioner Smart Communications, Inc. in the amount of
P3,989,456.43, representing overpaid final withholding taxes for the month of August 2001.
SO ORDERED.27
Both parties moved for partial reconsideration 28 but the CTA Second Division denied the
motions in a Resolution29dated July 18, 2006.
Ruling of the CTA En Banc
Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions for
Review,30 which were consolidated per Resolution31 dated February 8, 2007.
Petitioner’s Arguments
Petitioner contends that the cases relied upon by the CTA in upholding respondent’s right to
claim the refund are inapplicable since the withholding agents therein are wholly owned
subsidiaries of the principal taxpayers, unlike in the instant case where the withholding
agent and the taxpayer are unrelated entities. Petitioner further claims that since
respondent did not file the claim on behalf of Prism, it has no legal standing to claim the
refund. To rule otherwise would result to the unjust enrichment of respondent, who never
shelled-out any amount to pay the royalty taxes. Petitioner, thus, posits that the real party-
in-interest to file a claim for refund of the erroneously withheld taxes is Prism. He cites as
basis the case of Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue, 38 where it
was ruled that the proper party to file a refund is the statutory taxpayer. 39 Finally, assuming
that respondent is the proper party, petitioner counters that it is still not entitled to any
refund because the payments made to Prism are taxable as royalties, having been made in
consideration for the use of the programs owned by Prism.

On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial refund granted
to respondent. In sustaining respondent’s right to file the claim for refund, the CTA En
Banc said that although respondent "and Prism are unrelated entities, such circumstance
does not affect the status of [respondent] as a party-in-interest [as its legal interest] is based
on its direct and independent liability under the withholding tax system." 32 The CTA En
Banc also concurred with the Second Division’s characterization of the payments made to
Prism, specifically that the payments for the CM and SIM Application Agreements constitute
"business profits,"33 while the payment for the SDM Agreement is a royalty. 34
Respondent’s Arguments
Respondent, on the other hand, maintains that it is the proper party to file a claim for refund
as it has the statutory and primary responsibility and liability to withhold and remit the taxes
to the BIR. It points out that under the withholding tax system, the agent-payor becomes a
payee by fiction of law because the law makes the agent personally liable for the tax arising
from the breach of its duty to withhold. Thus, the fact that respondent is not in any way
related to Prism is immaterial.
84
Moreover, respondent asserts that the payments made to Prism do not fall under the
definition of royalties since the agreements are for programming and consultancy services
only, wherein Prism undertakes to perform services for the creation, development or the
bringing into existence of software applications solely for the satisfaction of the peculiar
needs and requirements of respondent.
Our Ruling
The petition is bereft of merit.
Withholding agent may file a claim for refund
Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes.
– The Commissioner may –
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the tax
or penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.
xxxx
Sec. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum alleged to have been excessively or
in any manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid.
(Emphasis supplied)
Pursuant to the foregoing, the person entitled to claim a tax refund is the taxpayer.
However, in case the taxpayer does not file a claim for refund, the withholding agent may
file the claim.
In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation,40 a withholding agent was considered a proper party to file a claim for refund of
the withheld taxes of its foreign parent company. Pertinent portions of the Decision read:
The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax
imposed by the Title [on Tax on Income]." It thus becomes important to note that under
Section 53(c)41 of the NIRC, the withholding agent who is "required to deduct and withhold
any tax" is made "personally liable for such tax" and indeed is indemnified against any claims
and demands which the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the provisions of the NIRC.
The withholding agent, P&G-Phil., is directly and independently liable for the correct amount
of the tax that should be withheld from the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency assessments, surcharges and penalties should
the amount of the tax withheld be finally found to be less than the amount that should have
been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal
obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider
a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable
standard, such a person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected
from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed
out that a withholding agent is in fact the agent both of the government and of the
taxpayer, and that the withholding agent is not an ordinary government agent:
"The law sets no condition for the personal liability of the withholding agent to attach. The
reason is to compel the withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government’s agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
85
ordinary government agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies
are not made liable by law."
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the
beneficial owner of the dividends with respect to the filing of the necessary income tax
return and with respect to actual payment of the tax to the government, such authority may
reasonably be held to include the authority to file a claim for refund and to bring an action
for recovery of such claim. This implied authority is especially warranted where, as in the
instant case, the withholding agent is the wholly owned subsidiary of the parent-
stockholder and therefore, at all times, under the effective control of such parent-
stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
xxxx
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of Section 309, 42 NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim. (Emphasis
supplied.)
Petitioner, however, submits that this ruling applies only when the withholding agent and
the taxpayer are related parties, i.e., where the withholding agent is a wholly owned
subsidiary of the taxpayer.
We do not agree.
Although such relation between the taxpayer and the withholding agent is a factor that
increases the latter’s legal interest to file a claim for refund, there is nothing in the decision
to suggest that such relationship is required or that the lack of such relation deprives the
withholding agent of the right to file a claim for refund. Rather, what is clear in the decision
is that a withholding agent has a legal right to file a claim for refund for two reasons. First,
he is considered a "taxpayer" under the NIRC as he is personally liable for the withholding
tax as well as for deficiency assessments, surcharges, and penalties, should the amount of
the tax withheld be finally found to be less than the amount that should have been withheld
under law. Second, as an agent of the taxpayer, his authority to file the necessary income tax
return and to remit the tax withheld to the government impliedly includes the authority to
file a claim for refund and to bring an action for recovery of such claim.
In this connection, it is however significant to add that while the withholding agent has the
right to recover the taxes erroneously or illegally collected, he nevertheless has the
obligation to remit the same to the principal taxpayer. As an agent of the taxpayer, it is his
duty to return what he has recovered; otherwise, he would be unjustly enriching himself at
the expense of the principal taxpayer from whom the taxes were withheld, and from whom
he derives his legal right to file a claim for refund.
As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue 43 cited by the
petitioner, we find the same inapplicable as it involves excise taxes, not withholding taxes.
In that case, it was ruled that the proper party to question, or seek a refund of, an indirect
tax "is the statutory taxpayer, the person on whom the tax is imposed by law and who paid
the same even if he shifts the burden thereof to another."
In view of the foregoing, we find no error on the part of the CTA in upholding respondent’s
right as a withholding agent to file a claim for refund.
The payments for the CM and the SIM Application Agreements constitute
"business profits"
Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kind
received as consideration for: "(i) the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, any copyright of literary, artistic or
scientific work, or for the use of, or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial or scientific experience; (ii)
the use of, or the right to use, cinematograph films, or tapes for radio or television
broadcasting."44 These are taxed at the rate of 25% of the gross amount.45
Under the same Treaty, the "business profits" of an enterprise of a Contracting State is
taxable only in that State, unless the enterprise carries on business in the other Contracting
State through a permanent establishment.46 The term "permanent establishment" is defined
as a fixed place of business where the enterprise is wholly or partly carried on. 47 However,
even if there is no fixed place of business, an enterprise of a Contracting State is deemed to
have a permanent establishment in the other Contracting State if it carries on supervisory
activities in that other State for more than six months in connection with a construction,
installation or assembly project which is being undertaken in that other State. 48
In the instant case, it was established during the trial that Prism does not have a permanent
establishment in the Philippines. Hence, "business profits" derived from Prism’s dealings
with respondent are not taxable. The question is whether the payments made to Prism
under the SDM, CM, and SIM Application agreements are "business profits" and not
royalties.
Paragraph 1.3 of the Programming Services (Schedule A) of the SDM Agreement, 49 reads:
1.3 Intellectual Property Rights (IPR)
86
The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of which shall be • TemplateServer$RequestThread.class
retained by PRISM. PRISM, however, shall provide the Client the APIs for the SDM at no cost
to the Client. The Client shall be permitted to develop programs to interface with the SDM • Template Server_skel.class
or the SDM Libraries, using the related APIs as appropriate. 50(Emphasis supplied.)
• TemplateServer_stub.class
Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM Agreement
and paragraph 1.3 of the Programming Services (Schedule A) of the SIM Agreement provide: • TemplateService.class

1.4 Intellectual Property Rights (IPR) • Prism Crypto Server module for PHP451

The IPR of all components of the CM belong to the Client with the exception of the xxxx
following components, which are provided, without technical or commercial restraints or
obligations:
1.3 Intellectual Property Rights (IPR)

• ConfigurationException.java
• DataStructures (DblLinkedListjava, DbIListNodejava, List
EmptyException.java, ListFullException.java, ListNodeNotFoundException.java,
QueueEmptyException.java, QueueFullException.java, QueueList.java, QueuListEx.java, and
QueueNodeNotFoundException.java)
The Client shall own the IPR for the Specifications and the Source Code for the SIM
Applications. PRISM shall develop an executable compiled code (the "Executable Version")
of the SIM Applications for use on the aSIMetric card which, however, shall only be for the
Client’s use. The Executable Version may not be provided by PRISM to any third [party]
without the prior written consent of the Client. It is further recognized that the Client
anticipates licensing the use of the SIM Applications, but it is agreed that no license fee will
be charged to PRISM or to a licensee of the aSIMetrix card from PRISM when SIMs are
supplied to the Client.52 (Emphases supplied.)

• FieldMappedObjeet.java The provisions in the agreements are clear. Prism has intellectual property right over the
SDM program, but not over the CM and SIM Application programs as the proprietary rights
• LogFileEx.java of these programs belong to respondent. In other words, out of the payments made to
Prism, only the payment for the SDM program is a royalty subject to a 25% withholding tax. A
• Logging (BaseLogger.java and Logger.java) refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and
SIM Application Agreements is therefore in order.
• PrismGeneric Exception.java
Indeed, the government has no right to retain what does not belong to it.1âwphi1 "No one,
not even the State, should enrich oneself at the expense of another." 53
• PrismGenericObject.java

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007 and the
• ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.
Resolution dated July 31, 2007 of the Court of Tax Appeals En Banc are
java, DeliverMessage.java, Login.java, Logout.java, Nack.java, SubmitMessage.java,
hereby AFFIRMED. The Bureau of Internal Revenue is hereby ordered to issue a Tax Credit
Certificate to Prism Transactive (M) Sdn. Bhd. in the amount of ₱3,989,456.43 representing
• TemplateManagement (FileTemplateDataBag.java, Template the overpaid final withholding taxes for the month of August 2001.
DataBag.java, TemplateManagerExBag.java, and TemplateParserExBag.java)
SO ORDERED.
• TemplateManager.class

• TemplateServer.class
87
 DECISION

DEL CASTILLO, J.:

Section 69 of the old National Internal Revenue Code (NIRC) allows unutilized tax credits to be
refunded as long as the claim is filed within the prescriptive period. This, however, no longer
holds true under Section 76 of the 1997 NIRC as the option to carry-over excess income tax
payments to the succeeding taxable year is now irrevocable.

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeks to set aside
the January 25, 2007 Decision 2 and the January 21, 2008 Resolution 3 of the Court of Appeals
(CA).

Factual Antecedents

Petitioner Belle Corporation is a domestic corporation engaged in the real estate and
property business.4

On May 30, 1997, petitioner filed with the Bureau of Internal Revenue (BIR) its Income Tax
Return (ITR) for the first quarter of 1997, showing a gross income of ₱741,607,495.00, a
deduction of ₱65,381,054.00, a net taxable income of ₱676,226,441.00 and an income tax
due of ₱236,679,254.00, which petitioner paid on even date through PCI Bank, Tektite Tower
Branch, an Authorized Agent Bank of the BIR.5
G.R. No. 181298 January 10, 2011
On August 14, 1997, petitioner filed with the BIR its second quarter ITR, declaring an
BELLE CORPORATION, Petitioner, overpayment of income taxes in the amount of ₱66,634,290.00. The computation of which
vs. is reproduced below:
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Gross Income ₱ 833,186,319.00

Taxation; Unlike Section 69 of the old National Internal Revenue Code, the carry-over of
excess income tax payments is no longer limited to the succeeding taxable year— Less: Deductions 347,343,565.00
unutilized excess income tax payments may now be carried over to the succeeding taxable
years until fully utilized.—Under the new law, in case of overpayment of income taxes, the Taxable Income ₱ 485,842,754.00
remedies are still the same; and the availment of one remedy still precludes the other. But Tax Rate x 35%
unlike Section 69 of the old NIRC, the carry-over of excess income tax payments is no longer
limited to the succeeding taxable year. Unutilized excess income tax payments may now be Tax Due ₱ 170,044,964.00
carried over to the succeeding taxable years until fully utilized. In addition, the option to
carry-over excess income tax payments is now irrevocable. Hence, unutilized excess income Less: Tax Credits/Payments
tax payments may no longer be refunded. In the instant case, both the CTA and the CA (a) Prior Year’s Excess Tax Credit -
applied Section 69 of the old NIRC in denying the claim for refund. We find, however, that
the applicable provision should be Section 76 of the 1997 NIRC because at the time (b) 1st Quarter Payment ₱236,679,254.00
petitioner filed its 1997 final ITR, the old NIRC was no longer in force. Belle Corporation vs.
(c) Creditable Withholding Tax - ________________
Commissioner of Internal Revenue, 639 SCRA 108, G.R. No. 181298 January 10, 2011

88
 (₱ 66,634,290.00)6 Minimum Corporate Income Tax ₱ 25,596,210.00
Tax Due 25,596,210.00
Less: Tax Credits/Payments
In view of the overpayment, no taxes were paid for the second and third quarters of
1997.7 Petitioner’s ITR for the taxable year ending December 31, 1997 thereby reflected an (a) Prior year’s excess Tax Credits (₱ 132,041,528.00)
overpayment of income taxes in the amount of ₱132,043,528.00, computed as follows: (b) Quarterly payment -
(c) Creditable tax withheld -
Gross Income ₱ 1,182,473,910.00
Tax Payable/Overpayment (₱ 106,447,318.00)10
Less: Deductions 879,485,278.00

On April 12, 2000, petitioner filed with the BIR an administrative claim for refund of its
Taxable Income ₱ 302,988,362.00 unutilized excess income tax payments for the taxable year 1997 in the amount of
Tax Rate x 35% ₱106,447,318.00.11

Notwithstanding the filing of the administrative claim for refund, petitioner carried over the
Tax Due ₱ 106,046,021.00 amount of ₱106,447,318.00 to the taxable year 1999 and applied a portion thereof to its
1999 Minimum Corporate Income Tax (MCIT) liability, as evidenced by its 1999 ITR. 12 Thus:
Less: Tax Credits/Payments
(a) Prior Year’s Excess Tax Credit - Gross Income ₱ 708,888,638.00
(b) 1st Quarter Payment ₱236,679,254.00 Less: Deduction 1,328,101,776.00
(c) Creditable Withholding Tax (1,410,295.00) (238,089,549.00) Taxable Income (₱ 619,213,138.00)
Tax Due -
REFUNDABLE AMOUNT (₱ 132,043,528.00)8

Minimum Corporate Income Tax ₱ 14,185,874.00

Instead of claiming the amount as a tax refund, petitioner decided to apply it as a tax credit Less: Tax Credits/Payments
to the succeeding taxable year by marking the tax credit option box in its 1997 ITR. 9
(a) Prior year’s excess Credit ₱ 106,447,318.00
For the taxable year 1998, petitioner’s amended ITR showed an overpayment of (b) Tax Payments for the 1st & 3rd Qtrs. 0
₱106,447,318.00, computed as follows:
(c) Creditable tax withheld 0 ₱ 106,447,318.00

Gross Income ₱ 1,279,810,489.00

TAX PAYABLE/REFUNDABLE (₱ 92,261,444.00)13
Less: Deduction 1,346,553,546.00
Taxable Income (Loss) (₱ 66,743,057.00) Proceedings before the Court of Tax Appeals (CTA)
Tax Rate 34%
On April 14, 2000, due to the inaction of the respondent Commissioner of Internal Revenue
Tax Due (Regular Income Tax) - NIL (CIR) and in order to toll the running of the two-year prescriptive period, petitioner
89
appealed its claim for refund of unutilized excess income tax payments for the taxable year
1997 in the amount of ₱106,447,318.00 with the CTA via a Petition for Review, 14docketed as
CTA Case No. 6070.
In answer thereto, respondent interposed that:
4. Petitioner’s alleged claim for refund/tax credit is subject to administrative
routinary investigation/examination by respondent’s Bureau;
5. Petitioner failed miserably to show that the total amount of ₱106,447,318.00
claimed as overpaid or excess income tax is refundable;
A painstaking scrutiny of Petitioner’s income tax returns would show that Petitioner carried
over its 1997 refundable tax of ₱132,043,528.00 to the succeeding year of 1998 yielding an
overpayment of ₱106,447,318.00 (Exhibit I-1) after deducting therefrom the minimum
Corporate Income tax of ₱25,596,210.00. However, Petitioner even went further to the
taxable year 1999 and applied the Prior Year’s (1998) Excess Credit of ₱106,447,318.00 to its
income tax liability.1avvphi1
True enough, upon verification of Petitioner’s 1999 Corporate Annual Income Tax Return
(Exh. I), this Court found that the whole amount of ₱106,447,318.00 representing its prior
year's excess credit (subject of this claim) was carried forward to its 1999 income tax
liability, details of the 1999 Income Tax Return are shown below as follows:

6. Taxes paid and collected are presumed to have been paid in accordance with law; Gross Income ₱ 708,888,638.00
hence, not refundable;
Less: Deduction 1,328,101,776.00
7. In an action for tax refund, the burden is on the taxpayer to establish its right to
refund, and failure to sustain the burden is fatal to the claim for refund; Taxable Income (₱ 619,213,138.00)

8. It is incumbent upon petitioner to show that it has complied with the provisions Tax Due -
of Section 204 (c) in relation to Section 229 of the tax Code;
Minimum Corporate Income Tax ₱ 14,185,874.00
9. Well-established is the rule that refunds/tax credits are construed strictly against
the taxpayer as they partake the nature of tax exemptions. 15 Less: Tax Credits/Payments
(a) Prior year's excess Credit ₱ 106,447,318.00
To prove entitlement to the refund, petitioner submitted, among others, the following
documents: its ITR for the first quarter of taxable year 1997 (Exhibit "B"), 16 its tentative ITRs (b) Tax Payments for the 1st & 3rd Qtrs. 0
for taxable years 1997 (Exhibit "D")17 and 1998 (Exhibit "H"),18 its final ITRs for taxable years
(c) Creditable tax withheld 0 ₱106,447,318.00
1997 (Exhibit "E"),19 1998 (Exhibit "I")20 and 1999 (Exhibit "J"),21 its Letter Claim for Refund
filed with the BIR (Exhibit "K")22 and the Official Receipt issued by PCI Bank showing the
income tax payment made by petitioner in the amount of ₱236,679,254.00 for the first TAX PAYABLE/REFUNDABLE (₱ 92,261,444.00)
quarter of 1997 (Exhibit "C").23

On April 10, 2001, the CTA rendered a Decision 24 denying petitioner’s claim for refund. It
found:
[T]hat all the allegations made by the Petitioner as well as the figures accompanying
Petitioner’s claim are substantiated by documentary evidence but noticed some flaws in
Petitioner’s application of the pertinent laws involved.
It bears stressing that the applicable provision in the case at bar is Section 69 of the old Tax
Code and not Section 76 of the 1997 Tax Code. Settled is the rule that under Section 69 of
the old Tax Code, the carrying forward of any excess/overpaid income tax for a given
taxable year is limited only up to the succeeding taxable year.
It is an elementary rule in taxation that an automatic carry over of an excess income tax
payment should only be made for the succeeding year. (Paseo Realty and Dev’t. Corp. vs.
CIR, CTA Case No. 4528, April 30, 1993) True enough, implicit from the provisions of Section
69 of the NIRC, as amended, (supra) is the fact that the refundable amount may be credited
against the income tax liabilities for the taxable quarters of the succeeding taxable year not
succeeding years; and that the carry-over is only limited to the quarters of the succeeding
taxable year. (citing ANSCOR Hagedorn Securities Inc. vs. CIR, CA-GR SP 38177, December 21,
1999) To allow the application of excess taxes paid for two successive years would run
counter to the specific provision of the law above-mentioned. 25 (Emphasis supplied.)
90
Petitioner sought reconsideration26 of the CTA’s denial of its claim for refund, but the same
was denied in a Resolution27 dated June 5, 2001, prompting petitioner to elevate the matter
to the CA via a Petition for Review28under Rule 43 of the Rules of Court.
Ruling of the Court of Appeals
On January 25, 2007, the CA, applying Philippine Bank of Communications v. Commissioner of
Internal Revenue,29denied the petition. The CA explained that the overpayment for taxable
year 1997 can no longer be carried over to taxable year 1999 because excess income
payments can only be credited against the income tax liabilities of the succeeding taxable
year, in this case up to 1998 only and not beyond. 30 Neither can the overpayment be
refunded as the remedies of automatic tax crediting and tax refund are alternative
remedies.31 Thus, the CA ruled:
[W]hile BELLE may not have fully enjoyed the complete utilization of its option and the sum
of Php106,447,318 still remained after it opted for a tax carry over of its excess payment for
the taxable year 1998, but be that as it may, BELLE has only itself to blame for making such
useless and damaging option, and BELLE may no longer opt to claim for a refund
considering that the remedy of refund is barred after the corporation has previously opted
for the tax carry over remedy. As a matter of fact, the CTA even made the factual findings
that BELLE committed an aberration to exhaust its unutilized overpaid income tax by
carrying it over further to the taxable year 1999, which is a blatant transgression of the
"succeeding taxable year limit" provided for under Section 69 of the old NIRC. 32(Emphasis
supplied)
Hence, the fallo of the Decision reads:
WHEREFORE, premises considered, the instant Petition for Review is DENIED, and
accordingly, the herein impugned April 10, 2001 Decision and June 5, 2001 Resolution of the
CTA are hereby affirmed.
SO ORDERED.33
Petitioner moved for reconsideration. 34 The CA, however, denied the same in a
Resolution35 dated January 21, 2008.
Issues
Aggrieved, petitioner availed of the present recourse, raising the following assignment of
errors:
A. THE CA COMMITTED SERIOUS ERROR OF LAW IN APPLYING THE PBCOM CASE.
A.1. THE [DECISION IN THE] PBCOM CASE HAS ALREADY BEEN REPEALED.
A.2. ASSUMING ARGUENDO THAT THE [DECISION IN THE] PBCOM CASE
HAS NOT BEEN REPEALED, IT HAS NO APPLICATION TO BELLE.
B. THE CA COMMITTED SERIOUS ERROR OF LAW IN FINDING THAT BELLE’S
REFUND CLAIM IS NOT ON ALL FOURS WITH THE CASES OF BPI FAMILY AND AB
LEASING.
B.1. BELLE’S ‘CARRYING-OVER’ OF ITS EXCESS INCOME TAX PAID FOR 1997
TO 1999 (BEYOND THE SUBSEQUENT YEAR) IS IMMATERIAL.
B.2. BELLE’S PARTIAL USE OF ITS EXCESS INCOME TAX PAID IN 1998 (THE
SUBSEQUENT YEAR) DOES NOT PRECLUDE BELLE FROM ASKING FOR A
REFUND.36
In a nutshell, the issue boils down to whether petitioner is entitled to a refund of its excess
income tax payments for the taxable year 1997 in the amount of ₱106,447,318.00.
Petitioner’s Arguments
Petitioner insists that it is entitled to a refund as the ruling in Philippine Bank of
Communications v. Commissioner of Internal Revenue 37 relied upon by the CA in denying its
claim has been overturned by BPI-Family Savings Bank, Inc. v. Court of Appeals, 38 AB Leasing
and Finance Corporation v. Commissioner of Internal Revenue, 39 Calamba Steel Center, Inc. v.
Commissioner of Internal Revenue,40 and State Land Investment Corporation v. Commissioner
of Internal Revenue.41 In these cases, the taxpayers were allowed to claim refund of
unutilized tax credits.42Similarly, in this case, petitioner asserts that it may still recover
unutilized tax credits via a claim for refund.43
And while petitioner admits that it has committed a "blatant transgression" of the
"succeeding taxable year limit" when it carried over its 1997 excess income tax payments
beyond the taxable year 1998, petitioner believes that this should not result in the denial of
its claim for refund but should only invalidate the application of its 1997 unutilized excess
income tax payments to its 1999 income tax liabilities. 44 Hence, petitioner postulates that a
claim for refund of its unutilized tax credits for the taxable year 1997 may still be made
because the carry-over thereof to the taxable year 1999 produced no legal effect, and is,
therefore, immaterial to the resolution of its claim for refund. 45
Respondent’s Arguments
Respondent, on the other hand, maintains that the cases of BPI-Family Savings Bank46 and AB
Leasing47 are inapplicable as the facts obtaining therein are different from those of the
91
present case.48 What is controlling, therefore, is the ruling in Philippine Bank of
Communications,49 that tax refund and tax credit are alternative remedies; thus, "the choice
of one precludes the other."50 Respondent, therefore, submits that since petitioner has
already applied its 1997 excess income tax payments to its liabilities for taxable year 1998, it
is precluded from carrying over the same to taxable year 1999, or from filing a claim for
refund.51
Our Ruling
The petition has no merit.
Both the CTA and the CA erred in applying Section 69 52 of the old NIRC. The law applicable is
Section 76 of the NIRC.
Unutilized excess income tax payments may be refunded within two years from the date of
payment under Section 69 of the old NIRC
Under Section 69 of the old NIRC, in case of overpayment of income taxes, a corporation
may either file a claim for refund or carry-over the excess payments to the succeeding
taxable year. Availment of one remedy, however, precludes the other. 53
Although these remedies are mutually exclusive, we have in several cases allowed
corporations, which have previously availed of the tax credit option, to file a claim for refund
of their unutilized excess income tax payments.
In BPI-Family Savings Bank,54 the bank availed of the tax credit option but since it suffered a
net loss the succeeding year, the tax credit could not be applied; thus, the bank filed a claim
for refund to recover its excess creditable taxes. Brushing aside technicalities, we granted
the claim for refund.
Likewise, in Calamba Steel Center, Inc., 55 we allowed the refund of excess income taxes paid
in 1995 since these could not be credited to taxable year 1996 due to business losses. In that
case, we declared that "a tax refund may be claimed even beyond the taxable year following
that in which the tax credit arises x x x provided that the claim for such a refund is made
within two years after payment of said tax."56
In State Land Investment Corporation,57 we reiterated that "if the excess income taxes paid in
a given taxable year have not been entirely used by a x x x corporation against its quarterly
income tax liabilities for the next taxable year, the unused amount of the excess may still be
refunded, provided that the claim for such a refund is made within two years after payment
of the tax."58
Thus, under Section 69 of the old NIRC, unutilized tax credits may be refunded as long as the
claim is filed within the two-year prescriptive period.
The option to carry over excess income tax payments is irrevocable under Section 76 of the
1997 NIRC
This rule, however, no longer applies as Section 76 of the 1997 NIRC now reads:
Section 76. Final Adjustment Return. – Every corporation liable to tax under Section 24 shall
file a final adjustment return covering the total net income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable net income of that year the corporation shall
either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable period and no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor.
(Emphasis supplied)
Under the new law, in case of overpayment of income taxes, the remedies are still the same;
and the availment of one remedy still precludes the other. But unlike Section 69 of the old
NIRC, the carry-over of excess income tax payments is no longer limited to the succeeding
taxable year. Unutilized excess income tax payments may now be carried over to the
succeeding taxable years until fully utilized. In addition, the option to carry-over excess
income tax payments is now irrevocable. Hence, unutilized excess income tax payments
may no longer be refunded.
In the instant case, both the CTA and the CA applied Section 69 of the old NIRC in denying
the claim for refund. We find, however, that the applicable provision should be Section 76 of
the 1997 NIRC because at the time petitioner filed its 1997 final ITR, the old NIRC was no
longer in force. In Commissioner of Internal Revenue v. McGeorge Food Industries, Inc., 59 we
explained that:
Section 76 and its companion provisions in Title II, Chapter XII should be applied following
the general rule on the prospective application of laws such that they operate to govern the
92
conduct of corporate taxpayers the moment the 1997 NIRC took effect on 1 January 1998.
There is no quarrel that at the time respondent filed its final adjustment return for 1997 on
15 April 1998, the deadline under Section 77 (B) of the 1997 NIRC (formerly Section 70(b) of
the 1977 NIRC), the 1997 NIRC was already in force, having gone into effect a few months
earlier on 1 January 1998. Accordingly, Section 76 is controlling.

