G.R. No.

L-21183 September 27, 1968

VICTORIAS MILLING CO., INC., plaintiff-appellant,

vs.
THE MUNICIPALITY OF VICTORIAS, PROVINCE OF NEGROS OCCIDENTAL, defendant-appellant.

This case calls into question the validity of Ordinance No. 1, series of 1956, of the Municipality of Victorias, Negros
Occidental.

The disputed ordinance was approved by the municipal Council of Victorias on September 22, 1956 by way of an
amendment to two municipal ordinances separately imposing license taxes on operators of sugar centrals 1 and
sugar refineries. 2 The changes were: with respect to sugar centrals, by increasing the rates of license taxes; and
as to sugar refineries, by increasing the rates of license taxes as well as the range of graduated schedule of
annual output capacity.

Ordinance No. 1 3 is labeled "An Ordinance Amending Ordinance No. 25, Series of 1953 and Ordinance No. 18,
Series of 1947 on Sugar Central by Increasing the Rates on Sugar Refinery Mill by Increasing the Range of
Graduated Schedule on Capacity Annual Output Respectively". It was, as the ordinance itself states, enacted
pursuant to the taxing power conferred by Commonwealth Act 472. By Section 1 of the Ordinance: "Any person,
corporation or other forms of companies, operating sugar central or engage[d] in the manufacture of centrifugal
sugar shall be required to pay the following annual municipal license tax, payable quarterly, to wit: . . ." Section 1
referred to prescribes a wide range of schedule. It starts with a sugar central with mill having an annual output
capacity of not less than 50,000 piculs of centrifugal sugar, in which case an annual municipal license tax of
P1,000.00 is provided. Depending upon the annual output capacity the schedule of taxes continues with
P2,000.00 progressively upward in twelve other grades until an output capacity of 1,500,001 piculs or more shall
have been reached. For this, the annual tax is P40,000.00. The tax on sugar refineries is likewise calibrated with
similar rates. It also starts with P1,000.00 for a refinery with mill having an annual output capacity of not less than
25,000 bags of 100 lbs. of refined sugar. Then, it continues with the second bracket of from 25,001 bags to 75,000
bags of 100 lbs. Here, the municipal license tax is P1,500.00. Then follow the other rates in the graduated scale
with the ceiling placed at a capacity of 1,750,001 bags or more. The annual municipal license tax for the last
mentioned output capacity is P40,000.00.

Of importance are the provisions of Section 1(m) relating to sugar centrals and Section 2(m) covering sugar
refineries with specific reference to the maximum annual license tax, viz:

Section No. 1 — Any person, corporation or other forms of Companies, operating Sugar Central or
engage[d] in the manufacture of centrifugal sugar shall be required to pay the following annual municipal
license tax, payable quarterly, to wit:

xxx xxx xxx

(m) Sugar Central with mill having a capacity of producing an annual output of from 1,500,001 piculs or
more shall be required to pay an annual municipal license tax of — P40,000.00.

Section No. 2 — Any person, corporation or other forms of Companies shall be required to pay an annual
municipal license tax for the operation of Sugar Refinery Mill at the following rates:

xxx xxx xxx

(m) Sugar Refinery with mill having a capacity of producing an annual output of from 1,750,001 bags of
100 lbs. or more shall be required to pay an annual municipal license tax of — P40,000.00.

For, the production of plaintiff Victorias Milling Co., Inc. in both its sugar central and its sugar refinery located in the
Municipality of Victorias comes within these items in the schedule.

Plaintiff filed suit below 4 to ask for judgment declaring Ordinance No. 1, series of 1956, null and void; ordering the
refund of all license taxes paid and to be paid under protest; directing the officials of Victorias and the Province of
Negros Occidental to observe, during the pendency of the action, the provisions of section 357 of the Revised
Manual of Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 edition, 5 regarding the treatment
of license taxes paid under protest by virtue of a disputed ordinance; and other reliefs. 6

The reasons put forth by plaintiff are that: (a) the ordinance exceeds the amounts fixed in Provincial Circular 12-A
issued by the Finance Department on February 27, 1940; (b) it is discriminatory since it singles out plaintiff which
is the only operator of a sugar central and a sugar refinery within the jurisdiction of defendant municipality; (c) it
constitutes double taxation; and (d) the national government has preempted the field of taxation with respect to
sugar centrals or refineries.

Upon the complaint as supplemented and amended, and the answer thereto, and following hearing on the merits,
the trial court rendered its judgment. After declaring that "[t]here is no doubt that" the ordinance in question refers
to license taxes or fees," and that "[i]t is settled that a license tax should be limited to the cost of licensing,
regulating and surveillance," 7 the trial court ruled that said license taxes in dispute are unreasonable, 8 and held
that: "If the defendant has the power to tax the plaintiff for purposes of revenue, it may do so by proper municipal
legislation, but not in the guise of a license tax." 9 The court added: "The Court is not, however, prepared to order
the refund of all the license taxes paid by the plaintiff under protest and amounting, up to the second quarter of
1960, to P280,000.00, considering that the plaintiff appears to have agreed to the payment of the license taxes at
the rates fixed prior to Ordinance No. 1, series of 1956; that the defendant had evidently not complied with the
provisions of Section 357 of the Revised Manual of Instructions to Treasurers of Provinces, Cities and
Municipalities, 1954 Edition, as the plaintiff herein seeks an order enjoining the defendant and its appropriate
officials to carry out said provisions; that the financial position of the defendant would surely be disrupted if
ordered to refund, while the plaintiff may perhaps easily forego or forget what it had already parted with". 10 It
disposes of the suit in the following manner:

WHEREFORE, judgment is rendered (a) declaring that Ordinance No. 1, series of 1956, of the
municipality of Victorias, Negros Occidental, is invalid; (b) ordering all officials of the defendant to observe
the provisions of Section 357 of the Revised Manual of Instructions to Treasurers of Provinces, Cities and
Municipalities, 1954 Edition, with particular reference to any license taxes paid by the plaintiff under said
Ordinance No. 1, series of 1956, after notice of this decision; and (c) ordering the defendant to refund to
the plaintiff any and all such license taxes paid under protest after notice of this decision. 11

Both plaintiff and defendant appealed direct to this Court. Plaintiff questions that portion of the decision denying
the refund of the license taxes paid under protest in the amount of P280,000 covering the period from the first
quarter of 1957 to the second quarter of 1960; and balked at the court's order limiting refund to "any and all such
license taxes paid under protest after notice of this decision." Defendant, upon the other hand, challenges the
correctness of the court's decision invalidating Ordinance No. 1, series of 1956.

The questions raised in the appeals will be discussed in their proper sequence.

1. We first grapple with the threshold question: Was Ordinance No. 1, series of 1956, passed by defendant's
municipal council as a regulatory enactment or as a revenue measure?

The trial court says, and plaintiff seconds, that the amounts set forth in the ordinance in question did exceed the
cost of licensing, regulating and surveillance, and that defendant cannot impose a tax — for revenue — in the
guise of a police or a regulatory measure. Our finding, however, is the other way.1awphîl.nèt

The ordinance itself recites that its source of taxing power emanates from Commonwealth Act 472, Section 1 of
which reads:

Section 1. A municipal council or municipal district council shall have authority to impose municipal
license taxes upon persons engaged in any occupation or business, or exercising privileges in the
municipality or municipal district, by requiring them to secure licenses at rates fixed by the municipal
council, or municipal district council, and to collect fees and charges for services rendered by the
municipality or municipal district and shall otherwise have power to levy for public local purposes, and for
school purposes, including teachers' salaries, just and uniform taxes other than percentage taxes and
taxes on specified articles.