The lower courts grounded their contrary conclusion on the fact that respondent’s
overpayment in 1997 was based on transactions occurring before 1 January 1998. This
analysis suffers from the twin defects of missing the gist of the present controversy and
misconceiving the nature and purpose of Section 76. None of respondent’s corporate
transactions in 1997 is disputed here. Nor can it be argued that Section 76 determines the
taxability of corporate transactions. To sustain the rulings below is to subscribe to the
untenable proposition that, had Congress in the 1997 NIRC moved the deadline for the filing
of final adjustment returns from 15 April to 15 March of each year, taxpayers filing returns
after 15 March 1998 can excuse their tardiness by invoking the 1977 NIRC because the
transactions subject of the returns took place before 1 January 1998. A keener appreciation
of the nature and purpose of the varied provisions of the 1997 NIRC cautions against
sanctioning this reasoning.60

Accordingly, since petitioner already carried over its 1997 excess income tax payments to
the succeeding taxable year 1998, it may no longer file a claim for refund of unutilized tax
credits for taxable year 1997.

To repeat, under the new law, once the option to carry-over excess income tax payments to
the succeeding years has been made, it becomes irrevocable. Thus, applications for refund
of the unutilized excess income tax payments may no longer be allowed.

WHEREFORE, the petition is hereby DENIED. The Decision dated January 25, 2007 and the
Resolution dated January 21, 2008 of the Court of Appeals are hereby AFFIRMED only insofar
as the denial of petitioner’s claim for refund is concerned.

SO ORDERED

93

G.R. No. 203057. June 6, 2016.*
BUREAU OF INTERNAL REVENUE, as represented by the Commissioner of Internal
Revenue, petitioner, vs. MANILA HOME TEXTILE, INC.,** THELMA LEE and SAMUEL LEE,
respondents.
Taxation; Tax Exemptions; Tax exemptions, which respondents obviously want or desire to
avail of in this case, are strictissimi juris. Indeed, taxation is the rule and tax exemption the
exception.—It must be borne in mind that tax exemptions, which respondents obviously
want or desire to avail of in this case, are strictissimi juris. Indeed,taxation is the rule and tax
exemption the exception. Tax exemptions should be granted only by clear and unequivocal
provision of law on the basis of language too plain to be misunderstood. We hold that in this
case respondents have utterly failed to make out even a prima facie for tax exemption in
their favor.
There is grave abuse of discretion when the determination of probable cause is exercised in
an arbitrary or despotic manner due to passion or personal hostility, so patent and so gross
as to amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined
by law.1ChanRoblesVirtualawlibrary
This Petition for Review on Certiorari under Rule 45 of the Rules of Court impugns the May 7,
2012 Decision2 and the July 25, 2012 Resolution3 of the Court of Appeals (CA) in CA-G.R. SP
No. 112159.
This case started out as a criminal complaint for tax evasion and perjury against respondents
herein. Docketed as I.S. No. 2006-372, the Bureau of Internal Revenue (BIR), represented
herein by the Commissioner of Internal Revenue (CIR), accused respondents the Manila
Home Textile, Inc. (MHI), its President Thelma Lee (Thelma), and its Vice-President Samuel
Lee (Samuel), and certain unidentified John Does and/or Jane Does, with having violated
Sections 254,4 255,5 2576 and 2677 of the National Internal Revenue Code (NIRC).
It is alleged that the MHI is a duly organized domestic corporation and registered with the
Securities and Exchange Commission (SEC) under SEC Registration No, 140920; that its
primary purpose is to engage in the business of manufacturing, buying, selling, exporting,
importing and otherwise dealing in home textiles, apparels of all kinds, and their end-
products, and any and all supplies, materials, tools, machines, appliances or apparatus
employed in or related to the manufacture of said goods, for itself or as contractor, and to
contract with third parties, natural or juridical persons, to supply the work, labor and
materials for the manufacture and processing of such materials as independent contractors;
that to facilitate importation, MHI was issued a license by the Garments and Textiles Export
Board (GTEB) to operate a Customs Bonded Manufacturing Warehouse (CBMW); that as a
rule, the CBMW operates by having imported raw materials stored at the warehouse; that
these raw materials are duty-free provided that these are utilized and consumed for the
manufacture of its final product, which are intended for export, as the same would have a
different treatment in terms of "tax incentives" than the regular importations; that
investigation of the MHI's importations documents revealed that for the taxable years 2001
and 2002, the said company made several importations of PVC (or polyvinyl chloride)
materials, woven fabrics, PVC leather and other raw materials used in the manufacture of its
end-products; that on January 14, 2005 BIR issued Letter of Authority (LOA) No.
000024628 to the MHI advising it that BIR agents under the National Investigation Division
(NID) had been authorized to examine its books of accounts and other accounting records
for all internal revenue taxes for taxable years 1997 to 2002 and unverified prior years; that
several attempts to serve the LOA were made by the BIR but all these efforts proved futile
because MHI could not be located at the address given in its Annual Income Tax Returns and
other BIR records; that indeed on March 3, 2004, GTEB issued a certification to the effect
that MHI, with address at De la Paz St., Manggahan, Pasig, Metro Manila, had been inactive
since 1997; and, that the SEC issued a certification on November 3, 2003 that the MHI failed
to file its General Information Sheet for the years 1998-2005 and financial statements for the
period 1997-2002.
It is further alleged that based on the information gathered by the NED, the MHI, through its
corporate officers, directors and/or employees understated its importations and/or
purchases, to wit:
YEAR PURCHASES/IMPORTATION
94
 2002 P 976,123.00
2001 P 3,355,853.00
which information is at war with the data provided by the BIR's Amended Information, Tax
Exemption and Incentives Division (AITEID) covering the MHI's Importers Detailed Report,
thus -
YEAR PURCHASES/IMPORTATION
2002 P 555,778,491.00
2001 P 431,764,487.00
In conclusion, it is alleged that the "MHI, through its corporate officers, directors and/or
employees, wilfully under-declared the amount of its purchases and/or importations for
taxable, years 2001 and 2002 by as much as P428,408,634,00 and P554,802,368.00,
respectively. This under-declaration resulted in estimated Deficiency Income Taxes in the
amount of P43,716,161,84 for taxable year 2001, and P34,561,975,40 for taxable year 2002,
both inclusive of interests and increments x x x."9ChanRoblesVirtualawlibrary
Although Thelma's and Samuel's counter-affidavits had not been appended to the records of
this case, the investigating prosecutor adverted to it in his Resolution 10 of January 30, 2007.
Therein Thelma and Samuel allegedly denied the accusation against them and instead
asserted that the "MHI as an independent contractor and supplier of work, labor and other
materials for the manufacture of garments and similar products like handbags," 11 in the year
2001, it merely "receive[d] various consignments of raw materials worth P431,764,487.00,
imported tax-free;"12 that "[t]hese were processed at its customs bonded warehouse and
eventually re-exported as finished handbags or unused materials;" 13 that it "did the same
thing with respect to the P555,778,491.00 worth of materials it imported in 2002;" 14 that
"MHI did not declare as purchases the foregoing importations of raw materials because it
did not buy them;" that it "processed them into finished products for its foreign customers;
the rest it returned as excess raw materials;" 15 that "[a]ll that MHI supplied in the
manufacture of the finished products x x x were shipped out and re-exported under what is
known' in the export industry as cut, make and trim or CMT invoices;" 16 that "[u]nder its
CMT arrangement, MHI could not dispose of any of its products it produced out of the
imported raw materials;"17 that "[considering that the importation spnd re-exportation
happened four or five years ago, its records are no longer readily available;" 18 and that
"[l]ikewise, a request made to the Bureau of Customs to provide copies of the export
documents including CMT invoices and bills of lading proved
futile."19ChanRoblesVirtualawlibrary
Against the foregoing backdrop, the investigating prosecutor ruled -
Truly, criminal intent is irrelevant in a special law, however the intent to commit the
prohibited act must be established. (People vs. De Gratia, 233 SCRA 716) Obviously,
respondents have not been shown to have intended to deliberately understate the
importation and/or purchases in their income tax returns for the years 2001 and 2002
considering that the raw materials were imported duty-free and as clearly explained,
respondents did not pay for the imported raw materials which were merely consigned to
them to be used in the manufacture of finished products for re-export under CMT invoices.
Thus, we cannot readily conclude that respondents intended to evade the payment of
proper taxes on the mere basis of suspicion and speculation which cannot substitute for
evidence. All told, this Office has not found any overt criminal act on the part of respondents
which could be made the basis for a complaint for tax evasion.
WHEREFORE, premises considered, it is respectfully recommended that the complaint
against respondents Thelma U. Lee and Samuel U. Lee for tax evasion and perjury be
DISMISSED.20
Petitioner filed a motion for reconsideration but this motion was denied.
Hence, petitioner appealed to the Secretary of Justice. But on September 29, 2009
Department of Justice (DOJ) Undersecretary Ernesto L. Pineda, signing for the Secretary of
Justice, resolved to dismiss the appeal.
Thereafter, petitioner instituted a Petition for Certiorari before the CA, thereat docketed as
CA-G.R. SP No. 112159. The CA rendered judgment dismissing the Petition for Certiorari. The
CA ruled -
Notably, [petitioner hastily concluded and attributed fraudulent intent on the part of herein
[p]rivate [respondents solely by the apparent understatement of the amount of its
purchases/importations, without at the very least offering proof that the amount withheld is
subject to tax. To simply put it, what is there to evade when no tax is due at all? In contrast,
[p]rivate [respondents were able to substantiate their claim that the amount they failed to
include are not purchases/importations subject to tax but consignments exclusively used for
the manufacture of its finished products for export, and hence duty-free. While it is true that
no direct evidence was presented by [p]rivate [respondent to prove such fact, the records
are however replete with strong circumstantial evidence inexorably leading to the same
conclusion.
Ultimately, [petitioner cannot seek refuge from the adequacy or weight of the evidence of
[p]rivate [respondents. Petitioner must be reminded that the burden is upon it as the
complainant, to prove the cause of action and show to the satisfaction of the state
prosecutor the facts and law upon which the claim is based.
95

WHEREFORE, the instant Petition for Certiorari is hereby DISMISSED for lack of merit.
SO ORDERED.21cralawred
Its motion for reconsideration of the foregoing CA Decision having been denied, petitioner
files this Petition for Review on Certiorari contending that all the Resolutions issued by the
investigating prosecutor, the DOJ Undersecretary, as well as the Decision and the
Resolution of the CA were all tainted with grave abuse of discretion.
With this contention we agree.
As clearly made out in the complaint-affidavit filed by the petitioner with the DOJ, petitioner,
in line with the governments' campaign against tax evasion conducted an inquiry or
preliminary investigation to determine the MHTs tax compliance; that in the course of this
inquiry or preliminary investigation, data or information culled by the petitioner from
certified copies of the Income Tax Return, the VAT, and other returns which the MHI was
required to file with the appropriate revenue district office/s, indeed indicated that the MHI
might have understated its purchases/importations for the years 2001 and 2002; that the
MHI declared in its audited financial statements purchases/importations to the tune of
P976,123.00 for 2002 and P3,355,853.00 for 2001; that by contrast, data from the BIR's
ATTEID showed that the MHTs importations and/or purchases were P555,778,491.00 for
2002, and P431,764,487.00 for 2001; which thus indicates that the MHI and its President,
Thelma and Vice-President Samuel, deliberately understated the amounts of importations
and/or purchases by as much as £428,408,634.00 for 2001, and P554,802,368.00 for 2002;
and that this explains why the MHI and its responsible corporate officers are being charged
with violations of Sections 254, 255, 257 and 267 vis-a-vis Sections 52(A), 105 and 114(A) of
the NIRC.
In refutation of the foregoing charges, Thelma and Samuel averred that they merely
received on consignment the raw materials valued at P431,764,487.00 and P555,778,497.00,
which were brought to the Philippines tax-free; that these raw materials were then
processed at the MHTs customs bonded warehouse and eventually re-exported as finished
handbags, or CMT (cut, made and trim); that if they did not declare the imported raw
materials as purchases, it was because they did not in fact purchase these imported raw
materials which, to repeat, were merely consigned to them tax-free; and that considering
that the importations and re-exportation of these raw materials happened four or five years
ago, their records are no longer available.
Viewed in this context, it is easy to see that petitioner has clearly made out a prima facie case
or shown probable cause to indict respondents for tax evasion under the pertinent sections
of the NTRC, Indeed, we believe that by themselves the annexes appended to the records of
this case, Annexes "A" to "M", submitted in amplification of petitioner's affidavit-complaint
do already provide viable support to petitioner's plea for the indictment of the said
respondents for tax evasion. By contrast, respondents' argument in this case is the
nebulous, murky and unsubstantiated claim of "consignment" with an alleged tax-free
guaranty, not a shred or scintilla of which has been adduced in this case. To repeat,
respondents have not produced even a slip of paper purporting to prove that the raw
materials valued at hundreds of millions of pesos were delivered to them on "consignment."
Corollary thereto, it must be borne in mind that tax exemptions, which respondents
obviously want or desire to avail of in this case, are strictissimi juris. Indeed, taxation is the
rule and tax exemption the exception. Tax exemptions should be granted only by clear and
unequivocal provision of law on the basis of language too plain to be misunderstood, 22 We
hold that in this case respondents have utterly failed to make out even a prima facie for tax
exemption in their favor.
Nevertheless, we must hasten to add at this juncture that we are here only to determine
probable cause, As to whether respondents are guilty of tax evasion and/or perjury under
the pertinent provisions of the NIRC and other penal statutes is an issue that must be
resolved during the trial of the criminal case/s where the quantum of proof required is proof
beyond reasonable doubt.
On top qf these, we must stress that our ailing in this ease should not be construed as an
unbridled license for our tax officials to engage in fishing expeditions and witch-hunting,
They should not abuse their investigative powers and should exercise the same within the
parameters and ambit of the law. By no means is this Court signalling mat it is opening the
floodgates to inundate the courts of justice with frivolous and malicious tax suits.
WHEREFORE, this Petition is hereby GRANTED. The Decision dated May 7, 2012 and the
Resolution dated July 25, 2012 of the Court of Appeals in CA-G.R. SP No. 112159
are REVERSED and SET ASIDE. The Resolutions of State Prosecutor II Sebastian F.
Caponong, Jr. dated January 30, 2007 and June 8, 2007 as well as the Resolution of
Department of Justice Undersecretary Ernesto L. Pineda dated September 25, 2009 are
also REVOKED and NULLIFIED, The Prosecutor General of the Department of Justice is
hereby directed to promptly file the appropriate information/s for tax evasion and perjury
under the pertinent provisions of the. National Intanal Revenue Code and other relevant
penal statutes against the respondents.
SO ORDERED. chanroblesvirtuallawlibrary
96
 penalties/surcharge and interest shall be cancelled by the concerned BIR Office following
existing rules and procedures. Thereafter, the docket of the case shall be forwarded to the
Office of the Commissioner, thru the Deputy Commissioner for Operations Group, for
issuance of Termination Letter.

Same; Tax Abatement; Asiatrust’s application for tax abatement will be deemed approved
only upon the issuance of a termination letter, and only then will the deficiency tax
assessment be considered closed and terminated.—Since no termination letter has been
issued by the BIR, there is no reason for the Court to consider as closed and terminated the
tax assessment on Asiatrust’s final withholding tax for fiscal year ending June 30, 1998.
Asiatrust’s application for tax abatement will be deemed approved only upon the issuance
of a termination letter, and only then will the deficiency tax assessment be considered
closed and terminated. However, in case Asiatrust’s application for tax abatement is denied,
any payment made by it would be applied to its outstanding tax liability. For this reason,
Asiatrust’s allegation of double taxation must also fail.

Remedial Law; Civil Procedure; Appeals; Motion for Reconsideration; In order for the Court
of Tax Appeals (CTA) En Banc to take cognizance of an appeal via a petition for review, a
timely motion for reconsideration or new trial must first be filed with the CTA Division that
issued the assailed decision or resolution. Failure to do so is a ground for the dismissal of
the appeal as the word “must” indicates

G.R. No. 201530 that the filing of a prior motion is mandatory, and not merely directory.—In order for the
CTA En Banc to take cognizance of an appeal via a petition for review, a timely motion for
ASIATRUST DEVELOPMENT BANK, INC., Petitioners, reconsideration or new trial must first be filed with the CTA Division that issued the assailed
vs. decision or resolution. Failure to do so is a ground for the dismissal of the appeal as the
COMMISSIONER OF INTERNAL REVENUE, Respondents word “must” indicates that the filing of a prior motion is mandatory, and not merely
directory. The same is true in the case of an amended decision. Section 3, Rule 14 of the
same rules defines an amended decision as “[a]ny action modifying or reversing a decision
Taxation; Commissioner of Internal Revenue; Jurisdiction; Section 204(B) of the 1997
of the Court En Banc or in Division.” As explained in CE Luzon Geothermal Power Company,
National Internal Revenue Code (NIRC) empowers the Commissioner of Internal Revenue
Inc. v. Commissioner of Internal Revenue, 768 SCRA 269 (2015), an amended decision is a
(CIR) to abate or cancel a tax liability.—Section 204(B) of the 1997 National Internal
different decision, and thus, is a proper subject of a motion for reconsideration. In this case,
Revenue Code (NIRC) empowers the CIR to abate or cancel a tax liability. On September 27,
the CIR’s failure to move for a reconsideration of the Amended Decision of the CTA Division
2006 the BIR issued RR No. 15-06 prescribing the guidelines on the implementation of the
is a ground for the dismissal of its Petition for Review before the CTA En Banc. Thus, the CTA
one-time administrative abatement of all penalties/surcharges and interest on delinquent
En Banc did not err in denying the CIR’s appeal on procedural grounds. Asiatrust
accounts and assessments (preliminary or final, disputed or not) as of June 30, 2006. Section
Development Bank, Inc. vs. Commissioner of Internal Revenue, 823 SCRA 648, G.R. No.
4 of RR No. 15-06 provides: SECTION 4. Who May Avail.—Any person/taxpayer, natural or
201530, G.R. Nos. 201680-81 April 19, 2017
juridical, may settle thru this abatement program any delinquent account or assessment
which has been released as of June 30, 2006, by paying an amount equal to One Hundred
Percent (100%) of the Basic Tax assessed with the Accredited Agent Bank (AAB) of the DECISION
Revenue District Office (RDO)/Large Taxpayers Service (LTS)/Large Taxpayers District Office
(LTDO) that has jurisdiction over the taxpayer. In the absence of an AAB, payment may be DEL CASTILLO, J.:
made with the Revenue Collection Officer/Deputized Treasurer of the RDO that has
jurisdiction over the taxpayer. After payment of the basic tax, the assessment for

97
An application for tax abatement is deemed approved only upon the issuance of a 39,163,539.57
termination letter by the Bureau of Internal Revenue (BIR). Documentary Stamp Tax - Industry Issue

These consolidated Petitions for Review on Certiorari1 under Rule 45 of the Rules of Court TOTAL 49,319,948.20
assail the November 16, 2011 Decision2 and the April 16, 2016 Resolution3 of the Court of Tax
Fiscal year 1998
Appeals (CTA) En Banc in CTA EB Case Nos. 614 and 677.
Documentary Stamp Tax ₱20,425,770.07

Factual Antecedents Final Withholding Tax – Trust ₱10,183,367.80

Documentary Stamp Tax - Industry Issue 93,430,878.54
On separate dates in February 2000, Asiatrust Development Bank, Inc. (Asiatrust) received
from the Commissioner of Internal Revenue (CIR) three Formal Letters of Demand (FLD)
with Assessment Notices 4 for deficiency internal revenue taxes in the amounts of TOTAL ₱124,040,016.41 9

P131,909,161.85, P83,012,265.78, and

₱l44,012,918.42 for fiscal years ending June 30, 1996, 1997, and 1998, respectively. 5
On March 17, 2000, Asiatrust timely protested the assessment notices. 6
Due to the inaction of the CIR on the protest, Asiatrust filed before the CTA a Petition for
Review7 docketed as CTA Case No. 6209 praying for the cancellation of the tax assessments
for deficiency income tax, documentary stamp tax (DST) - regular, DST - industry issue, final
withholding tax, expanded withholding tax, and fringe benefits tax issued against it by the
CIR.
On April 19, 2005, the CIR approved Asiatrust's Offer of Compromise of DST - regular
assessments for the fiscal years ending June 30, 1996, 1997, and 1998. 10
During the trial, Asiatrust manifested that it availed of the Tax Abatement Program for its
deficiency final withholding tax - trust assessments for fiscal years ending June 30, 1996 and
1998; and that on June 29, 2007, it paid the basic taxes in the amounts of P4,187,683.27 and
P6,097,825.03 for the said fiscal years, respectively. 11 Asiatrust also claimed that on March 6,
2008, it availed of the provisions of Republic Act (RA) No. 9480, otherwise known as the Tax
Amnesty Law of 2007. 12

On December 28, 2001, the CIR issued against Asiatrust new Assessment Notices for
deficiency taxes in the amounts of ₱l 12,816,258.73, ₱53,314,512.72, and ₱133,013,458.73,
covering the fiscal years ending June 30, 1996, 1997, and 1998, respectively. 8
On the same day, Asiatrust partially paid said deficiency tax assessments thus leaving the
following balances:
Ruling of the Court of Tax Appeals Division
On January 20, 2009, the CTA Division rendered a Decision13 partially granting the Petition.
The CTA Division declared void the tax assessments for fiscal year ending June 30, 1996 for
having been issued beyond the three-year prescriptive period. 14 However, due to the failure
of Asiatrust to present

1awp++i1 documentary and testimonial evidence to prove its availment of the Tax Abatement
Fiscal Year 1996 Program and the Tax Amnesty Law, the CTA Division affirmed the deficiency DST- Special
Documentary Stamp Tax ₱13,497,227.80 Savings Account (SSA) assessments for the fiscal years ending June 30, 1997 and 1998 and
the deficiency DST - Interbank Call Loans (IBCL) and deficiency final withholding tax - trust
Final Withholding Tax – Trust 8,770,265.07
assessments for fiscal year ending June 30, 1998, in the total amount of
Documentary Stamp Tax - Industry Issue 88,584,931.39 ₱142,777,785.91.15Thus:

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY
TOTAL ₱110,852,424.26 GRANTED. Accordingly, Assessment Notices issued against [ Asiatrust] for deficiency
Fiscal Year 1997 documentary stamp, final withholding, expanded withholding, and fringe benefits tax
Documentary Stamp Tax ₱10,156,408.63

98
assessments for the fiscal year ended June 30, 1996 are VOID for being [issued] beyond the
prescriptive period allowed by law.
The Assessment Notices issued by [CIR] against [Asiatrust] for deficiency income,
documentary stamp - regular, documentary stamp - trust, and fringe benefits tax
assessments for the fiscal years ended June 30, 1997 & 1998 are hereby ordered CANCELLED
and WITHDRAWN. Moreover, [Asiatrust's] deficiency documentary stamp tax - IBCL
assessment for the fiscal year ended June 30, 1997 is ordered CANCELLED and WITHDRAWN.
However, [Asiatrust's] deficiency documentary stamp tax - Special Savings Account
assessments for the fiscal years ended June 30, 1997 & 1998, and deficiency documentary
sta..111p tax - IBCL and deficiency final withholding tax - trust assessments for the fiscal year
ended June 30, 1998, in the aggregate amount of ?142,777,785.91 are hereby i\FFIRMED. The
said an1ount is broken down as follows:
Fiscal Year 1997
Documentary Stamp Tax - Industry Issue ₱39,163,539.57
Fiscal Year 1998
Final Withholding Tax – Trust 10,183,367.80
Documentary Stamp Tax - Industry Issue 93,430,878.54
Total Deficiency Tax ₱142,777,785.91
===============
SO ORDERED. 16
Asiatrust filed a Motion for Reconsideration 17 attaching photocopies of its Application for
Abatement Program, BIR Payment Form, BIR Tax Payment Deposit Slip, Improved Voluntary
Assessment Program Application Forms, Tax Amnesty Return, Tax Amnesty Payment Form,
Notice of Availment of Tax Amnesty and Statement of Assets and Liabilities and Networth
(SALN) as of June 30, 2005.
The CIR, on the other hand, filed a Motion for Partial Reconsideration of the assessments
assailing the CTA Division's finding of prescription and cancellation of assessment notices for
deficiency income, DST - regular, DST - trust, and fringe benefit tax for fiscal years ending
June 30, 1997 and 1998. 18
On July 6, 2009, the CTA Division issued a Resolution 19 denying the motion of the CIR while
partially granting the motion of Asiatrust. The CTA Division refused to consider Asiatrust's
availment of the Tax Abatement Program due to its failure to submit a termination letter
from the BIR. 20 However, as to Asiatrust's availment of the Tax Amnesty Law, the CTA
Division resolved to set the case for hearing for the presentation of the originals of the
documents attached to Asiatrust' s motion for reconsideration. 21
Meanwhile, the CIR appealed the January 20, 2009 Decision and the July 6, 2009 Resolution
before the CTA En Banc via a Petition for Review 22 docketed as CTA EB No. 508. The CTA En
Banc however dismissed the Petition for being premature considering that the proceedings
before the CT A Division was still pending.23
On December 7, 2009, Asiatrust filed a Manifestation 24 informing the CTA Division that the
BIR issued a Certification25 dated August 20, 2009 certifying that Asiatrust paid the amounts
of ₱4,187,683.27 and ₱6,097,825.03 at the Development Bank of the Philippines in
connection with the One-Time Administrative Abatement under Revenue Regulations (RR)
No. 15-2006. 26
On March 16, 20l0, the CTA Division rendered an Amended Decision 27 finding that Asiatrust
is entitled to the immunities and privileges granted in the Tax Amnesty Law. 28 However, it
reiterated its ruling that in the absence of a termination letter from the BIR, it cannot
consider Asiatrust's availment of the Tax Abatement Program. 29 Thus, the CTA Division
disposed of the case in this wise:
WHEREFORE, premises considered, [Asiatrust's] Motion for Reconsideration is hereby
PARTIALLY GRANTED and this Court's Decision dated January 20, 2009 is hereby MODIFIED.
Accordingly, the above-captioned case as regards [Asiatrust's] liability for deficiency
documentaly stamp tax is CLOSED and TERMINATED, subject to the provisions of R.A. No.
9480. However, (Asiatmst's] liability for deficiency final withholding tax assessment for
fiscal year ended June 30, 1998, subject of this litigation, in the amount of ₱l0,183,367.80, is
hereby REAFFIRMED.
SO ORDERED.30
Still unsatisfied, Asiatrust moved for partial reconsideration 31 insisting that the Certification
issued by the BIR is sufficient proof of its availment of the Tax Abatement Program
considering that the CIR, despite Asiatrust's request, has not yet issued a termination letter.
Asiatrust attached to the motion photocopies of its letter'' dated March 17, 2009 requesting
the BIR to issue a termination letter, Payment Form 33 BIR Tax Payment Deposit
Slips, 34 Improved Voluntary Assessment Program (IV AP) Payment Fonn, 35 and a
letter36 dated October 17, 2007 issued by Revenue District Officer (RDO) Ms. Clavelina S.
Nacar.
On July 28, 2010, the CTA Division issued a Resolution 37 denying Asiatrust's motion. The CTA
Division maintained that it cannot consider Asiatrust's availment of the Tax Abatement
99
Program in the absence of a termination letter from the BIR. 38 As to the Certification issued
by BIR, the CTA Division noted that it pertains to fiscal period July 1, 1995 to June 30, 1996. 39
Both parties appealed to CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On November 16, 2011, the CTA En Banc denied both appeals. It denied the CIR' s appeal for
failure to file a prior motion for reconsideration of the Amended Decision,40 while it denied
Asiatrust's appeal for lack of merit. 41 The CTA En Banc sustained the ruling of the CT A
Division that in the absence of a termination letter, it cannot be established that Asiatrust
validly availed of the Tax Abatement Program. 42 As to the Certification issued by the BIR, the
CTA En Banc noted that it only covers the fiscal year ending June 30, 1996. 43 As to the letter
issued by RDO Nacar and the various BIR Tax Payment Deposit Slips, the CTA En
Banc pointed out that these have no probative value because these were not authenticated
nor formally offered in evidence and are mere photocopies of the purported documents. 44
On April 16, 2012, the CTA En Banc denied the motions for partial reconsideration of the CIR
and Asiatrust.45
Issues Hence, the instant consolidated Petitions under Rule 45 of the Rules of Court, with
the following issues.
G.R. No. 201530
WHETHER XX X THE [CTA] EN BANC ERRED IN FINDING THAT [ASIATRUST] IS LIABLE FOR
DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING JUNE 30, 1998.
II.
WHETHER X X X THE ORDER OF THE [CTA] EN BANC FOR PETITIONER TO PAY AGAIN THE
FINAL WITIIBOLDING TAX FOR FISCAL YEAR ENDING JUNE 30, 1998 WOULD AMOUNT TO
DOUBLE TAXATION.
III.
WHETHER XX X THE [CTA] EN BANC ERRED IN RESOLVING THE ISSUE OF ALLEGED
DEFICIENCY FINAL WrI1ffiOLDING TAX FOR FISCAL YEAR ENDING JUNE 30, 1998 BASED ON
MERE TECHNICALITIES.46
G.R. Nos. 201680-81
I.
WHETHER XX X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR WHEN IT DISMISSED
[THE CIR'S] PETITION FOR REVIEW ON THE GROUND THAT THE LATTER ALLEGEDLY FAILED
TO COMPLY WITH SECTION 1, RULE 8 OF THE REVISED RULES OF THE [CTA].
II.
WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR WHEN IT SUSTAINED
THE AMENDED DECISION DATED 16 MARCH 2010 OF THE FIRST DIVISION DECLARING
CLOSED AND TERMINATED RESPONDENT'S LIABILITY FOR DEFICIENCY DOCUMENTARY
STAMP TAX FOR TAXABLE YEARS 1997 AND 1998.47
G.R. No. 201530
Asiatrust's Arguments
Asiatrust contends that the CTA En Banc erred in affirming the assessment for deficiency
final withholding tax for fiscal year ending June 30, 1998 considering that it already availed
of the Tax Abatement Program as evidenced by the Ce1tification issued by the BIR, the letter
issued by RDO Nacar, and the BIR Tax Payment Deposit Slips. 48Asiatrust maintains that the
BIR Certification is sufficient proof of its availment of the Tax Abatement Program
considering the CIR's unjustifiable refusal to issue a termination letter. 49 And although the
letter and the BIR Tax Payment Deposit Slips were not formally offered in evidence,
Asiatrust insists that the CTA En Banc should have relaxed the rules as the Supreme Court in
several cases has relaxed procedural rules in the interest of substantial justice. 50 Moreover,
Asiatrust posits that since it already paid the basic taxes, the affirmance of the deficiency
final withholding tax assessment for fiscal year ending June 30, 1998 would constitute
double taxation as Asiatrust would be made to pay the basic tax twice. 51
The CIR’s Arguments
The CIR, however, points out that the BIR Certification relied upon by Asiatrust does not
cover fiscal year ending June 30, 1998. 52 And even if the letter issued by RDO Nacar and the
BIR Tax Payment Deposit Slips were admitted in evidence, the result would still be the same
as these are not sufficient to prove that Asiatrust validly availed of the Tax Abatement
Program. 53
G.R. Nos. 201680-81
The CIR's Arguments
100
The CIR contends that the CT A En Banc erred in dismissing his appeal for failing to file a
motion for reconsideration on the Amended Decision as a perusal of the Amended Decision
shows that it is a mere resolution, modifying the original Decision. 54
Furthermore, the CIR claims that Asiatrust is not entitled to a tax amnesty because it failed
to submit its income tax returns (ITR’s). 55 The CIR likewise imputes bad faith on the part of
Asiatrust in belatedly submitting the documents before the CTA Division. 56
Asiatrust's Arguments
Asiatrust on the other hand argues that the CTA En Banc correctly dismissed the CIR's appeal
for failure to file a motion for reconsideration on the Amended Decision. 57 It asserts that an
amended decision is not a mere resolution but a new decision. 58
Asiatrust insists that the CIR can no longer assail the Amended Decision of the CTA Division
before the Court 9onsidering the dismissal of his appeal for failing to file a motion for
reconsideration on the Amended Decision59 . In any case, Asiatrust claims that the
submission of its IIRs is not required as the Tax Amnesty Law only requires the submission of
a SALN- as of December 31, 2005. 60 As to its belated submission of the documents, Asiatrust
contends that recent jurisprudence aJl9ws the presentation of evidence before the (.TA En
Banc even after trial. 61Thus, it follows that the presentation of evidence before the CTA
Division should likewise be allowed. 62
Our Ruling
The Petitions lack merit.
G.R. No. 201530
An application for tax abatement is
considered approved only upon the
issuance of a termination letter.
Section 204(B) 63 of the 1997 National lnten1al Revenue Code (NIRC) empowers the CIR to
abate or cancel a tax liability.
On September 27, 2006, the BIR issued .RR No. 15-06 prescribing the guidelines on the
implementation of the one-time administrative abatement of all penalties/surcharges and
interest on delinquent accounts and assessments (preliminary or final, disputed or not) as of
.June 30, 2006. Section 4 of RR No. 15-06 provides:
SECTION 4. Who May Avail, - Any person/ taxpayer, natural or juridical, may settle thru this
abatement program any delinquent account or assessment which has been released as of
June 30, 2006, by paying an
Amount equal to One Hundred Percent (100%) of the Basic Tax assessed with the Accredited
Agent Bank (AAB) of the Revenue District Office (RDO)/Large Taxpayers Service (LTS)/Large
Taxpayers District Office (LTDO) that has jurisdiction over the taxpayer. In the absence of an
AAB, payment may be made with the Revenue Collection Officer/Deputized Treasurer of the
RDO that has jurisdiction over the taxpayer. After payment of the basic tax, the assessment
for penalties/surcharge and interest shall be cancelled by the concerned BIR Office following
existing rules and procedures. Thereafter, the docket of the case shall be forwarded to the
Office of the Commissioner, thru the Deputy Commissioner for Operations Group, for
issuance of Termination Letter.1âwphi1
Based on the guidelines, the last step in the tax abatement process is the issuance of the
termination letter. The presentation of the termination letter is essential as it proves that
the taxpayer's application for tax abatement has been approved. Thus, without a
termination letter, a tax assessment cannot be considered closed and terminated.
In this case, Asiatrust failed to present a termination letter from the BIR. Instead, it
presented a Certification issued by the BIR to prove that it availed of the Tax Abatement
Program and paid the basic tax. It also attached copies of its BIR Tax Payment Deposit Slips
and a Jetter issued by RDO Nacar. These documents, however, do not prove that Asiatrust's
application for tax abatement has been approved. If at all, these documents only prove
Asiatrust's payment of basic taxes, which is not a ground to consider its deficiency tax
assessment closed and terminated.
Since no tennination letter has been issued by the BIR, there is no reason for the Court to
consider as closed and terminated the tax assessment on Asiatrust's final withholding tax
for fiscal year ending June 30, 1998. Asiatrust's application for tax abatement will be
deemed approved only upon the issuance of a tem1ination letter, and only then will the
deficiency tax assessment be considered closed and terminated. However, in case
Asiatrust's application for tax abatement is denied, any payment made by it would be
applied to its outstanding tax liability. For this reason, Asiatrust's allegation of double
taxation must also fail.
Thus, the Court finds no error on the part of the CTA En Banc in affirming the said tax
assessment.
G.R. Nos. 201680-81
An appeal to the CTA En Banc
must be preceded by the filing of a
101
timely motion for reconsideration or
new trial with the CTA Division.

Section 1, Rule 8 of the Revised Rules of the CTA states:

SECTION 1. Review of cases in the Court en bane. - In cases falling under the exclusive
appellate jurisdiction of the Court en bane, the petition for review of a decision or resolution
of the Court in Division must be preceded by the filing of a timely motion for reconsideration
or new trial with the Division.

Thus, in order for the CTA En Banc to take cognizance of an appeal via a petition for review, a
timely motion for reconsideration or new trial must first be filed with the CTA Division that
issued the assailed decision or resolution. Failure to do so is a ground for the dismissal of the
appeal as the word "must" indicates that the filing of a prior motion is mandatory, and not
merely directory. 64

The same is true in the case of an amended decision. Section 3, Rule 14 of the same rules
defines an amended decision as "[a]ny action modifying or reversing a decision of the Court
en bane or in Division." As explained in CE Luzon Geothermal Power Company, Inc. v.
Commissioner of Internal Revenue, 65 an amended decision is a different decision, and thus, is
a· proper subject of a motion for reconsideration.

In this case, the CIR's failure to move for a reconsideration of the Amended Decision of the
CTA Division is a ground for the dismissal of its Petition for Review before the CTA En
Banc. Thus, the CTA En .Banc did not err in denying the CIR's appeal on procedural grounds.

Due to this procedural lapse, the Amended Decision has attained finality insofar as the CIR is
concerned. The CIR, therefore, may no longer question the merits of the case before this
Court. Accordingly, there is no reason for the Court to discuss the other issues raised by the
CIR.

As the Court has often held, procedural rules exist to be followed, not to be trifled with, and
thus, may be relaxed only for the most persuasive reasons. 66

WHEREFORE, the Petitions are hereby DENIED. The assailed November 16, 2011 Decision and
the April 16, 2012 Resolution of the Court of Tax Appeals En .Banc in CTA EB Case Nos. 614
and 677 are hereby AFFIRMED, without prejudice to the action of the Bureau of Internal
Revenue on Asiatrust Development Bank, Inc.'s application for abatement. The Bureau of
Internal Revenue is DIRECTED to act on Asiatrust Development Bank, Inc.'s application for
abatement in view of Section 5, Revenue Regulations No. 13-2001.

SO ORDERED.

102
 rated sales under Section 112 (A) of the NIRC, and the other is a credit/refund of input VAT on
capital goods pursuant to Section 112 (B) of the same Code. In a claim for credit/refund of
input VAT attributable to zero-rated sales, Section 112 (A) of the NIRC lays down four
requisites, to wit: 1) the taxpayer must be VAT-registered; 2) the taxpayer must be engaged
in sales which are zero-rated or effectively zero-rated; 3) the claim must be filed within two
years after the close of the taxable quarter when such sales were made; and 4) the
creditable input tax due or paid must be attributable to such sales, except the transitional
input tax, to the extent that such input tax has not been applied against the output tax.

Same; Same; Failure to print the word “zero-rated” on the sales invoices or receipts is fatal
to a claim for credit/refund of input Value Added Tax (VAT) on zero-rated sales.— All told,
the non-presentation of the ATP and the failure to indicate the word “zero-rated” in the
invoices or receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales.
The failure to indicate the ATP in the sales invoices or receipts, on the other hand, is not. In
this case, petitioner failed to present its ATP and to print the word “zero-rated” on its
export sales invoices. Thus, we find no error on the part of the CTA in denying outright
petitioner’s claim for credit/refund of input VAT attributable to its zero-rated sales.

Same; Same; Words and Phrases; “Capital goods or properties” refer to goods or
properties with estimated useful life greater that one year and which are treated as
depreciable assets.—To claim a refund of input VAT on capital goods, Section 112 (B) of the
NIRC requires that: 1. the claimant must be a VAT registered person; 2. the input taxes
claimed must have been paid on capital goods; 3. the input taxes must not have been
applied against any output tax liability; and 4. the administrative claim for refund must have
been filed within two (2) years after the close of the taxable quarter when the importation
or purchase was made. Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as
follows: “Capital goods or properties” refer to goods or properties with estimated useful life
greater that one year and which are treated as depreciable assets under Section 29 (f), used
directly or indirectly in the production or sale of taxable goods or services. Silicon
Philippines, Inc. vs. Commissioner Internal Revenue, 639 SCRA 521, G.R. No. 172378 January
17, 2011