Under the statute just quoted and pertinent jurisprudence, a municipality is authorized to impose three kinds of
licenses: (1) license for regulation of useful occupations or enterprises; (2) license for restriction or regulation of
non-useful occupations or enterprises; and (3) license for revenue. 12 The first two easily fall within the broad police
power granted under the general welfare clause. 13 The third class, however, is for revenue purposes. It is not a
license fee, properly speaking, and yet it is generally so termed. It rests on the taxing power. That taxing power
must be expressly conferred by statute upon the municipality. 14 It is so granted under Commonwealth Act 472.

To be recalled at this point is that Ordinance No. 1, series of 1956, is but an amendment of Ordinance No. 18,
series of 1947, in reference to refineries, and Ordinance No. 25, series of 1953, covering sugar centrals.
Ordinance No. 18 imposes "municipal taxes on persons, firms or corporations operating refinery mills in this
municipality." 15Ordinance No. 25 speaks of municipal taxes "relative to the output of the sugar centrals." 16

What are these taxes for? Resolution No. 60 of the municipal council of Victorias, 17 adopted also on September
22, 1956 in conjunction with Ordinance No. 1, series of 1956, furnishes a ready answer. It reads in part:

WHEREAS, the Municipal Treasurer informed the Municipal Council of the revenue of the Municipality
and the heavy obligations which confront it because of the implementation of Minimum Wage Law on the
salaries and wages it pays to its municipal employees and laborers thus greatly draining the Municipal
Treasury;

WHEREAS, this local administration is committed to the plan of ameliorating the deplorable situation
existing in the barrios, sitios and rural areas by giving them essential and necessary facilities calculated to
improve conditions thereat thru improvements of roads and feeder roads;

WHEREAS, one of the causes of the municipality's financial difficulty is low rates of municipal taxes
imposed by some of the ordinances enacted by the local legislative body;

WHEREAS, [in] . . . the ordinances known as Ordinance No. 25, Series of 1953, dealing on
the operation of Sugar Central, and Ordinance No. 18, Series of 1947, which exclusively deals with
the operation of Sugar Refinery Mill, the rates so given are rates suggested and determined by the
Provincial Circular No. 12-A, dated February 27, 1940 issued by the Department of Finance as regards to
Sugar Centrals;

WHEREAS, the Municipal Council has come to the conclusion that the rates provided for in such
ordinances are no longer adequate if made in keeping with the present high cost of living;

WHEREAS, the Municipal Council has also taken cognizance of the fact that the price of sugar per picul
today is more than twice its pre-war average price; . . . . 18
Given the purposes just mentioned, we find no warrant in logic to give our assent to the view that the ordinance in
question is solely for regulatory purpose. Plain is the meaning conveyed. The ordinance is for raising money. To
say otherwise is to misread the purpose of the ordinance.1awphîl.nèt

We should not hang so heavy a meaning on the use of the term "municipal license tax". This does not necessarily
connote the idea that the tax is imposed — as the lower court would want it — to mean a revenue measure in the
guise of a license tax. For really, this runs counter to the declared purpose to make money.

Besides, the term "license tax" has not acquired a fixed meaning. It is often "used indiscriminately to designate
impositions exacted for the exercise of various privileges." 19 It does not refer solely to a license for regulation. In
many instances, it refers to "revenue-raising exactions on privileges or activities." 20 On the other hand, license
feesare commonly called taxes. But, legally speaking, the latter are "for the purpose of raising revenues," in
contrast to the former which are imposed "in the exercise of police power for purposes of regulation." 21

We accordingly say that the designation given by the municipal authorities does not decide whether the imposition
is properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as
may be apparent from the provisions of the ordinance. 22 Thus, "[w]hen no police inspection, supervision, or
regulation is provided, nor any standard set for the applicant 23 to establish, or that he agrees to attain or maintain,
but any and all persons engaged in the business designated, without qualification or hindrance, may come, and a
license on payment of the stipulated sum will issue, to do business, subject to no prescribed rule of conduct and
under no guardian eye, but according to the unrestrained judgment or fancy of the applicant and licensee, the
presumption is strong that the power of taxation, and not the police power, is being exercised." 24

Precisely because of these considerations the present imposition must be treated as a levy for revenue purposes.
A quick glance at the big amount of maximum annual tax set forth in the ordinance, P40,000.00 for sugar centrals,
and P40,000.00 for sugar refineries, will readily convince one that the tax is really a revenue tax. And then, we
read in the ordinance nothing which would as much as indicate that the tax imposed is merely for police
inspection, supervision or regulation.