G.R. No. 172378 January 17, 2011 DECISION

SILICON PHILIPPINES, INC., (Formerly INTEL PHILIPPINES MANUFACTURING, DEL CASTILLO, J.:
INC.), Petitioner,
vs. The burden of proving entitlement to a refund lies with the claimant.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside
Taxation; Value Added Tax; There are two types of input Value Added Tax (VAT) credits. the September 30, 2005 Decision1 and the April 20, 2006 Resolution 2 of the Court of Tax
One is a credit/refund of input VAT attributable to zero-rated sales under Section 112 (A) of Appeals (CTA) En Banc.
the National Internal Revenue Code (NIRC), and the other is a credit/refund of input Value
Added Tax (VAT) on capital goods pursuant to Section 112 (B) of the same Code.—Before us
Factual Antecedents
are two types of input VAT credits. One is a credit/refund of input VAT attributable to zero-
103
Petitioner Silicon Philippines, Inc., a corporation duly organized and existing under and by
virtue of the laws of the Republic of the Philippines, is engaged in the business of designing,
developing, manufacturing and exporting advance and large-scale integrated circuit
components or "IC’s."3 Petitioner is registered with the Bureau of Internal Revenue (BIR) as
a Value Added Tax (VAT) taxpayer 4 and with the Board of Investments (BOI) as a preferred
pioneer enterprise.5
On May 21, 1999, petitioner filed with the respondent Commissioner of Internal Revenue
(CIR), through the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
Department of Finance (DOF), an application for credit/refund of unutilized input VAT for
the period October 1, 1998 to December 31, 1998 in the amount of ₱31,902,507.50, broken
down as follows:
Amount
Tax Paid on Imported/Locally Purchased ₱ 15,170,082.00
Capital Equipment
Total VAT paid on Purchases per Invoices 16,732,425.50
Received During the Period for which
this Application is Filed
Amount of Tax Credit/Refund Applied For ₱ 31,902,507.506
Proceedings before the CTA Division
On December 27, 2000, due to the inaction of the respondent, petitioner filed a Petition for
Review with the CTA Division, docketed as CTA Case No. 6212. Petitioner alleged that for the
4th quarter of 1998, it generated and recorded zero-rated export sales in the amount of
₱3,027,880,818.42, paid to petitioner in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; 7 and that for
the said period, petitioner paid input VAT in the total amount of ₱31,902,507.50,8 which have
not been applied to any output VAT.9
To this, respondent filed an Answer 10 raising the following special and affirmative defenses,
to wit:
8. The petition states no cause of action as it does not allege the dates when the
taxes sought to be refunded/credited were actually paid;
9. It is incumbent upon herein petitioner to show that it complied with the
provisions of Section 229 of the Tax Code as amended;
10. Claims for refund are construed strictly against the claimant, the same being in
the nature of exemption from taxes (Commissioner of Internal Revenue vs.
Ledesma, 31 SCRA 95; Manila Electric Co. vs. Commissioner of Internal Revenue, 67
SCRA 35);
11. One who claims to be exempt from payment of a particular tax must do so under
clear and unmistakable terms found in the statute (Asiatic Petroleum vs. Llanes, 49
Phil. 466; Union Garment Co. vs. Court of Tax Appeals, 4 SCRA 304);
12. In an action for refund, the burden is upon the taxpayer to prove that he is
entitled thereto, and failure to sustain the same is fatal to the action for refund.
Furthermore, as pointed out in the case of William Li Yao vs. Collector (L-11875,
December 28, 1963), amounts sought to be recovered or credited should be shown
to be taxes which are erroneously or illegally collected; that is to say, their payment
was an independent single act of voluntary payment of a tax believed to be due and
collectible and accepted by the government, which had therefor become part of
the State moneys subject to expenditure and perhaps already spent or
appropriated; and
13. Taxes paid and collected are presumed to have been made in accordance with
the law and regulations, hence not refundable.11
On November 18, 2003, the CTA Division rendered a Decision 12 partially granting petitioner’s
claim for refund of unutilized input VAT on capital goods. Out of the amount of
₱15,170,082.00, only ₱9,898,867.00 was allowed to be refunded because training materials,
office supplies, posters, banners, T-shirts, books, and other similar items purchased by
petitioner were not considered capital goods under Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95 (Consolidated Value-Added Tax Regulations). 13 With regard to
petitioner’s claim for credit/refund of input VAT attributable to its zero-rated export sales,
the CTA Division denied the same because petitioner failed to present an Authority to Print
(ATP) from the BIR;14 neither did it print on its export sales invoices the ATP and the word
"zero-rated."15 Thus, the CTA Division disposed of the case in this wise:
WHEREFORE, in view of the foregoing the instant petition for review is hereby PARTIALLY
GRANTED. Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of
petitioner in the reduced amount of P9,898,867.00 representing input VAT on importation
of capital goods. However, the claim for refund of input VAT attributable to petitioner's
alleged zero-rated sales in the amount of P16,732,425.50 is hereby DENIED for lack of merit.
SO ORDERED.16
Not satisfied with the Decision, petitioner moved for reconsideration. 17 It claimed that it is
not required to secure an ATP since it has a "Permit to Adopt Computerized Accounting
Documents such as Sales Invoice and Official Receipts" from the BIR. 18 Petitioner further
argued that because all its finished products are exported to its mother company, Intel
104
Corporation, a non-resident corporation and a non-VAT registered entity, the printing of the
word "zero-rated" on its export sales invoices is not necessary. 19
On its part, respondent filed a Motion for Partial Reconsideration 20 contending that
petitioner is not entitled to a credit/refund of unutilized input VAT on capital goods because
it failed to show that the goods imported/purchased are indeed capital goods as defined in
Section 4.106-1 of RR No. 7-95.21
The CTA Division denied both motions in a Resolution22 dated August 10, 2004. It noted that:
[P]etitioner’s request for Permit to Adopt Computerized Accounting Documents such as
Sales Invoice and Official Receipt was approved on August 31, 2001 while the period involved
in this case was October 31, 1998 to December 31, 1998 x x x. While it appears that petitioner
was previously issued a permit by the BIR Makati Branch, such permit was only limited to the
use of computerized books of account x x x. It was only on August 31, 2001 that petitioner
was permitted to generate computerized sales invoices and official receipts [provided that
the BIR Permit Number is printed] in the header of the document x x x.
xxxx
Thus, petitioner’s contention that it is not required to show its BIR permit number on the
sales invoices runs counter to the requirements under the said "Permit." This court also
wonders why petitioner was issuing computer generated sales invoices during the period
involved (October 1998 to December 1998) when it did not have an authority or permit.
Therefore, we are convinced that such documents lack probative value and should be
treated as inadmissible, incompetent and immaterial to prove petitioner’s export sales
transaction.
xxxx
ACCORDINGLY, the Motion for Reconsideration and the Supplemental Motion for
Reconsideration filed by petitioner as well as the Motion for Partial Reconsideration of
respondent are hereby DENIED for lack of merit. The pronouncement in the assailed
decision is REITERATED.
SO ORDERED 23
Ruling of the CTA En Banc
Undaunted, petitioner elevated the case to the CTA En Banc via a Petition for
Review,24 docketed as EB Case No. 23.
On September 30, 2005, the CTA En Banc issued the assailed Decision25 denying the petition
for lack of merit. Pertinent portions of the Decision read:
This Court notes that petitioner raised the same issues which have already been thoroughly
discussed in the assailed Decision, as well as, in the Resolution denying petitioner's Motion
for Partial Reconsideration.
With regard to the first assigned error, this Court reiterates that, the requirement of
[printing] the BIR permit to print on the face of the sales invoices and official receipts is a
control mechanism adopted by the Bureau of Internal Revenue to safeguard the interest of
the government.
This requirement is clearly mandated under Section 238 of the 1997 National Internal
Revenue Code, which provides that:
SEC. 238. Printing of Receipts or Sales or Commercial Invoice. – All persons who are engaged
in business shall secure from the Bureau of Internal Revenue an authority to print receipts or
sales or commercial invoices before a printer can print the same.
The above mentioned provision seeks to eliminate the use of unregistered and double or
multiple sets of receipts by striking at the very root of the problem — the printer (H. S. de
Leon, The National Internal Revenue Code Annotated, 7th Ed., p. 901). And what better way to
prove that the required permit to print was secured from the Bureau of Internal Revenue
than to show or print the same on the face of the invoices. There can be no other valid proof
of compliance with the above provision than to show the Authority to Print Permit number
[printed] on the sales invoices and official receipts.
With regard to petitioner’s failure to print the word "zero-rated" on the face of its export
sales invoices, it must be emphasized that Section 4.108-1 of Revenue Regulations No. 7-95
specifically requires that all value-added tax registered persons shall, for every sale or lease
of goods or properties or services, issue duly registered invoices which must show the word
"zero-rated" [printed] on the invoices covering zero-rated sales.
It is not enough that petitioner prove[s] that it is entitled to its claim for refund by way of
substantial evidence. Well settled in our jurisprudence [is] that tax refunds are in the nature
of tax exemptions and as such, they are regarded as in derogation of sovereign
authority (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95). Thus, tax refunds are
construed in strictissimi juris against the person or entity claiming the same (Commissioner
of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation, 204 SCRA 377;
Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332).
105
In this case, not only should petitioner establish that it is entitled to the claim but it must
most importantly show proof of compliance with the substantiation requirements as
mandated by law or regulations.
The rest of the assigned errors pertain to the alleged errors of the First Division: in finding
that the petitioner failed to comply with the substantiation requirements provided by law in
proving its claim for refund; in reducing the amount of petitioner’s tax credit for input vat on
importation of capital goods; and in denying petitioner’s claim for refund of input vat
attributable to petitioner’s zero-rated sales.
It is petitioner’s contention that it has clearly established its right to the tax credit or refund
by way of substantial evidence in the form of material and documentary evidence and it
would be improper to set aside with haste the claimed input VAT on capital goods expended
for training materials, office supplies, posters, banners, t-shirts, books and the like because
Revenue Regulations No. 7-95 defines capital goods as to include even those goods which
are indirectly used in the production or sale of taxable goods or services.
Capital goods or properties, as defined under Section 4.106-1(b) of Revenue Regulations No.
7-95, refer "to goods or properties with estimated useful life greater than one year and
which are treated as depreciable assets under Section 29 (f), used directly or indirectly in the
production or sale of taxable goods or services."
Considering that the items (training materials, office supplies, posters, banners, t-shirts,
books and the like) purchased by petitioner as reflected in the summary were not duly
proven to have been used, directly or indirectly[,] in the production or sale of taxable goods
or services, the same cannot be considered as capital goods as defined above[.
Consequently,] the same may not x x x then [be] claimed as such.
WHEREFORE, in view of the foregoing, this instant Petition for Review is hereby DENIED
DUE COURSE and hereby DISMISSED for lack of merit. This Court's Decision of November 18,
2003 and Resolution of August 10, 2004 are hereby AFFIRMED in all respects.
SO ORDERED.26
Petitioner sought reconsideration of the assailed Decision but the CTA En Banc denied the
Motion27 in a Resolution28 dated April 20, 2006.
Issues
Hence, the instant Petition raising the following issues for resolution:
(1) whether the CTA En Banc erred in denying petitioner’s claim for credit/ refund of
input VAT attributable to its zero-rated sales in the amount of ₱16,732,425.00 due to
its failure:
(a) to show that it secured an ATP from the BIR and to indicate the same in
its export sales invoices; and
(b) to print the word "zero-rated" in its export sales invoices. 29
(2) whether the CTA En Banc erred in ruling that only the amount of ₱9,898,867.00
can be classified as input VAT paid on capital goods.30
Petitioner’s Arguments
Petitioner posits that the denial by the CTA En Banc of its claim for refund of input VAT
attributable to its zero-rated sales has no legal basis because the printing of the ATP and the
word "zero-rated" on the export sales invoices are not required under Sections 113 and 237
of the National Internal Revenue Code (NIRC).31 And since there is no law requiring the ATP
and the word "zero-rated" to be indicated on the sales invoices, 32 the absence of such
information in the sales invoices should not invalidate the petition 33 nor result in the outright
denial of a claim for tax credit/refund. 34 To support its position, petitioner cites Intel
Technology Philippines, Inc. v. Commissioner of Internal Revenue, 35 where Intel’s failure to
print the ATP on the sales invoices or receipts did not result in the outright denial of its claim
for tax credit/refund.36 Although the cited case only dealt with the printing of the ATP,
petitioner submits that the reasoning in that case should also apply to the printing of the
word "zero-rated."37 Hence, failure to print of the word "zero-rated" on the sales invoices
should not result in the denial of a claim.
As to the claim for refund of input VAT on capital goods, petitioner insists that it has
sufficiently proven through testimonial and documentary evidence that all the goods
purchased were used in the production and manufacture of its finished products which were
sold and exported.38
Respondent’s Arguments
To refute petitioner’s arguments, respondent asserts that the printing of the ATP on the
export sales invoices, which serves as a control mechanism for the BIR, is mandated by
Section 238 of the NIRC;39 while the printing of the word "zero-rated" on the export sales
invoices, which seeks to prevent purchasers of zero-rated sales or services from claiming
non-existent input VAT credit/refund, 40 is required under RR No. 7-95, promulgated pursuant
to Section 244 of the NIRC.41 With regard to the unutilized input VAT on capital goods,
respondent counters that petitioner failed to show that the goods it purchased/imported
are capital goods as defined in Section 4.106-1 of RR No. 7-95. 42
106
Our Ruling
The petition is bereft of merit.
Before us are two types of input VAT credits. One is a credit/refund of input VAT attributable
to zero-rated sales under Section 112 (A) of the NIRC, and the other is a credit/refund of
input VAT on capital goods pursuant to Section 112 (B) of the same Code.
Credit/refund of input VAT on zero-rated sales
In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A) 43 of
the NIRC lays down four requisites, to wit:
1) the taxpayer must be VAT-registered;
2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-
rated;
3) the claim must be filed within two years after the close of the taxable quarter
when such sales were made; and
4) the creditable input tax due or paid must be attributable to such sales, except
the transitional input tax, to the extent that such input tax has not been applied
against the output tax.
To prove that it is engaged in zero-rated sales, petitioner presented export sales invoices,
certifications of inward remittance, export declarations, and airway bills of lading for the
fourth quarter of 1998. The CTA Division, however, found the export sales invoices of no
probative value in establishing petitioner’s zero-rated sales for the purpose of claiming
credit/refund of input VAT because petitioner failed to show that it has an ATP from the BIR
and to indicate the ATP and the word "zero-rated" in its export sales invoices. 44 The CTA
Division cited as basis Sections 113,4523746 and 23847 of the NIRC, in relation to Section 4.108-1
of RR No. 7-95.48
We partly agree with the CTA.
Printing the ATP on the invoices or receipts is not required
It has been settled in Intel Technology Philippines, Inc. v. Commissioner of Internal
Revenue49 that the ATP need not be reflected or indicated in the invoices or receipts because
there is no law or regulation requiring it. 50 Thus, in the absence of such law or regulation,
failure to print the ATP on the invoices or receipts should not result in the outright denial of
a claim or the invalidation of the invoices or receipts for purposes of claiming a refund. 51
ATP must be secured from the BIR
But while there is no law requiring the ATP to be printed on the invoices or receipts, Section
238 of the NIRC expressly requires persons engaged in business to secure an ATP from the
BIR prior to printing invoices or receipts. Failure to do so makes the person liable under
Section 26452 of the NIRC.
This brings us to the question of whether a claimant for unutilized input VAT on zero-rated
sales is required to present proof that it has secured an ATP from the BIR prior to the
printing of its invoices or receipts.
We rule in the affirmative.
Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated
or effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-
rated sales must be presented. However, since the ATP is not indicated in the invoices or
receipts, the only way to verify whether the invoices or receipts are duly registered is by
requiring the claimant to present its ATP from the BIR. Without this proof, the invoices or
receipts would have no probative value for the purpose of refund. In the case of Intel, we
emphasized that:
It bears reiterating that while the pertinent provisions of the Tax Code and the rules and
regulations implementing them require entities engaged in business to secure a BIR
authority to print invoices or receipts and to issue duly registered invoices or receipts, it is
not specifically required that the BIR authority to print be reflected or indicated therein.
Indeed, what is important with respect to the BIR authority to print is that it has been
secured or obtained by the taxpayer, and that invoices or receipts are duly
registered.53 (Emphasis supplied)
Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of
input VAT1awphi1
Similarly, failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a
claim for credit/refund of input VAT on zero-rated sales.
In Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita
Business Machine Corporation of the Philippines) v. Commissioner of Internal Revenue, 54 we
upheld the denial of Panasonic’s claim for tax credit/refund due to the absence of the word
"zero-rated" in its invoices. We explained that compliance with Section 4.108-1 of RR 7-95,
requiring the printing of the word "zero rated" on the invoice covering zero-rated sales, is
essential as this regulation proceeds from the rule-making authority of the Secretary of
Finance under Section 24455 of the NIRC.
107
All told, the non-presentation of the ATP and the failure to indicate the word "zero-rated" in
the invoices or receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales.
The failure to indicate the ATP in the sales invoices or receipts, on the other hand, is not. In
this case, petitioner failed to present its ATP and to print the word "zero-rated" on its export
sales invoices. Thus, we find no error on the part of the CTA in denying outright petitioner’s
claim for credit/refund of input VAT attributable to its zero-rated sales.
Credit/refund of input VAT on capital goods
Capital goods are defined under Section 4.106-1(b) of RR No. 7-95
To claim a refund of input VAT on capital goods, Section 112 (B) 56 of the NIRC requires that:
1. the claimant must be a VAT registered person;
2. the input taxes claimed must have been paid on capital goods;
3. the input taxes must not have been applied against any output tax liability; and
4. the administrative claim for refund must have been filed within two (2) years
after the close of the taxable quarter when the importation or purchase was made.
Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows:
"Capital goods or properties" refer to goods or properties with estimated useful life greater
that one year and which are treated as depreciable assets under Section 29 (f), 57 used
directly or indirectly in the production or sale of taxable goods or services.
Based on the foregoing definition, we find no reason to deviate from the findings of the CTA
that training materials, office supplies, posters, banners, T-shirts, books, and the other
similar items reflected in petitioner’s Summary of Importation of Goods are not capital
goods. A reduction in the refundable input VAT on capital goods from ₱15,170,082.00 to
₱9,898,867.00 is therefore in order.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision dated September 30,
2005 and the Resolution dated April 20, 2006 of the Court of Tax Appeals En Banc are hereby
AFFIRMED.
G.R. No. 197590 November 24, 2014
BUREAU OF INTERNAL REVENUE, as represented by the COMMISSIONER OF INTERNAL
REVENUE,Petitioner,
vs.
COURT OF APPEALS, SPOUSES ANTONIO VILLAN MANLY, and RUBY ONG
MANLY, Respondents.
Remedial Law; Civil Procedure; Appeals; Petition for Review on Certiorari; The remedy of a
party aggrieved by a decision, final order, or resolution of the Court of Appeals (CA) is to
file a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which is a
continuation of the appellate process over the original case; Exceptions.—Indeed, the
remedy of a party aggrieved by a decision, final order, or resolution of the CA is to file a
Petition for Review on Certiorari under Rule 45 of the Rules of Court, which is a continuation
of the appellate process over the original case. And as a rule, if the remedy of an appeal is
available, an action for certiorari under Rule 65 of the Rules of Court, which is an original or
independent action based on grave abuse of discretion amounting to lack or excess of
jurisdiction, will not prosper because it is not a substitute for a lost appeal. There are,
however, exceptions to this rule, to wit: 1) when public welfare and the advancement of
public policy dictate; 2) when the broader interest of justice so requires; 3) when the writs
issued are null and void; 4) when the questioned order amounts to an oppressive exercise of
judicial authority; 5) when, for persuasive reasons, the rules may be relaxed to relieve a
litigant of an injustice not commensurate with his failure to comply with the prescribed
procedure; 6) when the judgment or order is attended by grave abuse of discretion; or 7) in
other meritorious cases.
Grave Abuse of Discretion; Words and Phrases; Grave abuse of discretion is defined as a
capricious and whimsical exercise of judgment tantamount to lack or excess of jurisdiction, a
blatant abuse of authority so grave and so severe as to deprive the court of its very power
to dispense justice, or an exercise of power in an arbitrary and despotic manner, due to
passion, prejudice or personal hostility, so patent and gross as to amount to an evasion or to
a unilateral refusal to perform the duty enjoined or to act in contemplation of the law.—
Grave abuse of discretion is defined as a capricious and whimsical exercise of judgment
tantamount to lack or excess of jurisdiction, a blatant abuse of authority so grave and so
severe as to deprive the court of its very power to dispense justice, or an exercise of power
in an arbitrary and despotic manner, due to passion, prejudice or personal hostility, so
patent and gross as to amount to an evasion or to a unilateral refusal to perform the duty
enjoined or to act in contemplation of the law.
Taxation; Expenditure Method; The government is allowed to resort to all evidence or
resources available to determine a taxpayer’s income and to use methods to reconstruct
his income. A method commonly used by the government is the expenditure method,
which is a method of reconstructing a taxpayer’s income by deducting the aggregate
yearly expenditures from the declared yearly income.—In the case of income, for it to be
taxable, there must be a gain realized or received by the taxpayer, which is not excluded by
law or treaty from taxation. The government is allowed to resort to all evidence or resources
available to determine a taxpayer’s income and to use methods to reconstruct his income. A
method commonly used by the government is the expenditure method, which is a method
108
of reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from Decision3 dated October 28, 2010 and the Resolution4 dated May 10, 2011 of the Court of
the declared yearly income. The theory of this method is that when the amount of the Appeals (CA) in CA-G.R. SP No. 112479.
money that a taxpayer spends during a given year exceeds his reported or declared income
and the source of such money is unexplained, it may be inferred that such expenditures Factual Antecedents
represent unreported or undeclared income.
Respondent Antonio Villan Manly (Antonio) is a stockholder and the Executive Vice-
Same; It is a basic concept in taxation that income denotes a flow of wealth during a President of Standard Realty Corporation, a family-owned corporation. 5 He is also engaged
definite period of time, while capital is a fund or property existing at one distinct point in in rental business.6 His spouse, respondent Ruby Ong Manly, is a housewife. 7
time.—Respondent spouses’ defense that they had sufficient savings to purchase the
properties remains self-serving at this point since they have not yet presented any evidence On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued Letter of Authority No.
to support this. And since there is no evidence yet to suggest that the money they used to 2001 000123878authorizing its revenue officers to investigate respondent spouses’ internal
buy the properties was from an existing fund, it is safe to assume that that money is income revenue tax liabilities for taxable year 2003 and prior years.
or a flow of wealth other than a mere return on capital. It is a basic concept in taxation that
income denotes a flow of wealth during a definite period of time, while capital is a fund or
On June 6, 2005, petitioner issued a letter 9 to respondent spouses requiring them to submit
property existing at one distinct point in time. Moreover, by just looking at the tables
documentary evidence to substantiate the source of their cash purchase of a 256-square
presented by petitioner, there is a manifest showing that respondent spouses had
meter log cabin in Tagaytay City worth ₱17,511,010.00. Respondent spouses, however,
underdeclared their income. The huge disparity between respondent Antonio’s reported or
failedto comply with the letter.10
declared annual income for the past several years and respondent spouses’ cash
acquisitions for the years 2000, 2001, and 2003 cannot be ignored. In fact, it makes us
On June 23, 2005, the revenue officers executed a Joint Affidavit 11 alleging that respondent
wonder how they were able to purchase the properties in cash given respondent Antonio’s
Antonio’s reported or declared annual income for the taxable years 1998-2003 are as
meager income.
follows:
Remedial Law; Criminal Procedure; Probable Cause; Words and Phrases; Probable cause,
for purposes of filing a criminal information, is defined as such facts that are sufficient to Net Profit
engender a well-founded belief that a crime has been committed, that the accused is Taxable Rental Business
Total sources
probably guilty thereof, and that he should be held for trial.—In view of the foregoing, we Compensation (1169-73 G. Tax Due/paid CASH
of Funds
are convinced that there is probable cause to indict respondent spouses for tax evasion as Income Masangkay St.,
petitioner was able to show that a tax is due from them. Probable cause, for purposes of Tondo, Manila
filing a criminal information, is defined as such facts that are sufficient to engender a well-
1998 [P]133,532.36 [P] 191,915.10 [P] 325,447.46 [P]55,834.00< [P] 269,613.46
founded belief that a crime has been committed, that the accused is probably guilty thereof,
and that he should be held for trial. It bears stressing that the determination of probable 1999 142,550.50 260,961.78 403,512.28 79,254.00 324,258.28
cause does not require actual or absolute certainty, nor clear and convincing evidence of
2000
guilt; it only requires reasonable belief or probability that more likely than not a crime has 141,450.00 213,740.67 355,190.67 64,757.21 290,433.46
been committed by the accused. Bureau of Internal Revenue vs. Court of Appeals, 741 SCRA 2001 151,500.00 233,396.62 384,896.62 73,669.00 311,227.62
536, G.R. No. 197590 November 24, 2014
2002 148,500.00 186,106.62 334,606.62 58,581.00 276,025.62
DECISION
2003 148,100.00 152,817.53 300.917.93 48,729.00 252,188.93

DEL CASTILLO, J.:

[Total] ₱865,633.26 ₱1,238,938.32 ₱2,104,571.58 ₱380,824.21 ₱1,723,747.3712
There is grave abuse of discretion when the determination of probable cause is exercised in
an arbitrary or despotic manner, due to passion or personal hostility, so patent and gross as
to amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined by
law.1 This Petition for Certiorari2 under Rule 65 of the Rules of Court assails the
109
and that despite his modestincome for the said years, respondent spouses were able to
purchase in cash the following properties:
1) a luxurious vacation house in Tagaytay City valuedat ₱17,511,010.0013 in the year
2000, evidenced by a Deed of Absolute Sale14 dated October 24, 2000;
2) a Toyota RAV4 for ₱1,350,000.00 in the year 2001, evidenced by a Sales
Invoice15 dated June 28, 2001; and
3) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a Deed of Sale 16 dated
July 9, 2003.17
Since respondent spouses failed to showthe source of their cash purchases, the revenue
officers concluded that respondent Antonio’s Income Tax Returns (ITRs) for taxable years
2000, 2001,and 2003 were underdeclared.18 And since the under declaration exceeded 30% of
the reported or declared income, it was considered a prima facie evidence of fraud with
intent to evade the payment of proper taxes due to the government. 19 The revenue officers,
thus, recommended the filing of criminal cases against respondent spouses for failing to
supply correct and accurate information intheir ITRs for the years 2000, 2001, and 2003,
punishable under Sections 25420 and 25521 in relation to Section 248(B)22 of Republic Act No.
8424 or the "Tax Reform Act of 1997," hereinafter referred to as the National Internal
Revenue Code (NIRC).23
Respondent spouses, in their Joint Counter-Affidavit, 24 denied the accusations hurled against
them and alleged that they used their accumulated savings from their earnings for the
past24 years in purchasing the properties. 25 They also contended that the criminal complaint
should be dismissed because petitioner failed to issue a deficiency assessment against
them.26
In response, the revenue officers executed a Joint Reply-Affidavit. 27 Respondent spouses, in
turn, executed a Joint Rejoinder-Affidavit.28
Ruling of the State Prosecutor
On August 31, 2006, State ProsecutorMa. Cristina A. Montera-Barot issued a Resolution in 29
I.S. No. 2005-573 recommending the filing of criminal charges 30 against respondent spouses,
to wit:
WHEREFORE, premises considered, it is respectfully recommended that [respondent]
spouses ANTONIO VILLAN MANLY and RUBY ONG MANLY be charged [with] the following:
(1) Three (3) counts of Violation of Section 254 – Attempt to Evade or Defeat Tax of
the NIRC for taxable years 2000, 2001, and 2003;
(2) Three (3) counts for Violation of Section 255 of the NIRC – Failure to Supply
Correct and Accurate Information for taxable years 2000, 2001 and 2003;
(3) Three counts of Violation ofSection 255 of the NIRC – Failure to Pay, as a
consequence of [respondent spouses’] failure to supply correct and accurate
information on their tax returns for taxable years 2000, 2001, and 2003. 31
Respondent spouses moved for reconsideration 32 but the State Prosecutor denied the same
in a Resolution33 dated November 29, 2007.
Ruling of the Secretary of Justice
On appeal to the Secretary of Justice via a Petition for Review, 34 Acting Justice Secretary
Agnes VST Devanadera (Devanadera) reversed the Resolution of the State Prosecutor. She
found no willfulfailure to pay or attempt to evade or defeat the tax on the part of
respondent spouses as petitioner allegedly failed to specify the amount of tax due and the
likely source of income from which the same was based. 35 She also pointed out petitioner’s
failure to issue a deficiency tax assessment against respondentspouses which is a
prerequisite to the filing of a criminal case for tax evasion. 36 The dispositive portion of the
Resolution37 dated July 27, 2009 reads:
WHEREFORE, the assailed Resolution is hereby REVERSED and SET ASIDE. The Chief State
Prosecutor ishereby directed to withdraw the Information filed against [respondent
spouses] Antonio Villan Manly and Ruby Ong Manly, if one has been filed, and report the
action taken thereon within ten (10) days from receipt hereto.
SO ORDERED.38
Petitioner sought reconsideration39 but Acting Justice Secretary Devanadera denied the
same in a Resolution40dated November 5, 2009.
Ruling of the Court of Appeals
Unfazed, petitioner filed a Petition for Certiorari 41 with the CA imputing grave abuse of
discretion on the part of Acting Justice Secretary Devanadera in finding no probable cause
to indict respondent spouses for willfulattempt to evade or defeat tax and willful failure to
supply correct and accurate information for taxable years 2000, 2001 and 2003.
On October 28, 2010, the CA rendered the assailed Decision 42 dismissing the Petition for
Certiorari. Although it disagreed that anassessment is a condition sine qua nonin filing a
criminal case for tax evasion, the CA, nevertheless, ruled that there was no probable cause
to charge respondent spouses as petitioner allegedly failed to state their exact tax liability
and to show sufficient proof of their likely source of income. 43 The CA further said that
110
before one could be prosecuted for tax evasion,the fact that a tax is due must first be
proved.44 Thus:
IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED, and the assailed
Resolution of the Secretary of Justice dated July 27, 2009 dismissing I.S. No. 2005-573
against private respondents, AFFIRMED. However, the dismissal of the instant case is
without prejudice to the refiling by the BIR of a complaint sufficient in form and substance
before the appropriate tribunal.
SO ORDERED.45
The CA likewise denied petitioner’s Motion for Reconsideration 46 in its Resolution47 dated
May 10, 2011.
Issues
Hence, petitioner filed the instant Petition contending that the CA committed grave abuse
of discretion amounting to lackor excess of jurisdiction in holding that:
I. A CATEGORICAL FINDING OF THE EXACT AMOUNT OF TAX DUE FROM THE
PRIVATE RESPONDENT SHOULD BE SPECIFICALLY ALLEGED [AND THAT] SINCE THE
BIR FAILED TO MAKE SUCH FINDINGS THEYCONSEQUENTLYFAILED TO BUILD A
CASE FOR TAX EVASION AGAINST [RESPONDENT SPOUSES] DESPITE THE WELL
ESTABLISHED DOCTRINE THAT IN TAX EVASION CASES, A PRECISE COMPUTATION
OF THE [TAX] DUE IS NOT NECESSARY.
II. THE BIR FAILED TO SHOW SUFFICIENT PROOF OF A LIKELY SOURCE OF
[RESPONDENT SPOUSES’] INCOME DESPITE THE FACT THAT THE BIR WAS
SUFFICIENTLY ABLE TO SHOW PROOF OF SUCH INCOME.48
Petitioner’s Arguments
Petitioner imputes grave abuse of discretion on the part of the CA in affirming the dismissal
of the criminal cases against respondent spouses. Petitioner contends that in filing a criminal
case for tax evasion, a prior computation or assessment of tax is not required because the
crime is complete when the violator knowingly and willfully filed a fraudulent return with
intentto evade a part or all of the tax. 49 In this case, an analysis of respondent spouses’
income and expenditure shows that their cash expenditure is grossly disproportionate to
their reported or declared income, leading petitioner to believe that they under declared
their income.50 In computing the unreported or undeclared income, which was likely sourced
from respondent Antonio’s rental business, 51 petitioner used the expenditure method of
reconstructing income, a method used to determine a taxpayer’s income tax liability when
his records are inadequate or inaccurate.52 And since respondent spouses failed to explain
the alleged unreported or undeclared income, petitioner asserts that criminal charges for
tax evasion should be filed against them.
Respondent spouses’ Arguments
Respondent spouses, on the other hand, argue that the instant Petition should be dismissed
as petitioner availed of the wrong remedy in filing a Petition for Certiorari under Rule 65 of
the Rules of Court.53 And even if the Petition is given due course, the same should still be
dismissed because no grave abuse of discretion can be attributed to the CA. 54 They maintain
that petitioner miserably failed to prove that a tax is actually due. 55 Neither was it able to
show the source of the alleged unreported or undeclared income as required by Revenue
Memorandum Order No. 15-95, Guidelines and Investigative Procedures in the Development
of Tax Fraud Cases for Internal Revenue Officers. 56 As to the method used by petitioner, they
claim that it completely ignored their lifetime savings because it was limited to the years
1998-2003.57
Our Ruling
The Petition is meritorious.
Before discussing the merits of thiscase, we shall first discuss the procedural matter raised
by respondent spouses that petitioner availed of the wrong remedy in filing a Petition for
Certiorari under Rule 65 of the Rules of Court, instead of a Petition for Review on Certiorari
under Rule 45.
Indeed, the remedy of a party aggrieved by a decision, final order, or resolution of the CA is
to file a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which is a
continuation of the appellate process over the original case. 58 And as a rule, if the remedy of
an appeal is available, an action for certiorari under Rule 65 of the Rules of Court, which is
anoriginal or independent action based on grave abuse of discretion amounting to lack or
excess of jurisdiction, will not prosper 59 because it is not a substitute for a lost appeal.60
There are, however, exceptions to this rule, to wit: 1) when public welfare and the
advancement of public policy dictate; 2) when the broader interest of justice so requires; 3)
when the writs issued are null and void; 4) when the questioned order amounts to an
oppressive exercise of judicial authority; 5) when, for persuasive reasons, the rules may be
relaxed to relieve a litigant of an injustice not commensurate with his failure to comply with
the prescribed procedure; 6) when the judgment or order is attended by grave abuse of
discretion; or 7) in other meritorious cases.61
In this case, after considering the arguments raised by the parties, we find that there is
reason to give due course to the instant Petition for Certiorari as petitioner was able to
convincingly show that the CA committed grave abuse of discretion when it affirmed the
111
dismissal of the criminal charges against respondent spouses despite the fact that there
isprobable cause toindict them.
Although the Court has consistently adopted the policy of non-interference in the conduct
and determination of probable cause, 62 which is exclusively within the competence of the
Executive Department, through the Secretary of Justice, 63 judicial intrusion, in the form of
judicial review, is allowed when there is proof that the Executive Department gravely
abused its discretion in making its determination and in arriving atthe conclusion it
reached.64
Grave abuse of discretion is defined as a capricious and whimsical exercise of judgment
tantamount to lack or excess of jurisdiction, a blatant abuse of authority so grave and so
severe as to deprive the court of its very power to dispense justice, or an exercise of
powerin an arbitrary and despotic manner, due to passion, prejudice or personal hostility,
sopatent and gross as to amount to an evasion or to a unilateral refusal to perform the duty
enjoined or to act in contemplation of the law. 65 Such is the situation in this case.
Having resolved the foregoing procedural matter, we shall now proceed to determine the
main issue in this case.
a part or all of the tax.67 Corollarily, an assessment of the tax deficiency is notrequired in a
criminal prosecution for tax evasion. 68 However, in Commissioner of Internal Revenue v.
Court of Appeals,69 we clarified that although a deficiency assessment is not necessary, the
fact that a tax is due must first be proved before one can be prosecuted for tax evasion. 70
In the case of income, for it to be taxable, there must be a gain realized or received by the
taxpayer, which is not excluded by law or treaty from taxation. 71 The government is allowed
to resort to all evidence or resources available to determine a taxpayer’s income and to use
methods to reconstruct his income. 72 A method commonly used by the government isthe
expenditure method, which is a method of reconstructing a taxpayer’s income by deducting
the aggregate yearly expenditures from the declared yearly income. 73 The theory of this
method is that when the amount of the money that a taxpayer spends during a given year
exceeds his reported or declared income and the source of such money is unexplained, it
may be inferred that such expenditures represent unreported or undeclared income. 74
In the case at bar, petitioner used this method to determine respondent spouses’ tax
liability.1âwphi1 Petitioner deducted respondent spouses’ major cash acquisitions from their
available funds. Thus:

Sections 254 and 255 of the NIRC pertinently provide: Cash Loans Withdra Funds Major Unexplained
(business) wal available Acquisition Sources of
SEC. 254. Attempt to Evade or Defeat Tax. – Any person who willfully attempts in any of Capital s Funds
manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in
addition to other penalties provided by law, upon conviction thereof, be punished by a fine 1998 P 900,000.0 130,638.9 1,300,252.44
of not less than Thirty thousand pesos (₱30,000.00) but not more than One hundred 269,613.46 0 8
thousand pesos (₱100,000.00) and suffer imprisonment of not less than two (2) years but 1999 324,258.28 (400,000. 39,281.87 1,263,792.59
not more than four (4) years: Provided, That the conviction or acquittal obtained under this 00)
Section shall not be a bar to the filing of a civil suit for the collection of taxes.
2000 290,433.46 - 102,024.9 1,656,251.02 17,511,010.0 (15,854,758.98)
SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold 7 0
and Remit Tax and Refund Excess Taxes Withheld on Compensation. – Any person required 2001 311,227.62 - 406,309. 717,537.32 1,350,000.0 (632,462.68)
under this Code or by rules and regulations promulgated thereunder to pay any tax, make a 70 0
return, keep any record, or supply correct and accurate information, who willfully fails to
pay such tax, make such return, keep such record, or supply such correct and accurate 2002 276,025.62 (100,000.0 184,092.0 360,117.65
information, or withhold or remit taxes withheld, or refund excess taxes withheld on 0) 3
compensation at the time or times required by law or rules and regulations shall, in addition
2003 252,188.93 - 245,167.9 857,474.55 2,000,000. (1,142,525.45)
to other penalties provided by law, upon conviction thereof, be punished by a fine of not
7 00
less than Ten thousand pesos (₱10,000.00) and suffer imprisonment of not less than one (1)
year but not more than ten (10) years. [Total: ₱1,723,747. 20,861,010. (17,629,747.1 75

] 37 00 1)
In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion is deemed complete when the
violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat 2000 2001 2003

112
 Unexplained funds – under declaration [P]15,854,758 [P]632,462. [P] also clearly explained. The revenue officers likewise showed that the under declaration
.98 68 1,142,525.45 exceeded 30% of the reported or declared income.

Taxable income [P]15,854,758 [P]632,462. [P] The revenue officers alsoidentified the likely source of the unreported or undeclared income
.98 68 1,142,525.45 intheir Reply-Affidavit. The pertinent portion reads:
Income Tax due thereon:
7. x x x x
First Php500,000.00 125,000.00 125,000.00 125,000.00
In excess of Php500,000.00 4,913,522.87 42,388.06 205,608.14 [Respondent spouses] are into rental business and the net profit for six (6) years before tax
summed only to ₱1,238,938.32 (an average of more or less Php200,000.00 annually). We
Total income tax due (net tax paid) 4,973,765.66 93,719.06 281,879.14 asked respondent [Antonio] if we can proceed to his rented property to [appraise] the
earning capacity of the building [for] lease/ rent, but he declined our proposition. Due to
Add: 50% Surcharge 2,486,882.83 46,859.53 165,304.07 such refusal made by the respondent, [petitioner], thru its examiners,took pictures of the
20% Interest (up to 5/31/2005) - 825 4,104,376.29 77,337.43 272,751.72 subject property and came up with the findings that indeed the unexplained funds sought to
have been used in acquiring the valuable property in Tagaytay x x x came from the
underdeclaration of rental income.80
[P]11,565,024. [P]217,916. [P]
Total Tax Due inclusive of Increments 76
79 02 655,369.01 Apparently, the revenue officers considered respondent Antonio’s rental business to be the
likely source of their unreported or undeclared income due to his unjustified refusal to allow
the revenue officers to inspect the building.
Particulars 2000 2001 2003
Respondent spouses’ defense that they had sufficient savings to purchase the properties
Unexplained Funds [Underdeclaration] [P]15,854,758.98 [P]632,462.68 [P]1,142,525.45 remains self-serving at thispoint since they have not yet presented any evidence to support
this. And since there is no evidence yet to suggest that the money they used to buy the
Sources of Funds as per Financial [P]1,656,251.02 [P]717,537.32 [P]817,474.55 properties was from an existing fund, it is safe to assume that that money is income or a
Statements as attached to the Income Tax flowof wealth other than a mere return on capital. It is a basic concept in taxation that
Return income denotes a flow of wealth during a definite period of time, while capital is a fund or
Percentage of underdeclaration 957.27% 88.14% 133.24% 77 property existing at one distinct point in time. 81

Moreover, by just looking at the tables presented by petitioner, there is a manifest showing
And since the underdeclaration is more than 30%of respondent spouses’ reported or
that respondent spouses had under declared their income. The huge disparity between
declared income, which under Section 248(B) of the NIRC constitutes as prima facie
respondent Antonio’s reported or declared annual income for the past several years and
evidence of false or fraudulent return, petitioner recommended the filing of criminal cases
respondent spouses’ cash acquisitions for the years 2000, 2001, and 2003 cannot be ignored.
against respondent spouses under Sections 254 and 255, in relation to Section 248(B) of the
Infact, it makes uswonder how they were able to purchase the properties in cash given
NIRC.
respondent Antonio’s meager income.

The CA, however, found no probable cause to indict respondent spouses for tax evasion. It
In view of the foregoing,we are convinced that there is probable cause to indict respondent
agreed with Acting Justice Secretary Devanadera that petitioner failed to make "a
spouses for tax evasion aspetitioner was able to show that a tax is due from them. Probable
categorical finding of the exact amount of tax due from [respondent spouses]" and "to
cause, for purposes of filing a criminal information, is defined as such facts that are sufficient
show sufficient proof of a likely source of [respondent spouses’] income that enabled them
to engender a well-founded belief that a crime has been committed, that the accusedis
to purchase the real and personal properties adverted to x x x." 78 We find otherwise.
probably guilty thereof, and that he should be held for trial. 82 It bears stressing that the
determination of probable cause does not require actual or absolute certainty, nor clear and
The amount of tax due from respondent spouses was specifically alleged in the Complaint-
Affidavit.79 The computation, as wellas the method used in determining the tax liability, was
113
convincing evidence of guilt; it only requires reasonable belief or probability that more likely
than not a crime has been committed by the accused.83
In completely disregarding the evidence presented and in affirming the ruling of the Acting
Justice Secretary Devanadera that no probable cause exists, we find that the CA committed
grave abuse of discretion amounting to lack or excess of jurisdiction. As we have said,
ifthere is grave abuse of discretion, the court may step in and proceed to make its own
independent determination of probable cause as judicial review is allowed to ensure that
the Executive Department acts within the permissible bounds of its authority or does not
gravely abuse the same.84
We must make it clear, however, that we are only here to determine probable
cause.1âwphi1 As to whether respondent spouses are guilty of tax evasion is an issue that
must be resolved during the trial of the criminal case, where the quantum of proof required
is proof beyond reasonable doubt.
Before we close, we must stress that our ruling in this case should not be interpreted as an
unbridled license for our tax officials to engage in fishing expeditions and witch-hunting.
They should not abuse their investigative powers, instead they should exercise the same
within the bounds of the law. They must properly observe the guidelines in making
assessments and investigative procedures to ensure that the constitutional rights of the
taxpayers are well protected as we cannot allow the floodgates to be opened for frivolous
and malicious tax suits.
WHEREFORE, the Petition is hereby GRANTED. The Decision dated October 28, 2010 and the
Resolution dated May 10, 2011 of the Court of Appeals in CA-G.R. SP No. 112479 are hereby
REVERSED and SET ASIDE. The Resolutions dated August 31, 2006 and November 29, 2007 of
State Prosecutor Ma. Cristina A. Montera-Barot in LS. No. 2005-573 finding probable cause to
indict respondent spouses Antonio Villan Manly and Ruby Ong Manly for Violation of
Sections 254 and 255 of the National Internal Revenue Code are hereby REINSTATED.
SO ORDERED.
LOCAL AND REAL PROPERTY TAXATION
G.R. No. 166134 June 29, 2010
ANGELES CITY, Petitioner,
vs.
ANGELES CITY ELECTRIC CORPORATION and REGIONAL TRIAL COURT BRANCH 57,
ANGELES CITY,Respondents.
Taxation; Injunction; Taxes being the lifeblood of the government should be collected
promptly; No court shall have the authority to grant an injunction to restrain the collection
of any national internal revenue tax, fee or charge imposed by the National Internal
Revenue Code.—A principle deeply embedded in our jurisprudence is that taxes being the
lifeblood of the government should be collected promptly, without unnecessary hindrance
or delay. In line with this principle, the National Internal Revenue Code of 1997 (NIRC)
expressly provides that no court shall have the authority to grant an injunction to restrain
the collection of any national internal revenue tax, fee or charge imposed by the code. An
exception to this rule obtains only when in the opinion of the Court of Tax Appeals (CTA) the
collection thereof may jeopardize the interest of the government and/or the taxpayer.
Same; Same; In the case of the collection of local taxes, there is no express provision in the
Local Government Code (LGC) prohibiting courts from issuing an injunction to restrain
local governments from collecting taxes.—The situation, however, is different in the case
of the collection of local taxes as there is no express provision in the LGC prohibiting courts
from issuing an injunction to restrain local governments from collecting taxes. Thus, in the
case of Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, 171SCRA 501
(1989), cited by the petitioner, we ruled that: Unlike the National Internal Revenue Code, the
Local Tax Code does not contain any specific provision prohibiting courts from enjoining the
collection of local taxes. Such statutory lapse or intent, however it may be viewed, may have
allowed preliminary injunction where local taxes are involved but cannot negate the
procedural rules and requirements under Rule 58.
Remedial Law; Injunction; Requisites to warrant the issuance of a writ of the preliminary
injunction.—Two requisites must exist to warrant the issuance of a writ of preliminary
injunction, namely: (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.
Same; Same; As a rule, the issuance of preliminary injunction rests entirely within the
discretion of the court taking cognizance of the case and will not be interfered with,
except where there is grave abuse of discretion committed by the court.—As a rule, the
issuance of a preliminary injunction rests entirely within the discretion of the court taking
cognizance of the case and will not be interfered with, except where there is grave abuse of
discretion committed by the court. For grave abuse of discretion to prosper as a ground for
certiorari, it must be demonstrated that the lower court or tribunal has exercised its power
in an arbitrary and despotic manner, by reason of passion or personal hostility, and it must
114
be patent and gross as would amount to an evasion or to a unilateral refusal to perform the
duty enjoined or to act in contemplation of law. In other words, mere abuse of discretion is
not enough. Angeles City vs. Angeles Electric Corporation, 622 SCRA 43, G.R. No. 166134
June 29, 2010
DECISION
DEL CASTILLO, J.:
The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes
applies only to national internal revenue taxes, and not to local taxes.
This Petition1 for Certiorari under Rule 65 of the Rules of Court seeks to set aside the Writ of
Preliminary Injunction issued by the Regional Trial Court (RTC) of Angeles City, Branch 57, in
Civil Case No. 11401, enjoining Angeles City and its City Treasurer from levying, seizing,
disposing and selling at public auction the properties owned by Angeles Electric Corporation
(AEC).
Factual Antecedents
On June 18, 1964, AEC was granted a legislative franchise under Republic Act No. (RA)
40792 to construct, maintain and operate an electric light, heat, and power system for the
purpose of generating and distributing electric light, heat and power for sale in Angeles City,
Pampanga. Pursuant to Section 3-A thereof, 3 AEC’s payment of franchise tax for gross
earnings from electric current sold was in lieu of all taxes, fees and assessments.
On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise tax of electric
franchise holders. Section 1 of PD 551 provided that:
SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the
franchise tax payable by all grantees of franchises to generate, distribute and sell electric
current for light, heat and power shall be two percent (2%) of their gross receipts received
from the sale of electric current and from transactions incident to the generation,
distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly
authorized representative on or before the twentieth day of the month following the end of
each calendar quarter or month as may be provided in the respective franchise or pertinent
municipal regulation and shall, any provision of the Local Tax Code or any other law to the
contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature
imposed by any national or local authority on earnings, receipts, income and privilege of
generation, distribution and sale of electric current.
On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was passed into
law, conferring upon provinces and cities the power, among others, to impose tax on
businesses enjoying franchise.4 In accordance with the LGC, the Sangguniang Panlungsod of
Angeles City enacted on December 23, 1993 Tax Ordinance No. 33, S-93, otherwise known as
the Revised Revenue Code of Angeles City (RRCAC).
On February 7, 1994, a petition seeking the reduction of the tax rates and a review of the
provisions of the RRCAC was filed with the Sangguniang Panlungsod by Metro Angeles
Chamber of Commerce and Industry Inc. (MACCI) of which AEC is a member. There being no
action taken by the Sangguniang Panlungsod on the matter, MACCI elevated the petition 5 to
the Department of Finance, which referred the same to the Bureau of Local Government
Finance (BLGF). In the petition, MACCI alleged that the RRCAC is oppressive, excessive,
unjust and confiscatory; that it was published only once, simultaneously on January 22, 1994;
and that no public hearings were conducted prior to its enactment. Acting on the petition,
the BLGF issued a First Indorsement 6 to the City Treasurer of Angeles City, instructing the
latter to make representations with the Sangguniang Panlungsod for the appropriate
amendment of the RRCAC in order to ensure compliance with the provisions of the LGC, and
to make a report on the action taken within five days.
Thereafter, starting July 1995, AEC has been paying the local franchise tax to the Office of
the City Treasurer on a quarterly basis, in addition to the national franchise tax it pays every
quarter to the Bureau of Internal Revenue (BIR).
Proceedings before the City Treasurer
On January 22, 2004, the City Treasurer issued a Notice of Assessment 7 to AEC for payment
of business tax, license fee and other charges for the period 1993 to 2004 in the total
amount of ₱94,861,194.10. Within the period prescribed by law, AEC protested the
assessment claiming that:
(a) pursuant to RA 4079, it is exempt from paying local business tax;
(b) since it is already paying franchise tax on business, the payment of business tax
would result in double taxation;
(c) the period to assess had prescribed because under the LGC, taxes and fees can
only be assessed and collected within five (5) years from the date they become due;
and
(d) the assessment and collection of taxes under the RRCAC cannot be made
retroactive to 1993 or prior to its effectivity. 8
115
On February 17, 2004, the City Treasurer denied the protest for lack of merit and requested
AEC to settle its tax liabilities.9
Proceedings before the RTC
Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a Petition for
Declaratory Relief,10docketed as Civil Case No. 11401.
On April 5, 2004, the City Treasurer levied on the real properties of AEC. 11 A Notice of Auction
Sale12 was published and posted announcing that a public auction of the levied properties of
AEC would be held on May 7, 2004.
This prompted AEC to file with the RTC, where the petition for declaratory relief was
pending, an Urgent Motion for Issuance of Temporary Restraining Order and/or Writ of
Preliminary Injunction13 to enjoin Angeles City and its City Treasurer from levying, annotating
the levy, seizing, confiscating, garnishing, selling and disposing at public auction the
properties of AEC.
Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles City and
its City Treasurer filed an Answer with Counterclaim14 to which AEC filed a Reply.15
After due notice and hearing, the RTC issued a Temporary Restraining Order (TRO) 16 on May
4, 2004, followed by an Order 17 dated May 24, 2004 granting the issuance of a Writ of
Preliminary Injunction, conditioned upon the filing of a bond in the amount of
₱10,000,000.00. Upon AEC’s posting of the required bond, the RTC issued a Writ of
Preliminary Injunction on May 28, 2004, 18 which was amended on May 31, 2004 due to some
clerical errors.19
On August 5, 2004, Angeles City and its City Treasurer filed a "Motion for Dissolution of
Preliminary Injunction and Motion for Reconsideration of the Order dated May 24,
2004,"20 which was opposed by AEC.21
Finding no compelling reason to disturb and reconsider its previous findings, the RTC denied
the joint motion on October 14, 2004.22
Issue
Being a special civil action for certiorari, the issue in the instant case is limited to the
determination of whether the RTC gravely abused its discretion in issuing the writ of
preliminary injunction enjoining Angeles City and its City Treasurer from levying, selling, and
disposing the properties of AEC. All other matters pertaining to the validity of the tax
assessment and AEC’s tax exemption must therefore be left for the determination of the
RTC where the main case is pending decision.
Petitioner’s Arguments
Petitioner’s main argument is that the collection of taxes cannot be enjoined by the RTC,
citing Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, 23 wherein the lower
court’s denial of a motion for the issuance of a writ of preliminary injunction to enjoin the
collection of a local tax was upheld. Petitioner further reasons that since the levy and
auction of the properties of a delinquent taxpayer are proper and lawful acts specifically
allowed by the LGC, these cannot be the subject of an injunctive writ. Petitioner likewise
insists that AEC must first pay the tax before it can protest the assessment. Finally,
petitioner contends that the tax exemption claimed by AEC has no legal basis because RA
4079 has been expressly repealed by the LGC.
Private respondent’s Arguments
Private respondent AEC on the other hand asserts that there was no grave abuse of
discretion on the part of the RTC in issuing the writ of preliminary injunction because it was
issued after due notice and hearing, and was necessary to prevent the petition from
becoming moot. In addition, AEC claims that the issuance of the writ of injunction was
proper since the tax assessment issued by the City Treasurer is not yet final, having been
seasonably appealed pursuant to Section 195 24 of the LGC. AEC likewise points out that
following the case of Pantoja v. David, 25 proceedings to invalidate a warrant of distraint and
levy to restrain the collection of taxes do not violate the prohibition against injunction to
restrain the collection of taxes because the proceedings are directed at the right of the City
Treasurer to collect the tax by distraint or levy. As to its tax liability, AEC maintains that it is
exempt from paying local business tax. In any case, AEC counters that the issue of whether
it is liable to pay the assessed local business tax is a factual issue that should be determined
by the RTC and not by the Supreme Court via a petition for certiorari under Rule 65 of the
Rules of Court.
Our Ruling
We find the petition bereft of merit.
The LGC does not specifically prohibit an injunction enjoining the collection of taxes
A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the
government should be collected promptly, 26 without unnecessary hindrance27 or delay.28 In
line with this principle, the National Internal Revenue Code of 1997 (NIRC) expressly
provides that no court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge imposed by the code. 29 An
exception to this rule obtains only when in the opinion of the Court of Tax Appeals (CTA) the
collection thereof may jeopardize the interest of the government and/or the taxpayer. 30
116
The situation, however, is different in the case of the collection of local taxes as there is no
express provision in the LGC prohibiting courts from issuing an injunction to restrain local
governments from collecting taxes. Thus, in the case of Valley Trading Co., Inc. v. Court of
First Instance of Isabela, Branch II, cited by the petitioner, we ruled that:
Unlike the National Internal Revenue Code, the Local Tax Code 31 does not contain any
specific provision prohibiting courts from enjoining the collection of local taxes. Such
statutory lapse or intent, however it may be viewed, may have allowed preliminary
injunction where local taxes are involved but cannot negate the procedural rules and
requirements under Rule 58.32
In light of the foregoing, petitioner’s reliance on the above-cited case to support its view
that the collection of taxes cannot be enjoined is misplaced. The lower court’s denial of the
motion for the issuance of a writ of preliminary injunction to enjoin the collection of the
local tax was upheld in that case, not because courts are prohibited from granting such
injunction, but because the circumstances required for the issuance of writ of injunction
were not present.
Nevertheless, it must be emphasized that although there is no express prohibition in the
LGC, injunctions enjoining the collection of local taxes are frowned upon. Courts therefore
should exercise extreme caution in issuing such injunctions.
No grave abuse of discretion was committed by the RTC
Section 3, Rule 58, of the Rules of Court lays down the requirements for the issuance of a
writ of preliminary injunction, viz:
(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.
Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely:
(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. 33
In issuing the injunction, the RTC ratiocinated that:
It is very evident on record that petitioner 34 resorted and filed an urgent motion for issuance
of a temporary restraining order and preliminary injunction to stop the scheduled auction
sale only when a warrant of levy was issued and published in the newspaper setting the
auction sale of petitioner’s property by the City Treasurer, merely few weeks after the
petition for declaratory relief has been filed, because if the respondent will not be
restrained, it will render this petition moot and academic. To the mind of the Court, since
there is no other plain, speedy and adequate remedy available to the petitioner in the
ordinary course of law except this application for a temporary restraining order and/or writ
of preliminary injunction to stop the auction sale and/or to enjoin and/or restrain
respondents from levying, annotating the levy, seizing, confiscating, garnishing, selling and
disposing at public auction the properties of petitioner, or otherwise exercising other
administrative remedies against the petitioner and its properties, this alone justifies the
move of the petitioner in seeking the injunctive reliefs sought for.
Petitioner in its petition is questioning the assessment or the ruling of the City Treasurer on
the business tax and fees, and not the local ordinance concerned. This being the case, the
Court opines that notice is not required to the Solicitor General since what is involved is just
a violation of a private right involving the right of ownership and possession of petitioner’s
properties. Petitioner, therefore, need not comply with Section 4, Rule 63 requiring such
notice to the Office of the Solicitor General.
The Court is fully aware of the Supreme Court pronouncement that injunction is not proper
to restrain the collection of taxes. The issue here as of the moment is the restraining of the
respondent from pursuing its auction sale of the petitioner’s properties. The right of
ownership and possession of the petitioner over the properties subject of the auction sale is
at stake.
Respondents assert that not one of the witnesses presented by the petitioner have proven
what kind of right has been violated by the respondent, but merely mentioned of an injury
which is only a scenario based on speculation because of petitioner’s claim that electric
power may be disrupted.
Engr. Abordo’s testimony reveals and even his Affidavit Exhibit "S" showed that if the
auction sale will push thru, petitioner will not only lose control and operation of its facility,
but its employees will also be denied access to equipments vital to petitioner’s operations,
and since only the petitioner has the capability to operate Petersville sub station, there will
117
be a massive power failure or blackout which will adversely affect business and economy, if
not lives and properties in Angeles City and surrounding communities.
Petitioner, thru its witnesses, in the hearing of the temporary restraining order, presented
sufficient and convincing evidence proving irreparable damages and injury which were
already elaborated in the temporary restraining order although the same may be realized
only if the auction sale will proceed. And unless prevented, restrained, and enjoined, grave
and irreparable damage will be suffered not only by the petitioner but all its electric
consumers in Angeles, Clark, Dau and Bacolor, Pampanga.
The purpose of injunction is to prevent injury and damage from being incurred, otherwise, it
will render any judgment in this case ineffectual.
"As an extraordinary remedy, injunction is calculated to preserve or maintain the status quo
of things and is generally availed of to prevent actual or threatened acts, until the merits of
the case can be heard" (Cagayan de Oro City Landless Res. Assn. Inc. vs. CA, 254 SCRA 220)
show that before issuing the injunction, the RTC conducted a hearing where both parties
were given the opportunity to present their arguments. During the hearing, AEC was able to
show that it had a clear and unmistakable legal right over the properties to be levied and
that it would sustain serious damage if these properties, which are vital to its operations,
would be sold at public auction. As we see it then, the writ of injunction was properly issued.
A final note. While we are mindful that the damage to a taxpayer’s property rights generally
takes a back seat to the paramount need of the State for funds to sustain governmental
functions,40 this rule finds no application in the instant case where the disputed tax
assessment is not yet due and demandable. Considering that AEC was able to appeal the
denial of its protest within the period prescribed under Section 195 of the LGC, the collection
of business taxes41 through levy at this time is, to our mind, hasty, if not premature. 42 The
issues of tax exemption, double taxation, prescription and the alleged retroactive
application of the RRCAC, raised in the protest of AEC now pending with the RTC, must first
be resolved before the properties of AEC can be levied. In the meantime, AEC’s rights of
ownership and possession must be respected.