Our view that the tax imposed by the ordinance is for revenue purposes finds support in judicial pronouncements
which have gained foothold in this jurisdiction. In Standard Vacuum vs. Antigua, 25 this Court had occasion to pass
upon a similar ordinance. In categorical terms, we there stated: "We are satisfied that the graduated license tax
imposed by the ordinance in question is an occupation tax, imposed not under the police or regulatory power of
the municipality but by virtue of its taxing power for purposes of revenue, and is in accordance with the last part of
Section 1 of Commonwealth Act No. 472. It is, therefore, valid." 26

The present case is not to be analogized with Panaligan vs. City of Tacloban cited in the decision below. 27 For
there, the inspection fee sought to be collected — upon every head of specified animals to be transported out of
the City of Tacloban (P2.00 per hog, P10.00 per cow and 20.00 per carabao) — was in reality an export tax
specifically withheld from municipal taxing power under Section 2287 of the Revised Administrative Code.

So also do we say that the cases of Pacific Commercial Co. vs. Romualdez, 28 Lacson vs. City of
Bacolod, 29 and Santos vs. Municipal Government of Caloocan, 30 used by plaintiff as references, are entirely
inopposite. In Pacific Commercial, the tax involved — on frozen meat — was nullified because tax measures on
cold stores were not then within the legislative grant to the City of Manila. In Lacson, the City of Bacolod taxed
every admission ticket sold in the moviehouses. And justification for this imposition was moored to the general
welfare clause of the city charter. This Court held the ordinance ultra vires for the reason that the authority to tax
cannot be derived from the general welfare clause. In Santos, the taxes in controversy were internal organs fees,
meat inspection fees and corral fees, separate from the slaughter or slaughterhouse fees. In annulling the taxes
there questioned, this Court declared: "[W]hen the Council ordained the payment of internal organs fees, meat
inspection fees and corral fees, aside from the slaughter or slaughterhouse fees, it overstepped the limits of its
statutory grant [Sec. 1, C.A. 655]. Only one fee was allowed by that law to be charged and that was slaughter or
slaughterhouse fees."

In the cases cited then, the tax ordinances did not find plain and clear statutory prop. Such infirmity is not present
here.

We, accordingly, rule that Ordinance No. 1, series of 1956, of the Municipality of Victorias, was promulgated not in
the exercise of the municipality's regulatory power but as a revenue measure — a tax on occupation or business.
The authority to impose such tax is backed by the express grant of power in Section 1 of Commonwealth Act 472.

2. Not that the disputed ordinance lacks the imprimatur of the Secretary of Finance required in paragraph 2,
Section 4, of Commonwealth Act 472. This legal provision necessitates such approval "[w]henever the rate of fixed
municipal license taxes on businesses not excepted in this Act or otherwise covered by the preceding paragraph
and subject to the fixed annual tax imposed in section one hundred eighty-two of the National Internal Revenue
Law, is in excess of fifty pesos per annum; . . . ."

The ordinance here challenged was recommended by the Provincial Board of Negros Occidental in its resolution
(No. 1864) of October 26, 1956. 31 And, the Undersecretary of Finance in his letter to the municipal council of
Victorias on December 18, 1956 approved said ordinance. But considering that it is amendatory in nature, that
approval was coupled with the mandate that the ordinance "should take effect at the beginning of the ensuing
calendar year [1957] pursuant to Section 2309 of the Revised Administrative Code." 32