It appearing that the two essential requisites of an injunction have been satisfied, as there WHEREFORE, the petition is hereby DISMISSED.
exists a right on the part of the petitioner to be protected, its right[s] of ownership and
possession of the properties subject of the auction sale, and that the acts (conducting an SO ORDERED.
auction sale) against which the injunction is to be directed, are violative of the said rights of
the petitioner, the Court has no other recourse but to grant the prayer for the issuance of a
writ of preliminary injunction considering that if the respondent will not be restrained from
doing the acts complained of, it will preempt the Court from properly adjudicating on the
merits the various issues between the parties, and will render moot and academic the
proceedings before this court.35

As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the
court taking cognizance of the case and will not be interfered with, except where there is
grave abuse of discretion committed by the court. 36For grave abuse of discretion to prosper
as a ground for certiorari, it must be demonstrated that the lower court or tribunal has
exercised its power in an arbitrary and despotic manner, by reason of passion or personal
hostility, and it must be patent and gross as would amount to an evasion or to a unilateral
refusal to perform the duty enjoined or to act in contemplation of law. 37 In other words,
mere abuse of discretion is not enough. 381avvph!1

Guided by the foregoing, we find no grave abuse of discretion on the part of the RTC in
issuing the writ of injunction. Petitioner, who has the burden to prove grave abuse of
discretion,39 failed to show that the RTC acted arbitrarily and capriciously in granting the
injunction. Neither was petitioner able to prove that the injunction was issued without any
factual or legal justification. In assailing the injunction, petitioner primarily relied on the
prohibition on the issuance of a writ of injunction to restrain the collection of taxes. But as
we have already said, there is no such prohibition in the case of local taxes. Records also

118
LOCAL AND REAL PROPERTY TAXATION

G.R. No. 180200 November 25, 2013

DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., Petitioner,
vs.
JESSIE E. CANTOS, Respondent.

Remedial Law; Special Civil Actions; Contempt; Contempt is not a criminal offense.
However, a charge for contempt of court partakes of the nature of a criminal action. Rules
that govern criminal prosecutions strictly apply to a prosecution for contempt.—Indeed,
contempt is not a criminal offense. However, a charge for contempt of court partakes of the
nature of a criminal action. Rules that govern criminal prosecutions strictly apply to a
prosecution for contempt. In fact, Section 11 of Rule 71 of the Rules of Court provides that
the appeal in indirect contempt proceedings may be taken as in criminal cases. This Court
has held that an alleged contemner should be accorded the same rights as that of an
accused. Thus, the dismissal of the indirect contempt charge against respondent amounts to
an acquittal, which effectively bars a second prosecution.

Same; Same; Same; Words and Phrases; Contempt of court is defined as a disobedience to
the court by acting in opposition to its authority, justice, and dignity.—“Contempt of court
is defined as a disobedience to the court by acting in opposition to its authority, justice, and
dignity. It signifies not only a willful disregard or disobedience of the court’s order, but such
conduct which tends to bring the authority of the court and the administration of law into
disrepute or, in some manner, to impede the due administration of justice. It is a defiance of
the authority, justice, or dignity of the court which tends to bring the authority and
administration of the law into disrespect or to interfere with or prejudice party-litigants or
their witnesses during litigation.”

Same; Res Judicata; Words and Phrases; Res judicata means a matter adjudged; a thing
judicially acted upon or decided; a thing or matter settled by judgment. For res judicata to
apply there must among others be, between the first and the second actions, identity of
the parties, identity of subject matter, and identity of causes of action.—Res judicata
means ‘a matter adjudged; a thing judicially acted upon or decided; a thing or matter settled
by judgment.’ ” For res judicata to apply there must among others be, between the first and
the second actions, identity of the parties, identity of subject matter, and identity of causes
of action. Here, there is no identity of parties between Civil Case No. 3514 and the instant
case. “Identity of parties exists ‘where the parties in both actions are the same, or there is

119
privity between them, or they are successors-ininterest by title subsequent to the
commencement of the action, litigating for the same thing and under the same title and in
the same capacity.’ ” Digital Telecommunication Philippines, Inc. vs. Cantos, 710 SCRA 514,
G.R. No. 180200 November 25, 2013
DECISION
DEL CASTILLO, J.:
"It is of the utmost importance x x x that the modes adopted to enforce the taxes levied
should be interfered with as little as possible. Any delay in the proceedings of the officers,
upon whom the duty is devolved of collecting the taxes, may derange the operations of
government, and thereby cause serious detriment to the public." 1
This Petition for Review on Certiorari 2 assails the July 24, 2007 Decision 3 of the Court of
Appeals (CA) in CA-G.R. CR No. 29009 which affirmed the July 7, 2003 Decision 4 of the
Regional Trial Court (RTC), Branch XI, Balayan, Batangas in Civil Case No. 4051 dismissing
petitioner Digital Telecommunications, Philippines, Inc.’s (petitioner) Petition for Indirect
Contempt/Prohibition against respondent Jessie E. Cantos (respondent) as Provincial
Treasurer of Batangas. Also assailed is the October 11, 2007 CA Resolution 5 denying
petitioner’s Motion for Reconsideration.
Factual Antecedents
By virtue of Republic Act (RA) No. 7678,6 petitioner was granted a legislative franchise to
install, operate and maintain telecommunications systems throughout the Philippines on
February 17, 1994.
Upon seeking the renewal of its Mayor’s Permit to operate and provide telecommunications
service in Balayan, Batangas, petitioner was informed by then Mayor Benjamin E. Martinez,
Jr. that its business operation would be restrained should it fail to pay the assessed real
property taxes on or before October 5, 1998. And as petitioner failed to pay, the Chief of the
Permit and License Division of Balayan, Batangas, Mr. Francisco P. Martinez, issued on
October 6, 1998 a Cease and Desist Order enjoining petitioner from further operating its
business.
Petitioner thus promptly filed a case for Annulment of the Cease and Desist Order before
the RTC of Balayan, Batangas against the Mayor and the Chief of the Permit and License
Division. The case was docketed as Civil Case No. 3514 and raffled to Branch IX of said court.
In a Decision7 dated July 15, 1999, Branch IX ruled in favor of petitioner and declared that the
issuance of the Cease and Desist Order was without legal basis. It held that the enjoinment
of petitioner’s business operation is not one of the remedies available to enforce collection
of real property taxes under existing laws. The RTC also ruled that petitioner is only liable to
pay real property taxes on properties not used in connection with the operation of its
franchise. In arriving at such conclusion, the RTC relied on Section 5 of RA 7678, which
provides that:
Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real estate,
buildings, and personal property exclusive of this franchise as other persons or corporations
are now or hereafter may be required by law to pay. In addition thereto, the grantee shall
pay to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and
approval of the accounts, a franchise tax as may be prescribed by law of all gross receipts of
the telephone or other telecommunications businesses transacted under this franchise by
the grantee; provided, that the grantee shall continue to be liable for income taxes payable
under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive
Order No. 72 unless the latter enactment is amended or repealed, in which case the
amendment or repeal shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal
Revenue. (Boldfacing and underscoring supplied)
and construed the phrase "exclusive of this franchise" in the first sentence as limiting
petitioner’s exemption from paying real property tax only to properties used in furtherance
of its legislative franchise to provide telecommunications services.
The dispositive portion of Branch IX’s Decision reads:
WHEREFORE, the Cease and Desist Order dated October 6, 1998 is hereby declared null and
void for lack of legal basis. The Court further declares that real properties of plaintiff [Digital]
Telecommunications Philippines, Inc. (DIGITEL) which are used in the operation of its
franchise are exempt from the payment of real property taxes, but those not used in
connection thereto are subject to aforesaid taxes.
SO ORDERED.8
The then Mayor attempted to set aside the above Decision by filing a Petition for Certiorari
before the CA. But his efforts were in vain as the CA outrightly dismissed the Petition. 9 The
dismissal became final and executory as shown in an Entry of Judgment dated February 2,
2000.10
In June 2002, respondent, in his capacity as Provincial Treasurer of the Province of Batangas,
issued seven Warrants of Levy11 certifying that several real properties of petitioner situated
in the Municipalities of Ibaan, San Juan, Sto. Tomas, Cuenca, Nasugbu, Balayan, and Lemery,
120
all in the Province of Batangas, are delinquent in the payment of real property taxes. Hence,
the properties would be advertised and sold at public auction within 30 days from
petitioner’s receipt of the warrants.
On July 1, 2002, petitioner wrote respondent to request the lifting of the Warrants of Levy
and to refrain from proceeding with the public sale of its property located in Balayan,
Batangas.12 It invoked the final Decision in Civil Case No. 3514 decreeing petitioner’s
exemption from the payment of real property tax which it claimed to be binding upon
respondent. But since the warrants remained unlifted, petitioner filed with the RTC a
Petition for Indirect Contempt and Prohibition with prayer for the issuance of a Writ of
Preliminary Injunction and/or Temporary Restraining Order (TRO) 13 on July 5, 2002. The case
was docketed as Civil Case No. 4051.
Proceedings before the Regional Trial Court
For his defense, respondent averred that he cannot be held liable for contempt or for having
disobeyed the Decision in Civil Case No. 3514 since the same relates to an action in personam
and, therefore, binds only the parties impleaded therein and their successors in interest. 14 He
also asserted that petitioner’s claim for tax exemption could not be collaterally presented
and resolved in a contempt proceeding and that petitioner should have resorted instead to
the remedies provided under the Local Government Code (LGC) in order to prevent the
public sale of its delinquent properties.
On July 25, 2002, the RTC granted 15 petitioner’s prayer for TRO. Respondent, however,
manifested that when said TRO was served upon him, he had already effected the public
auction of petitioner’s real properties. 16 Thus, petitioner filed a Very Urgent Manifestation
and Motion17 to recall and nullify the auction sale and to order respondent and his counsel to
explain why they should not be held in contempt for their blatant defiance of the TRO. It
also thereafter asserted that respondent is bound by the final Decision rendered in Civil Case
No. 3514 under the principle of res judicata. 18 It maintained that respondent has a shared
interest with the defendants in Civil Case No. 3514 in that they are all interested in the levy,
imposition and collection of real property tax and that the Province of Batangas, including
respondent, is estopped from denying privity because of the Province’s active participation
in both proceedings by virtue of the representation of the same counsel. Petitioner likewise
contended that the declaration in Civil Case No. 3514 that it is exempt from real property tax
for properties used in the operation of its franchise is considered in rem and binds the
property itself.
On August 14, 2002, the RTC issued an Order 19 denying petitioner’s prayer for the issuance of
a Writ of Preliminary Injunction. It held that the issuance of the writ prayed for had already
become moot and academic since the public auction sale sought to be enjoined was already
consummated. It further noted that the writ as a provisional remedy is unavailing to
petitioner’s case as it should have availed of the remedy provided under Section 260 of the
LGC in order to stop the scheduled auction sale, that is, to pay the delinquent tax and
interest due thereon under protest.
Petitioner filed a Joint Motion for Reconsideration and Motion to Declare Null and Void the
Sale Conducted on July 25, 2002 20 which was, however, denied in an Order 21 dated
September 3, 2002. When petitioner elevated the denial to the CA via a Petition for
Certiorari,22 the same was dismissed in a Resolution23 dated November 18, 2002.
Meanwhile, acting on petitioner’s Motion for Judgment on the Pleadings, 24 the RTC
rendered its Decision25 dated July 7, 2003 dismissing petitioner’s Petition for Indirect
Contempt and Prohibition against respondent (Civil Case No. 4051). The RTC ruled that since
respondent was not a party in Civil Case No. 3514, he had no duty to render obedience to the
Decision therein. Furthermore, there being no identity of causes of action between Civil
Case No. 3514 and Civil Case No. 4051, the former being an action in personam, the Decision
in said case binds only the parties impleaded therein and their successors in interest, which
do not include the respondent. The said court refused to rule on petitioner’s claim for
exemption from payment of realty taxes ratiocinating that any case pertaining thereto
should be filed directly with the local government unit concerned.
The dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing, the instant petition is dismissed, with costs against
the petitioner.
IT IS SO ORDERED.26
As petitioner’s Motion for Reconsideration 27 was denied by the RTC in a Resolution 28 dated
September 17, 2004, it appealed to the CA.29
Proceedings before the Court of Appeals
In a Decision30 dated July 24, 2007, the CA found no merit in the appeal. First, it noted that
the dismissal of the case for indirect contempt by the RTC amounted to an acquittal from
which an appeal is not allowed. In any case, respondent’s act of issuing the warrants of levy
did not constitute indirect contempt in Civil Case No. 3514 since the final Decision issued in
said case was not directed against him but to the Mayor and the Chief of the Permit and
License Division of Balayan, Batangas. The CA also concurred with the trial court’s ruling that
petitioner’s claim for tax exemption could not be presented and resolved in an indirect
contempt case and opined that the correct remedy is for petitioner to file an independent
action for annulment of sale against the Province of Batangas and there invoke its
exemption from real property taxes.
The dispositive portion of the Decision reads:
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WHEREFORE, premises considered, the assailed Decision dated July 7, 2003 and the
Resolution dated September 17, 2004, rendered by the Regional Trial Court, Branch XI,
Balayan, Batangas in Civil Case No. 4051 are AFFIRMED.
SO ORDERED.31
Petitioner’s Motion for Reconsideration 32 was denied by the CA in a Resolution 33 dated
October 11, 2007.
Issues
Petitioner, thence, filed this Petition on the following grounds:
(a) The Honorable Court of Appeals erred in ruling that Civil Case No. 4051 is simply a case
for indirect contempt so much [so] that its dismissal by the lower court would amount to
acquittal from which an appeal would not lie;
(b) The Honorable Court of Appeals erred in ruling that respondent, not being a party to Civil
Case No. 3514, cannot be held in contempt for refusing to abide by the decision there[in];
(c) The Honorable Court of Appeals erred in ruling that the claim of Digitel for real property
tax exemption cannot be presented and resolved in the indirect contempt case; and
(d) The Honorable Court of Appeals erred in ruling that the "proper remedy is for Digitel to
file an independent action for annulment of sale against the Province of Batangas, invoking
its exemption from payment of real property taxes.34
Petitioner takes exception to the CA’s ruling that an appeal will not lie since the RTC
Decision essentially amounts to respondent’s acquittal. It posits that the CA can still take
cognizance of the appeal since the same is also a Petition for Prohibition. It is well within the
authority of the said court to rule on the claim for tax exemption like in the case of The City
Government of Quezon City v. Bayan Telecommunications, Inc. 35 wherein the claim for realty
tax exemption of another telecommunications company, Bayantel, was resolved through a
Petition for Prohibition. Petitioner likewise insists that respondent cannot defy the final
ruling in Civil Case No. 3514 and also the pronouncement of this Court in Digital
Telecommunications Philippines, Inc. v. Province of Pangasinan 36 that petitioner is exempted
from paying real property tax. Also, in consonance with said rulings, the sale by public
auction of petitioner’s properties is void ab initio, the same having been made under a
mistaken premise that petitioner’s properties are not exempt from realty taxes. Thus, an
independent action to annul the sale of the properties, contrary to the CA’s intimation, is
not the proper remedy. Petitioner therefore prays for the nullification and setting aside of
the auction sale conducted by respondent against its real properties.
Our Ruling
The Petition has no merit.
Respondent is not guilty of indirect contempt.
At the outset, the Court shall address the issue on double jeopardy as discussed by
petitioner in its Memorandum.
In his Comment, respondent reiterated the CA’s ruling that the RTC Decision amounts to an
acquittal, hence, an appeal does not lie. Arguing against it, petitioner contends that the rule
on double jeopardy will not bar it from pursuing its appeal because this is not a criminal case
and respondent is not tried as an accused.
The Court is not persuaded. Indeed, contempt is not a criminal offense. 37 However, a charge
for contempt of court partakes of the nature of a criminal action. 38 Rules that govern
criminal prosecutions strictly apply to a prosecution for contempt. 39 In fact, Section 11 of
Rule 7140 of the Rules of Court provides that the appeal in indirect contempt proceedings
may be taken as in criminal cases. This Court has held that an alleged contemner should be
accorded the same rights as that of an accused. 41 Thus, the dismissal of the indirect
contempt charge against respondent amounts to an acquittal, which effectively bars a
second prosecution.42
Be that as it may, respondent is not guilty of indirect contempt. "Contempt of court is
defined as a disobedience to the court by acting in opposition to its authority, justice, and
dignity. It signifies not only a willful disregard or disobedience of the court’s order, but such
conduct which tends to bring the authority of the court and the administration of law into
disrepute or, in some manner, to impede the due administration of justice. It is a defiance of
the authority, justice, or dignity of the court which tends to bring the authority and
administration of the law into disrespect or to interfere with or prejudice party-litigants or
their witnesses during litigation."43
In this case, the acts of respondent in issuing the Warrants of Levy and in effecting the
public auction sale of petitioner’s real properties, were neither intended to undermine the
authority of the court nor resulted to disobedience to the lawful orders of Branch IX. He
merely performed a ministerial function which he is bound to perform under Sections 176
and 177 of RA 7160,44 viz:
Section 176. Levy on Real Property. - After the expiration of the time required to pay the
delinquent tax, fee, or charge, real property may be levied on before, simultaneously, or
after the distraint of personal property belonging to the delinquent taxpayer. To this end,
the provincial, city or municipal treasurer, as the case may be, shall prepare a duly
authenticated certificate showing the name of the taxpayer and the amount of the tax, fee,
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or charge, and penalty due from him. Said certificate shall operate with the force of a legal
execution throughout the Philippines. Levy shall be effected by writing upon said certificate
the description of the property upon which levy is made. At the same time, written notice of
the levy shall be mailed to or served upon the assessor and the Register of Deeds of the
province or city where the property is located who shall annotate the levy on the tax
declaration and certificate of title of the property, respectively, and the delinquent taxpayer
or, if he be absent from the Philippines, to his agent or the manager of the business in
respect to which the liability arose, or if there be none, to the occupant of the property in
question.
In case the levy on real property is not issued before or simultaneously with the warrant of
distraint on personal property, and the personal property of the taxpayer is not sufficient to
satisfy his delinquency, the provincial, city or municipal treasurer, as the case may be, shall
within thirty (30) days after execution of the distraint, proceed with the levy on the
taxpayer's real property. .
A report on any levy shall, within ten (10) days after receipt of the warrant, be submitted by
the levying officer to the sanggunian concerned.
Section 177. Penalty for Failure to Issue and Execute Warrant. - Without prejudice to criminal
prosecution under the Revised Penal Code and other applicable laws, any local treasurer
who fails to issue or execute the warrant of distraint or levy after the expiration of the time
prescribed, or who is found guilty of abusing the exercise thereof by competent authority
shall be automatically dismissed from the service after due notice and hearing.
Noteworthy at this point is that there is nothing in the records which would show that
petitioner availed of the tax exemption or submitted the requirements to establish that it is
exempted from paying real property taxes. Section 206 of RA 7160 outlines the
requirements for real property tax exemption, viz.:
Sec. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom
real property is declared, who shall claim tax exemption for such property under this Title
shall file with the provincial, city or municipal assessor within thirty (30) days from the date
of the declaration of real property sufficient documentary evidence in support of such claim
including corporate charters, title of ownership, articles of incorporation, by-laws, contracts,
affidavits, certifications and mortgage deeds, and similar documents.
If the required evidence is not submitted within the period herein prescribed, the property
shall be listed as taxable in the assessment roll. However, if the property shall be proven to
be tax exempt, the same shall be dropped from the assessment roll.
Neither did petitioner avail of the remedy of paying the assessed real property tax under
protest as prescribed in Section 252 45 of RA 7160. Suffice it to say that the availment of these
remedies could have prevented respondent’s issuance of the Warrants of Levy and the
conduct of the subsequent public auction sale of petitioner’s properties. Due to petitioner’s
non-availment of these remedies, respondent therefore remained duty bound to perform
such acts, otherwise, he may be subjected to the penalties prescribed for non-performance
of his ministerial duties as provincial treasurer.
Respondent is not bound by the Decision in Civil Case No. 3514.
Petitioner avers that respondent blatantly defied a final and binding Decision rendered in
Civil Case No. 3514 declaring it exempt from paying taxes on its real properties. It argues that
there is a shared identity of interest between the defendants in Civil Case No. 3514 and
respondent. Therefore, respondent is barred by the Decision in the said case under the
principle of res judicata.
The contention is specious. "Res judicata means ‘a matter adjudged; a thing judicially acted
upon or decided; a thing or matter settled by judgment.’" 46 For res judicata to apply there
must among others be, between the first and the second actions, identity of the parties,
identity of subject matter, and identity of causes of action. 47 Here, there is no identity of
parties between Civil Case No. 3514 and the instant case. "Identity of parties exists ‘where
the parties in both actions are the same, or there is privity between them, or they are
successors-in-interest by title subsequent to the commencement of the action, litigating for
the same thing and under the same title and in the same capacity.’" 48 In Civil Case No. 3514,
the action was directed against Benjamin E. Martinez, Jr. and Francisco P. Martinez in their
capacities as Mayor and Chief of the Permit and License Division of the Municipality of
Balayan, Batangas, respectively. On the other hand, respondent, in the instant case, is being
sued in his capacity as Provincial Treasurer of the Province of Batangas. While the
defendants in both cases similarly sought to enforce the tax obligation of petitioner, they
were sued under different capacities. Moreover, there is no identity in the causes of action
between the two cases. In Civil Case No. 3514, the propriety of the municipal officials’
closure/stoppage of petitioner’s business operation in Balayan, Batangas was the one in
question while what is involved in this case is respondent’s act of issuing Warrants of Levy
and proceeding with the auction sale of the real properties of petitioner. Clearly, the
principle of res judicata does not apply. The RTC and the CA are therefore correct in ruling
that respondent, not being a party thereto, is not bound by the Decision rendered in Civil
Case No. 3514.
Petitioner’s reliance on the rulings in Civil Case No. 3514 and Digital Telecommunications
Philippines, Inc. v. Province of Pangasinan is misplaced.
In support of its prayer to annul the auction sale of its real properties, petitioner heavily
relies on the Decision rendered in Civil Case No. 3514 declaring that it is exempt from paying
real property tax. In addition, it invokes Digital Telecommunications Philippines, Inc. v.
Province of Pangasinan49 wherein it was ruled that petitioner’s real properties located within
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the territorial jurisdiction of Pangasinan that are actually, directly and exclusively used in its
franchise are exempt from realty tax.
As in Civil Case No. 3514, this Court’s Third Division in Digital Telecommunications Philippines,
Inc. v. Province of Pangasinan 50 has interpreted the phrase "exclusive of this franchise" in
the first sentence of Section 5 of RA 7678 as limiting petitioner’s exemption from realty tax
to real properties used in the pursuit of its legislative franchise.1âwphi1 It was then held that
RA 7678 exempted petitioner’s properties that are actually, directly, and exclusively used in
the conduct and operation of its franchise from real property tax.
But this ruling has already been abandoned.
In the later case of Digital Telecommunications Philippines, Inc. v. City Government of
Batangas,51 the Court en banc speaking thru Senior Associate Justice Antonio T. Carpio
pronounced:
Nowhere in the language of the first sentence of Section 5 of RA 7678 does it expressly or
even impliedly provide that petitioner’s real properties that are actually, directly and
exclusively used in its telecommunications business are exempt from payment of realty tax.
On the contrary the first sentence of Section 5 specifically states that the petitioner, as the
franchisee shall pay the ‘same taxes on its real estate, buildings, and personal property
exclusive of this franchise as other persons or corporations are now or hereafter may be
required by law to pay.’
The heading of Section 5 is ‘Tax Provisions,’ not Tax Exemptions. To reiterate, the phrase
‘exemption from real estate tax’ or other words conveying exemption from realty tax do
not appear in the first sentence of Section 5. The phrase ‘exclusive of this franchise’ in the
first sentence of Section 5 merely qualifies the phrase personal property to exclude
petitioner’s legislative franchise, which is an intangible personal property. Petitioner’s
franchise is subject to tax in the second sentence of Section 5 which imposes the ‘franchise
tax.’ Thus, there is no grant of tax exemption in the first sentence of Section 5.
The interpretation of the phrase exclusive of this franchise in the Bayantel and Digitel cases
goes against the basic principle in construing tax exemptions. In PLDT v. City of Davao the
Court held that ‘tax exemptions should be granted only by clear and unequivocal provision
of law on the basis of language too plain to be mistaken. They cannot be extended by mere
implication or inference.’
Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must
point to a specific provision of law conferring on the taxpayer in clear and plain terms,
exemption from a common burden. Any doubt whether a tax exemption exists is resolved
against the taxpayer.52
As things now stand, petitioner s real properties, whether used in the furtherance of its
franchise or not, are subject to real property tax. Hence, its reliance on the rulings in Civil
Case No. 3514 and Digital Telecommunications Philippines Inc. v. Province of
Pangasinan53 becomes unavailing.
WHEREFORE, the Petition is DENIED. The assailed Decision dated July 24, 2007 and the
Resolution dated October 11, 2007 of the Court of Appeals in CA-GR. CR No. 29009 are
AFFIRMED.
SO ORDERED.
LOCAL AND REAL PROPERTY TAXATION
G.R. No. 196278 June 17, 2015
CE CASECNAN WATER and ENERGY COMPANY, INC., Petitioner,
vs.
THE PROVINCE OF NUEVA ECIJA, THEOFFICEOFTHEPROVINCIAL ASSESSOR OF NUEVA
ECIJA, and THEOFFICEOFTHEPROVINCIAL TREASURER OF NUEVA ECIJA, as represented by
HON. AURELIO UMALI, HON. FLORANTE FAJARDO and HON. EDILBERTO PANCHO,
respectively, or their lawful successors,Respondents,
NATIONAL IRRIGATION ADMINISTRATION and DEPARTMENT OF FINANCE, As Necessary
Parties.
Remedial Law; Civil Procedure; Jurisdiction; Jurisdiction over the subject matter is required
for a court to act on any controversy.—Jurisdiction over the subject matter is required for a
court to act on any controversy. It is conferred by law and not by the consent or waiver
upon a court. As such, if a court lacks jurisdiction over an action, it cannot decide the case on
the merits and must dismiss it.
Same; Same; Same; Court of Tax Appeals; This expanded jurisdiction of the Court of Tax
Appeals (CTA) includes its exclusive appellate jurisdiction to review by appeal the
decisions, orders or resolutions of the Regional Trial Court (RTC) in local tax cases
originally decided or resolved by the RTC in the exercise of its original or appellate
jurisdiction.—With respect to the CTA, its jurisdiction was expanded and its rank elevated to
that of a collegiate court with special jurisdiction by virtue of Republic Act No. 9282. This
expanded jurisdiction of the CTA includes its exclusive appellate jurisdiction to review by
appeal the decisions, orders or resolutions of the RTC in local tax cases originally decided or
resolved by the RTC in the exercise of its original or appellate jurisdiction.
124
Same; Same; Same; Same; In the recent case of City of Manila v. Grecia-Cuerdo, 715 SCRA
182 (2014), the Supreme Court (SC)ruled that the Court of Tax Appeals (CTA) likewise has
the jurisdiction to issue writs of certiorari or to determine whether there has been grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of the Regional
Trial Court (RTC) in issuing an interlocutory order in cases falling within the CTA’s exclusive
appellate jurisdiction.—In the recent case of City of Manila v. Grecia-Cuerdo, 715 SCRA 182
(2014), the Court ruled that the CTA likewise has the jurisdiction to issue writs of certiorari or
to determine whether there has been grave abuse of discretion amounting to lack or excess
of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within
the CTA’s exclusive appellate jurisdiction.
Same; Same; Same; Same; It is settled that it is the Court of Tax Appeals (CTA) which has
exclusive jurisdiction over a special civil action for certiorari assailing an interlocutory
order issued by the Regional Trial Court (RTC) in a local tax case.—It is settled that it is the
CTA which has exclusive jurisdiction over a special civil action for certiorari assailing an
interlocutory order issued by the RTC in a local tax case.
Interlocutory Orders; Certiorari; Local Taxation; Court of Tax Appeals; Jurisdiction; A
certiorari petition questioning an interlocutory order issued in a local tax case falls under
the jurisdiction of the Court of Tax Appeals (CTA).—No doubt, the injunction case before
the RTC is a local tax case. And as earlier discussed, a certiorari petition questioning an
interlocutory order issued in a local tax case falls under the jurisdiction of the CTA. Thus, the
CA correctly dismissed the Petition for Certiorari before it for lack of jurisdiction. CE
Casecnan Water and Energy Company, Inc. vs. Province of Nueva Ecija, 759 SCRA 180, G.R.
No. 196278 June 17, 2015
DECISION
DEL CASTILLO, J.:
The Court of Tax Appeals (CTA) has exclusive jurisdiction over a special civil action for
certiorari assailing an interlocutory order issued by the Regional Trial Court (RTC) in a local
tax case.
This Petition for Review on Certiorari 1 assails the November 2, 2010 Decision 2 of the Court of
Appeals (CA) in CA-GR SP No. 108441 which dismissed for lack of jurisdiction the Petition for
Certiorari of petitioner CE Casecnan Water and Energy Company, Inc.(petitioner) against the
Province of Nueva Ecija, the Office of the Provincial Assessor of Nueva Ecija (Office of the
Provincial Assessor) and the Office of the Provincial Treasurer of Nueva Ecija (Office of the
Provincial Treasurer) (respondents). Also assailed is the March 24, 2011 Resolution 3 of the CA
denying petitioner’s Motion for Reconsideration.4
Factual Antecedents
On June 26, 1995, petitioner and the National Irrigation Administration (NIA) entered into a
build-operate-transfer (BOT) contract known as the "Amended and Restated Casecnan
Project Agreement"5 (Casecnan Contract) relative to the construction and development of
the Casecnan Multi-Purpose Irrigation and Power Project (Casecnan Project) in
Pantabangan, Nueva Ecija and Alfonso Castaneda, Nueva Vizcaya. The Casecnan Project is a
combined irrigation and hydroelectric power generation facility using the Pantabangan Dam
in Nueva Ecija. On September 29, 2003, petitioner and NIA executed a Supplemental
Agreement6 amending Article II of the Casecnan Contract which pertains to payment of
taxes. Article 2.2 thereof states that NIA must reimburse petitioner for real property taxes
(RPT) provided the same was paid upon NIA’s directive and with the concurrence of the
Department of Finance.
On September 6, 2005, petitioner received from the Office of the Provincial Assessor a
Notice of Assessment of Real Property dated August 2, 2005, which indicates that for the
years 2002 to 2005, its RPT due was 248,676,349.60. Petitioner assailed the assessment with
the Nueva Ecija Local Board of Assessment Appeals (Nueva Ecija LBAA) which dismissed it
on January 26, 2006. Undeterred, petitioner filed a Notice of Appeal with the Nueva Ecija
Central Board of Assessment Appeals (Nueva Ecija CBAA). During the pendency thereof,
respondents collected from petitioner the RPT due under the said assessment as well as
those pertaining to the years 2006 up to the second quarter of 2008, totalling
₱363,703,606.88. Petitioner paid the assessed RPT under protest; it also initiated
proceedings questioning the validity of the collection with respect to the years 2006 up to
the second quarter of 2008. Thereafter, petitioner received a letter 7 dated July 9, 2008 from
the Office of the Provincial Treasurer stating that it has RPT in arrears for the years 2002 up
to the second quarter of 2008 amounting to ₱1,277,474,342.10. Petitioner received another
letter8 dated August 29, 2008 from the same office clarifying that its arrearages in RPT
actually amounted to ₱1,279,997,722.70 (2008 RPT Reassessment). Again, petitioner
questioned this assessment through an appeal before the Nueva Ecija LBAA. While the same
was pending, petitioner received from respondents a letter dated September 10, 2008
demanding payment for its alleged RPT arrearages.
Hence, on September 23, 2008, petitioner filed with the RTC of San Jose City, Nueva Ecija a
Complaint9 for injunction and damages with application for temporary restraining order
(TRO) and preliminary injunction10 praying to restrain the collection of the 2008 RPT
Reassessment. Petitioner emphasized, among others, that it was not the one which should
pay the taxes but NIA.
Ruling of the Regional Trial Court
On September 24, 2008, the RTC denied petitioner’s application for a 72-hour
TRO.11 Meanwhile, petitioner received from the Office of the Provincial Treasurer a letter
dated September 22, 2008 further demanding payment for RPT covering the third quarter of
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2008 (2008-3Q Assessment). Thus, petitioner filed on September 29, 2008 an Amended
Complaint12 asking the RTC to likewise enjoin respondents from collecting RPT based on the
2008-3Q Assessment in the amount of ₱53,346,755.18.
On October 2, 2008, the RTC issued a 20-day TRO13 enjoining respondents from collecting
from petitioner the RPT covered by the 2008 RPT Reassessment amounting to
₱1,279,997,722.70, including surcharges and penalties.
Subsequently, however, the RTC denied petitioner’s application for writ of preliminary
injunction in its Order14 of October 24, 2008.It also denied petitioner’s Motion for
Reconsideration thereof in an Order15 dated January 30, 2009.
On April 24, 2009, petitioner filed with the CA a Petition for Certiorari under Rule 65 of the
16
Rules of Court seeking to annul and set aside the aforementioned October 24, 2008 and
January 30, 2009 RTC Orders.
Ruling of the Court of Appeals
In its November 2, 2010 Decision, the CA observed that the Petition for Certiorari before it
17
was actually an offshoot of the 2008 RPT Reassessment. And since in resolving the issue of
whether the RTC committed grave abuse of discretion in denying petitioner’s application for
a writ of preliminary injunction, the issue of the validity of the assessment and the collection
of the RPT against petitioner must also be resolved, thus jurisdiction over the case lies
within the Court of Tax Appeals (CTA).Hence, the CA ruled:
WHEREFORE, premises considered, the Petition for Certiorari is hereby DENIED DUE
COURSE and accordingly, DISMISSED for lack of jurisdiction.
SO ORDERED.18
Petitioner sought reconsideration; however, it was denied in a Resolution 19 dated March 24,
2011.
Undaunted, petitioner filed this Petition imputing upon the CA grave error in:
x x x ruling that it is the Court of Tax Appeals (and not the Court of Appeals) which has
jurisdiction over the CA Injunction Case. 20
Petitioner’s Arguments
In its Petition21 and Reply,22 petitioner argues that it is the CA, not the CTA, which has
jurisdiction over the subject matter of its Petition for Certiorari. Petitioner maintains that its
petition relates to an ordinary civil action for injunction and not to a local tax case. It insists
that in both the RTC injunction case and the Petition for Certiorari before the CA, petitioner
was not protesting respondents’ assessment of RPT against it; what it was seeking was
respondents’ enjoinment from committing or continuing to commit acts that would
probably violate its right. In particular, petitioner points out that the RTC injunction case was
intended to enjoin respondents from collecting payment during the pendency of the case
with the LBAA challenging the validity of the 2008 RPT Reassessment. Petitioner explains
that the said injunction case was filed with the RTC because the LBAA has no injunctive
power.
Respondents’ Arguments
In their Comment,23 respondents argue that in resolving the issue on the propriety of issuing
a writ of injunction, the CA will have to inevitably pass upon the propriety of the assessment
of RPT on the Casecnan Project, a local tax matter which is within the jurisdiction of the CTA.
Respondents also echo the CA pronouncement that petitioner failed to exhaust
administrative remedies with respect to the assessment and collection of RPT.
Our Ruling
There is no merit in the Petition.
It is the CTA which has the power to rule
on a Petition for Certiorari assailing an
interlocutory order of the RTC relating
to a local tax case.
Jurisdiction over the subject matter is required for a court to act on any controversy. It is
conferred by law and not by the consent or waiver upon a court. As such, if a court lacks
jurisdiction over an action, it cannot decide the case on the merits and must dismiss it. 24
With respect to the CTA, its jurisdiction was expanded and its rank elevated to that of a
collegiate court with special jurisdiction by virtue of Republic Act No. 9282. 25 This expanded
jurisdiction of the CTA includes its exclusive appellate jurisdiction to review by appeal the
decisions, orders or resolutions of the RTC in local tax cases originally decided or resolved by
the RTC in the exercise of its original or appellate jurisdiction. 26
In the recent case of City of Manila v. Grecia-Cuerdo, 27 the Court ruled that the CTA likewise
has the jurisdiction to issue writs of certiorari or to determine whether there has been grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in
issuing an interlocutory order in cases falling within the CTA’s exclusive appellate
jurisdiction, thus:
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The foregoing notwithstanding, while there is no express grant of such power, with respect
to the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial
power shall be vested in one Supreme Court and in such lower courts as may be established
by law and that judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to
determine whether or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that the
power of the CTA includes that of determining whether or not there has been grave abuse
of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax
court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to
issue writs of certiorari in these cases.28 (Citations omitted and emphasis supplied)
Further, the Court in City of Manila, citing J. M. Tuason & Co., Inc. v. Jaramillo, 29 De Jesus v.
Court of Appeals,30 as well as the more recent cases of Galang, Jr. v. Hon. Judge
Geronimo31 and Bulilis v. Nuez,32 held that:
Consistent with the above pronouncement, this Court has held as early as the case of J.M.
Tuason & Co., Inc. v. Jaramillo, et al. that ‘if a case may be appealed to a particular court or
judicial tribunal or body, then said court or judicial tribunal or body has jurisdiction to issue
the extraordinary writ of certiorari, in aid of its appellate jurisdiction.’ This principle was
affirmed in De Jesus v. Court of Appeals, where the Court stated that ‘a court may issue a
writ of certiorari in aid of its appellate jurisdiction if said court has jurisdiction to review, by
appeal or writ of error, the final orders or decisions of the lower court.’ The rulings in J.M.
Tuason and De Jesus were reiterated in the more recent cases of Galang, Jr. v. Geronimo and
Bulilis v. Nuez.
Furthermore, Section 6, Rule 135 of the present Rules of Court provides that when by law,
jurisdiction is conferred on a court or judicial officer, all auxiliary writs, processes and other
means necessary to carry it into effect may be employed by such court or officer. 33 (Citations
omitted)
Anent petitioner’s contention that it is the CA which has jurisdiction over a certiorari petition
assailing an interlocutory order issued by the RTC in a local tax case, the Court had this to
say: If this Court were to sustain petitioners’ contention that jurisdiction over their certiorari
petition lies with the CA, this Court would be confirming the exercise by two judicial bodies,
the CA and the CTA, of jurisdiction over basically the same subject matter – precisely the
split-jurisdiction situation which is anathema to the orderly administration of justice. The
Court cannot accept that such was the legislative motive, especially considering that the law
expressly confers on the CTA, the tribunal with the specialized competence over tax and
tariff matters, the role of judicial review over local tax cases without mention of any other
court that may exercise such power. Thus, the Court agrees with the ruling of the CA that
since appellate jurisdiction over private respondents’ complaint for tax refund is vested in
the CTA, it follows that a petition for certiorari seeking nullification of an interlocutory order
issued in the said case should, likewise, be filed with the same court. To rule otherwise
would lead to an absurd situation where one court decides an appeal in the main case while
another court rules on an incident in the very same case.
xxxx
A grant of appellate jurisdiction implies that there is included in it the power necessary to
exercise it effectively, to make all orders that will preserve the subject of the action, and to
give effect to the final determination of the appeal. It carries with it the power to protect
that jurisdiction and to make the decisions of the court thereunder effective. The court, in
aid of its appellate jurisdiction, has authority to control all auxiliary and incidental matters
necessary to the efficient and proper exercise of that jurisdiction. For this purpose, it may,
when necessary, prohibit or restrain the performance of any act which might interfere with
the proper exercise of its rightful jurisdiction in cases pending before it. 34 (Citations omitted
and emphasis supplied) Given these, it is settled that it is the CTA which has exclusive
jurisdiction over a special civil action for certiorari assailing an interlocutory order issued by
the RTC in a local tax case.
The RTC injunction case is a local tax >case.
In maintaining that it is the CA that has jurisdiction over petitioner’s certiorari petition, the
latter argues that the injunction case it filed with the RTC is not a local tax case but an
ordinary civil action. It insists that it is not protesting the assessment of RPT against it but
only prays that respondents be enjoined from collecting the same.
The Court finds, however, that in praying to restrain the collection of RPT, petitioner also
implicitly questions the propriety of the assessment of such RPT.1awp++i1 This is because in
ruling as to whether to restrain the collection, the RTC must first necessarily rule on the
propriety of the assessment. In other words, in filing an action for injunction to restrain
collection, petitioner was in effect also challenging the validity of the RPT assessment. As
aptly discussed by the CA:
x x x [T]he original action filed with the RTC is one for Injunction, with an application for
Temporary Restraining Order and a Writ of Preliminary Injunction to enjoin the province of
Nueva Ecija from further collecting the alleged real property tax liability assessed against it.
Simply because the action is an application for injunctive relief does not necessarily mean
that it may no longer be considered as a local tax case. The subject matter and the issues,
not the name or designation of the remedy, should control. While an ancillary action for
injunction may not be a main case, the court [still has] to determine, even in a preliminary
matter, the applicable tax laws, rules and jurisprudence. x x x 35
127
Moreover, in National Power Corporation v. Municipal Government of Navotas, 36 as well as
in City of Lapu-Lapu v. Philippine Economic Zone Authority, 37 this Court already held that
local tax cases include RPT.

No doubt, the injunction case before the RTC is a local tax case. And as earlier discussed, a
certiorari petition questioning an interlocutory order issued in a local tax case falls under the
jurisdiction of the CT A. Thus, the CA correctly dismissed the Petition for Certiorari before it
for lack of jurisdiction.
DOCUMENTARY STAMP TAX
WHEREFORE, the Petition is DENIED. The November 2, 2010 Decision and March 24, 2011
Resolution of the Court of Appeals in CA-G.R. SP No.108441 are AFFIRMED.
G.R. No. 180390 July 27, 2011

SO ORDERED.
PRUDENTIAL BANK, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Taxation; Banks and Banking; Certificate of Deposit; Definition of a Certificate of Deposit.

—A certificate of deposit is defined as “a written acknowledgment by a bank or banker of
the receipt of a sum of money on deposit which the bank or banker promises to pay to the
depositor, to the order of the depositor, or to some other person or his order, whereby the
relation of debtor and creditor between the bank and the depositor is created.”

Same; Same; Same; A document to be considered a certificate of deposit need not be in a

specific form.—The fact that the SAP is evidenced by a passbook likewise cannot remove its
coverage from Section 180 of the old NIRC, as amended. A document to be considered a
certificate of deposit need not be in a specific form. Thus, a passbook issued by a bank
qualifies as a certificate of deposit drawing interest because it is considered a written
acknowledgement by a bank that it has accepted a deposit of a sum of money from a
depositor. Prudential Bank vs. Commissioner of Internal Revenue, 654 SCRA 702, G.R. No.
180390 July 27, 2011

DECISION

DEL CASTILLO, J.:

A certificate of deposit need not be in a specific form; thus, a passbook of an interest-

earning deposit account issued by a bank is a certificate of deposit drawing interest. 1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the
Decision3 dated March 30, 2007 and the Resolution4 dated October 30, 2007 of the Court of
Tax Appeals (CTA) in CTA EB No. 185.

128
Factual Antecedents GRAND TOTAL ₱18,982,734.387

Petitioner Prudential Bank5 is a banking corporation organized and existing under Philippine
law.6 On July 23, 1999, petitioner received from the respondent Commissioner of Internal
Revenue (CIR) a Final Assessment Notice No. ST-DST-95-0042-99 and a Demand Letter for
deficiency Documentary Stamp Tax (DST) for the taxable year 1995 on its Repurchase
Agreement with the Bangko Sentral ng Pilipinas [BSP], Purchase of Treasury Bills from the
BSP, and on its Savings Account Plus [SAP] product, in the amount of ₱18,982,734.38,
broken down as follows:
a. Repurchase Agreement — BSP Seller
1,656,000,000.00
Basic x .30 ₱2,484,000.00
200
Petitioner protested the assessment on the ground that the documents subject matter of
the assessment are not subject to DST. 8 However, respondent denied9 the protest on
December 28, 2001.
Thus, petitioner filed a Petition for Review before the CTA which was raffled to its First
Division and docketed as CTA Case No. 6396.10
Ruling of the First Division of the Court of Tax Appeals
On February 10, 2006, the First Division of the CTA affirmed the assessment for deficiency
DST insofar as the SAP is concerned, but cancelled and set aside the assessment on
petitioner’s repurchase agreement and purchase of treasury bills 11 with the BSP. Thus, it
disposed of the case as follows:

WHEREFORE, the instant petition is hereby PARTIALLY GRANTED. The subject Decision of
Add: 25% Surcharge 621,000.00
the Commissioner of Internal Revenue dated December 28, 2001 assessing petitioner of
deficiency documentary stamp taxes is hereby AFFIRMED insofar as the Savings Account
Compromise Penalty 25,000.00 ₱3,130,000.00 Plus is concerned. The deficiency assessment on petitioner's repurchase agreements and
treasury bills are hereby CANCELLED and SET ASIDE.
b. Purchase of [Treasury] Bills from BSP
Accordingly, petitioner is hereby ORDERED TO PAY respondent the reduced amount of
5,038,610,000.00 ₱6,355,340.63 plus 20% delinquency interest from August 23, 1999 up to the time such
Basic x .30 ₱7,557,915.00 amount is fully paid pursuant to Section 249 (c) of the [old] NIRC, as amended, covered by
200 Assessment Notice No. ST-DST-95-0042-99 as deficiency documentary stamp tax for the
taxable year 1995, recomputed as follows:

Add: 25% Surcharge 1,889,478.75

Savings Account Plus ₱5,084,272.50
Compromise Penalty 25,000.00 ₱9,472,393.75 Add: 25% Surcharge 1,271,068.13

c. Savings Account Plus (page 1307 of the docket)

TOTAL ₱6,355,340.63

3,389,515,000.00
Basic x .30 ₱5,084,272.50
200 SO ORDERED.12

Petitioner moved for partial reconsideration but the same was denied by the First Division of
Add: 25% Surcharge 1,271,068.13
the CTA in its Resolution dated May 22, 2006. 13

Compromise Penalty 25,000.00 ₱6,380,340.63

Thus, petitioner appealed to the CTA En Banc.

129
Ruling of the Court of Tax Appeals En Banc
On March 30, 2007, the CTA En Banc denied the appeal for lack of merit. It affirmed the ruling
of its First Division that petitioner’s SAP is a certificate of deposit bearing interest subject to
DST under Section 180 of the old National Internal Revenue Code (NIRC), as amended by
Republic Act (RA) No. 7660.14
Petitioner sought reconsideration but later moved to withdraw the same in view of its
availment of the Improved Voluntary Assessment Program (IVAP) pursuant to Revenue
Regulation (RR) No. 18-200615 in relation to RR No. 15-200616 and Revenue Memorandum
Order (RMO) No. 23-2006.17
On October 30, 2007, the CTA En Banc rendered a Resolution 18 denying petitioner’s motion
to withdraw for non-compliance with the requirements for abatement. It found that the
amount paid for purposes of the abatement program was not in accordance with Revenue
Memorandum Circular (RMC) No. 66-2006,19 which provides that the amount to be paid
should be based on the original assessment or the court’s decision, whichever is higher. 20 It
also noted that petitioner failed to comply with RMO No. 23-2006, specifically with the
requirement to submit the letter of termination and authority to cancel assessment signed
by the respondent.21 In the same Resolution, the CTA En Banc denied petitioner’s motion for
reconsideration for lack of merit.22
Issues
Hence, the present recourse by petitioner raising the following issues:
I.
WHETHER X X X PETITIONER’S [SAP] WITH A HIGHER INTEREST IS SUBJECT TO
DOCUMENTARY STAMP TAX.
II.
WHETHER X X X THE CTA EN BANC ERRED IN NOT ALLOWING THE WITHDRAWAL OF
THE PETITION AND/OR CANCELLATION OF THE DST ASSESSMENT ON PETITIONER’S
[SAP] ON THE GROUND THAT PETITIONER HAD ALREADY PAID AND
SUBSTANTIALLY COMPLIED WITH RR NO. 15-2006 AND RMO NO. 23-2006.23
Petitioner’s Arguments
Petitioner contends that its SAP is not subject to DST because it is not included in the list of
documents under Section 180 of the old NIRC, as amended. 24 Petitioner insists that unlike a
time deposit, its SAP is evidenced by a passbook and not by a deposit certificate. 25 In
addition, its SAP is payable on demand and not on a fixed determinable future. 26 To support
its position, petitioner relies on the legislative intent of the law prior to Republic Act (RA)
No. 924327 and the historical background of the taxability of certificates of deposit. 28
Petitioner further contends that even assuming that its SAP is subject to DST, the CTA En
Banc nonetheless erred in denying petitioner’s withdrawal of its petition considering that it
has paid under the IVAP the amount of ₱5,084,272.50, which it claims is 100% of the basic tax
of the original assessment of the Bureau of Internal Revenue (BIR). 29 Petitioner insists that
the payment it made should be deemed substantial compliance considering the refusal of
the respondent to issue the letter of termination and authority to cancel assessment. 30
Respondent’s Arguments
Respondent maintains that petitioner’s SAP is subject to DST conformably with the ruling in
International Exchange Bank v. Commissioner of Internal Revenue. 31 It also contends that
the CTA En Banc correctly denied the motion to withdraw since petitioner failed to comply
with the requirements of the IVAP. 32 Mere payment of the deficiency DST cannot be deemed
substantial compliance as tax amnesty, like tax exemption, must be construed strictly
against the taxpayer.33
Our Ruling
The petition lacks merit.
Petitioner’s Savings Account Plus is subject to Documentary Stamp Tax.
DST is imposed on certificates of deposit bearing interest pursuant to Section 180 of the old
NIRC, as amended, to wit:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest and others not payable on sight or
demand. – On all loan agreements signed abroad wherein the object of the contract is
located or used in the Philippines; bills of exchange (between points within the Philippines),
drafts, instruments and securities issued by the Government or any of its instrumentalities
or certificates of deposits drawing interest, or orders for the payment of any sum of money
otherwise than at the sight or on demand, or on all promissory notes, whether negotiable or
non-negotiable, except bank notes issued for circulation, and on each renewal of any such
note, there shall be collected a documentary stamp tax of Thirty centavos (₱0.30) on each
Two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill
of exchange, draft, certificate of deposit, or note: Provided, That only one documentary
stamp tax shall be imposed on either loan agreement, or promissory note issued to secure
such loan, whichever will yield a higher tax: provided, however, that loan agreements or
130
promissory notes the aggregate of which does not exceed Two hundred fifty thousand
pesos (₱250,000.00) executed by an individual for his purchase on installment for his
personal use or that of his family and not for business, resale, barter or hire of a house, lot,
motor vehicle, appliance or furniture shall be exempt from the payment of the documentary
stamp tax provided under this section. (Emphasis supplied.)
A certificate of deposit is defined as "a written acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the bank or banker promises to pay to the
depositor, to the order of the depositor, or to some other person or his order, whereby the
relation of debtor and creditor between the bank and the depositor is created." 34
In this case, petitioner claims that its SAP is not a certificate of deposit bearing interest
because unlike a time deposit, its SAP is payable on demand and is evidenced by a passbook
and not by a certificate of deposit.
We do not agree.
In China Banking Corporation v. Commissioner of Internal Revenue, 35 we held that the Savings
Plus Deposit Account, which has the following features:
1. Amount deposited is withdrawable anytime;
2. The same is evidenced by a passbook;
3. The rate of interest offered is the prevailing market rate, provided the depositor
would maintain his minimum balance in thirty (30) days at the minimum, and should
he withdraw before the period, his deposit would earn the regular savings deposit
rate;
is subject to DST as it is essentially the same as the Special/Super Savings Deposit Account
in Philippine Banking Corporation v. Commissioner of Internal Revenue, 36 and the Savings
Account-Fixed Savings Deposit in International Exchange Bank v. Commissioner of Internal
Revenue,37 which are considered certificates of deposit drawing interests.38
Similarly, in this case, although the money deposited in a SAP is payable anytime, the
withdrawal of the money before the expiration of 30 days results in the reduction of the
interest rate.39 In the same way, a time deposit withdrawn before its maturity results to a
lower interest rate and payment of bank charges or penalties.40
The fact that the SAP is evidenced by a passbook likewise cannot remove its coverage from
Section 180 of the old NIRC, as amended. A document to be considered a certificate of
deposit need not be in a specific form. 41 Thus, a passbook issued by a bank qualifies as a
certificate of deposit drawing interest because it is considered a written acknowledgement
by a bank that it has accepted a deposit of a sum of money from a depositor. 421avvphi1
In view of the foregoing, we find that the CTA En Banc correctly affirmed the ruling of its
First Division that petitioner’s SAP is a certificate of deposit bearing interest and that the
same is subject to DST.
The CTA En Banc’s denial of petitioner’s motion to withdraw is proper.
The CTA En Banc denied petitioner’s motion to withdraw because it failed
to show that it was able to comply with the requirements of IVAP.
To avail of the IVAP, a taxpayer must pay the 100% basic tax of the original assessment of the
BIR or the CTA Decision, whichever is higher 43 and submit the letter of termination and
authority to cancel assessment signed by the respondent. 44 In this case, petitioner failed to
submit the letter of termination and authority to cancel assessment as respondent found
the payment of ₱5,084,272.50 not in accordance with RMC No. 66-2006. Hence, we find no
error on the part of the CTA En Banc in denying petitioner’s motion to withdraw.
Petitioner’s payment of ₱5,084,272.50, without the supporting documents, cannot be
deemed substantial compliance as tax amnesty must be construed strictly against the
taxpayer and liberally in favor of the taxing authority. 45 Nevertheless, the amount of
₱5,084,272.50 paid by petitioner to the BIR must be considered as partial payment of
petitioner’s tax liability.
WHEREFORE, the petition is hereby DENIED. The assailed Decision dated March 30, 2007 and
the Resolution dated October 30, 2007 of the Court of Tax Appeals in CTA EB No. 185 are
hereby AFFIRMED with MODIFICATION that petitioner Prudential Bank’s payment be
considered as partial payment of its tax liability.
SO ORDERED.
131
DOCUMENTARY STAMP TAX

G.R. No. 175188 July 15, 2015

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
LA TONDENA DISTILLERS, INC. (LTDI [now GINEBRA SAN MIGUEL], Respondent.

Remedial Law; Civil Procedure; Judgments; Stare Decisis; The doctrine of stare decisis
dictates that when a court has reached a conclusion in one case, it should be applied to
those that follow if the facts are substantially the same, even though the parties may be
different.—Following the doctrine of stare decisis, which dictates that when a court has
reached a conclusion in one case, it should be applied to those that follow if the facts are
substantially the same, even though the parties may be different, we find that respondent is
not liable for DST as the transfer of real properties from the absorbed corporations to
respondent was pursuant to a merger. And having complied with the provisions of Sections
204(C) and 229 of the NIRC, we agree with the CTA that respondent is entitled to a refund of
the DST it erroneously paid on various dates between October 31, 2001 to November 15, 2001
in the total amount of P14,140,980.00.

Taxation; Tax laws must be construed strictly against the State and liberally in favor of the
taxpayer.—In closing, we must stress that taxes must not be imposed beyond what the law
expressly and clearly declares as tax laws must be construed strictly against the State and
liberally in favor of the taxpayer. Commissioner of Internal Revenue vs. La Tañeda Distillers,
Inc. (LTDI [now Ginebra San Miguel, 762 SCRA 636, G.R. No. 175188 July 15, 2015

DECISION

132
DEL CASTILLO, J.: On October 14, 2003, claiming that it is exempt from paying DST, respondent filed with
petitioner Commissioner of Internal Revenue (CIR) an administrative claim for tax refund or
The transfer of real property to a surviving corporation pursuant to a merger is not subject tax credit in the amount of 14,140,980.00, representing the DST it allegedly erroneously paid
to Documentary Stamp Tax (DST).1 on the occasion of the merger.17

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the
September 26, 2006 Decision 3 and the October 31, 2006 Resolution 4 of the Court of Tax
Appeals (CTA) in C.T.A. EB No. 178.
Factual Antecedents
On September 17, 2001, respondent La Tondeña Distillers, Inc. entered into a Plan of
Merger5 with Sugarland Beverage Corporation (SBC), SMC Juice, Inc. (SMCJI), and Metro
Bottled Water Corporation (MBWC).6 As a result of the merger, the assets and liabilities of
the absorbed corporations were transferred to respondent, the surviving
corporation.7 Respondent later changed its corporate name to Ginebra San Miguel, Inc.
(GSMI).8
On September 26, 2001, respondent requested for a confirmation of the tax-free nature of
the said merger from the Bureau of Internal Revenue (BIR).9
On November 5, 2001, the BIR issued a ruling stating that pursuant to Section 40(C)(2) 10 and
(6)(b)11 of the 1997 National Internal Revenue Code (NIRC), no gain or loss shall be
recognized by the absorbed corporations as transferors of all assets and
liabilities.12 However, the transfer of assets, such as real properties, shall be subject to DST
imposed under Section 19613 of the NIRC.14
On the same day, respondent filed with the CTA a Petition for Review, docketed as C.T.A.
Case No. 6796 and raffled to the Second (2nd) Division of the CTA.18
Ruling of the Court of Tax Appeals Division
On January 6, 2006, the 2nd Division of the CTA rendered a Decision 19 finding respondent
entitled to its claim for tax refund or tax credit in the amount of 14,140,980.00, representing
its erroneously paid DST for the taxable year 2001. 20 The 2nd Division of the CTA ruled that
Section 196 of the NIRC does not apply because there is no purchaser or buyer in the case of
a merger.21 Citing Section 8022 of the Corporation Code of the Philippines, the 2nd Division of
the CTA explained that the assets of the absorbed corporations were not bought or
purchased by respondent but were transferred to and vested in respondent as an inherent
legal consequence of the merger, without any further act or deed. 23 It also noted that any
doubts as to the tax-free nature of the merger had been already removed by the
subsequent enactment of Republic Act No. (RA) 9243, 24 which amended Section 19925 of the
NIRC by specifically exempting from the payment of DST the transfer of property pursuant
to a merger.26Aggrieved, petitioner moved for reconsideration but the 2nd Division of the
CTA denied the same in a Resolution dated April 4, 2006. 27
Unfazed, petitioner elevated the matter to the CTA En Banc via a Petition for Review,
docketed as C.T.A.EB No. 178.

Consequently, on various dates from October 31, 2001 to November 15, 2001, respondent Ruling of the Court of Tax Appeals En Banc
paid to the BIR the following DST, to wit:
On September 26, 2006, the CTA En Banc rendered the assailed Decision, finding no
reversible error on the part of the 2nd Division of the CTA in granting respondent’s claim for
Property Locations Total Assets DST Payments
tax refund or tax credit.28 The CTA En Banc opined that Section 196 of the NIRC does not
A. Metro Bottled Water Corp. apply to a merger as the properties subject of a merger are not sold, but are merely
General Trias, Cavite 326,508,953.0015 4,897,635.00 absorbed by the surviving corporation.29 In other words, the properties are transferred by
Mandaue City, Cebu 14,078,381.00 211,185.00 operation of law, without any further act or deed. 30
Pavia, Iloilo 10,644,861.00 159,675.00
Petitioner sought reconsideration of the assailed Decision.
B. Sugarland Beverage Corp.
Navotas, Metro Manila 171,790,790.00 2,576,865.00 On October 31, 2006, the CTA En Banc issued the assailed Resolution, denying petitioner’s
Imus, Cavite 218,114,261.00 3,272,175.00 motion for reconsideration.31
Pine Street, Mandaluyong 201,562,148.00 3,023,445.00
Totals 942,729,393.00 14,140,980.00 16 Issue

133
Hence, petitioner filed the instant Petition for Review on Certiorari raising the sole issue of
whether the CTA En Banc erred in ruling that respondent is exempt from payment of
DST.32 Petitioner’s Arguments
Petitioner posits that DST is levied on the exercise of the privilege to convey real property
regardless of the manner of conveyance.33 Thus, it is imposed on all conveyances of realty,
including realty transfer during a corporate merger. 34 As to the subsequent enactment of RA
9243, petitioner claims that respondent cannot benefit from it as laws apply
prospectively.35 Respondent’s Arguments
Respondent, on the other hand, contends that DST is imposed only on conveyances, deeds,
instruments, or writing, where realty sold shall be conveyed to a purchaser or buyer. 36 In this
case, there is no purchaser or buyer as a merger is neither a sale nor a liquidation of
corporate property but a consolidation of properties, powers, and facilities of the
constituent companies.37
Our Ruling
The Petition must fail.
In Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, 38 the Supreme
Court already ruled that Section 196of the NIRC does not include the transfer of real
property from one corporation to another pursuant to a merger. It explained that:
[W]e do not find merit in petitioner’s contention that Section 196 covers all transfers and
conveyances of real property for a valuable consideration. A perusal of the subject provision
would clearly show it pertains only to sale transactions where real property is conveyed to a
purchaser for a consideration. The phrase "granted, assigned, transferred or otherwise
conveyed" is qualified by the word "sold" which means that documentary stamp tax under
Section 196 is imposed on the transfer of realty by way of sale and does not apply to all
conveyances of real property. Indeed, as correctly noted by the respondent, the fact that
Section 196 refers to words "sold", "purchaser" and "consideration" undoubtedly leads to
the conclusion that only sales of real property are contemplated therein.
Thus, petitioner obviously erred when it relied on the phrase "granted, assigned, transferred
or otherwise conveyed" in claiming that all conveyances of real property regardless of the
manner of transfer are subject to documentary stamp tax under Section 196. It is not proper
to construe the meaning of a statute on the basis of one part. x x x
xxxx
It should be emphasized that in the instant case, the transfer of SPPC’s real property to
respondent was pursuant to their approved plan of merger.1âwphi1 In a merger of two
existing corporations, oneof the corporations survives and continues the business, while the
other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving
corporation. Although there is a dissolution of the absorbed or merged corporations, there
is no winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as their
liabilities. Here, SPPC ceased to have any legal personality and respondent PSPC stepped
into everything that was SPPC’s, pursuant to the law and the terms of their Plan of Merger.
Pertinently, a merger of two corporations produces the following effects, among others:
Sec. 80. Effects of merger or consolidation. – x x x
xxxx
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises of each of the constituent corporations; and
all property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporations, shall be taken and deemed to be
transferred to and vested in such surviving or consolidated corporation without further act
or deed;
In a merger, the real properties are not deemed "sold" to the surviving corporation and the
latter could not be considered as "purchaser" of realty since the real properties subject of
the merger were merely absorbed by the surviving corporation by operation of law and
these properties are deemed automatically transferred to and vested in the surviving
corporation without further act or deed. Therefore, the transfer of real properties to the
surviving corporation in pursuance of a merger is not subject to documentary stamp tax. As
stated at the outset, documentary stamp tax is imposed only on all conveyances, deeds,
instruments or writing where realty sold shall be conveyed to a purchaser or purchasers. The
transfer of SPPC’s real property to respondent was neither a sale nor was it a conveyance of
real property for a consideration contracted to be paid as contemplated under Section 196
of the Tax Code. Hence, Section 196 of the Tax Code is inapplicable and respondent is not
liable for documentary stamp tax.39(Emphasis in the original)
Following the doctrine of stare decisis, which dictates that when a court has reached a
conclusion in one case, it should be applied to those that follow if the facts are substantially
the same, even though the parties may be different, 40 we find that respondent is not liable
for DST as the transfer of real properties from the absorbed corporations to respondent was
pursuant to a merger. And having complied with the provisions of Sections 204(C) 41and
22942 of the NIRC, we agree with the CTA that respondent is entitled to a refund of the DST it
erroneously paid on various dates between October 31, 2001 to November 15, 2001 in the
total amount of 14,140,980.00.
134
Likewise without merit is petitioner’s contention that respondent cannot claim exemption
under RA 9243 as this was enacted only in 2004 or after respondent’s tax liability accrued. To
be clear, respondent did not file its claim for tax refund or tax credit based on the
exemption found in RA 9243. Rather, it filed a claim for tax refund or tax credit on the
ground that Section 196 of the NIRC does not include the transfer of real property pursuant
to a merger. In fact, the ratio decidendi (or reason for the decision) in Pilipinas Shell
Petroleum Corporation43 was based on Section 196 of the NIRC, in relation to Section 80 of
the Corporation Code, not RA 9243. In that case, RA 9243 was mentioned only to emphasize
that "the enactment of the said law now removes any doubt and had made clear that the
transfer of real properties as a consequence of merger or consolidation is not subject to
[DST]."44

All told, we find no error on the part of the CTA in granting respondent's claim for tax refund
or tax credit in the amount of ₱14,140,980.00, representing its erroneously paid DST for the
taxable year 2001.

In closing, we must stress that taxes must not be imposed beyond what the law expressly
and clearly declares as tax laws must be construed strictly against the State and liberally in
favor of the taxpayer.45

WHEREFORE, the Petition is hereby DENIED. The assailed September 26, 2006 Decision and
the October 31, 2006 Resolution of the Court of Tax Appeals in C.T.A. EB No. 178 are hereby
AFFIRMED.

SO ORDERED.

135