3. Plaintiff argues that the municipality is bereft of authority to enact the ordinance in question because the
national government "had preempted it from entering the field of taxation of sugar centrals and sugar
refineries." 33 Plaintiff seeks refuge in Section 189 of the National Internal Revenue Code which subjects
proprietors or operators of sugar centrals or sugar refineries to percentage tax.
The implausibility of this position is at once apparent. We are not dealing here with percentage tax. Rather, we are
concerned with a tax specifically for operators of sugar centrals and sugar refineries. The rates imposed are based
on the maximum annual output capacity. Which is not a percentage. Because it is not a share. Nor is it a tax
based on the amount of the proceeds realized out of the sale of sugar, centrifugal or refined. 34

What can be said at most is that the national government has preempted the field of percentage taxation. Section
1 of Commonwealth Act 472, while granting municipalities power to levy taxes, expressly removes from them the
power to exact "percentage taxes".

It is correct to say that preemption in the matter of taxation simply refers to an instance where the national
government elects to tax a particular area, impliedly withholding from the local government the delegated power to
tax the same field. This doctrine primarily rests upon the intention of Congress. 35 Conversely, should Congress
allow municipal corporations to cover fields of taxation it already occupies, then the doctrine of preemption will not
apply.

In the case at bar, Section 4(1) of Commonwealth Act 472 clearly and specifically allows municipal councils to tax
persons engaged in "the same businesses or occupation" on which "fixed internal revenue privilege taxes" are
"regularly imposed by the National Government." With certain exceptions specified in Section 3 of the same
statute. Our case does not fall within the exceptions. It would therefore be futile to argue that Congress exclusively
reserved to the national government the right to impose the disputed taxes.

We rule that there is no preemption.

4. Petitioner advances the theory that the ordinance is excessive.

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial
inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable,
oppressive, or confiscatory. 36 A rule which has gained acceptance is that factors relevant to such an inquiry are
the municipal conditions as a whole and the nature of the business made subject to imposition. 37

Plaintiff has however not sufficiently proven that, taking these factors together, the license taxes are unreasonable.
The presumption of validity subsists. For, plaintiff has limited itself to insisting that the amounts levied exceed the
cost of regulation and that the municipality has adequate funds for the alleged purposes as evidenced by the
municipality's cash surplus for the fiscal year ending 1956.

The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a revenue
ordinance. For, "if the charge exceeds the expense of issuance of a license and costs of regulation, it is a
tax." 38 And if it is, and it is validly imposed, as in this case, "the rule that license fees for regulation must bear a
reasonable relation to the expense of the regulation has no application." 39

And then, a cash surplus alone cannot stop a municipality from enacting a revenue ordinance increasing license
taxes in anticipation of municipal needs. Discretion to determine the amount of revenue required for the needs of
the municipality is lodged with the municipal authorities. Again, judicial intervention steps in only when there is a
flagrant, oppressive and excessive abuse of power by said municipal authorities. 40

Not that defendant municipality was without reason. On February 27, 1940, the Secretary of Finance, later
President, Manuel A. Roxas, issued Provincial Circular 12-A. In that circular, the then Finance Secretary stated
that his "Department has reached the conclusion that a tax on the basis of one centavo for every picul of annual
output capacity of sugar centrals ... would be just and reasonable." At that time, the price of sugar was around
P6.00 per picul. Sixteen years later — 1956 — when Ordinance No. 1 was approved, the market quotation for
export sugar ranged from P12.00 to P15.00 per picul. 41 And yet, since then the rate per output capacity of a sugar
central in Ordinance No. 1 was merely from one centavo to two centavos. There is a statement in the
municipality's brief 42that thereafter the price of sugar had never gone below P16.00 per picul; instead it had gone
up.

The reasonableness of the ordinance may not be disputed. It is not confiscatory.

There was misapprehension in the decision below in its statement that the increase of rates for refineries was
2,000%. We should not overlook the fact that the original maximum rate covering refineries in Ordinance No. 18,
series of 1947, was P2,000.00; but that was only for a refinery with an output capacity of 90,000 or more sacks.
Under Section 2(c) of Ordinance No. 1, series of 1956, where the refineries have an output capacity of from
75,001 bags to 100,000 bags, the tax remains at P2,000.00. From here on, the ordinance provides for ten more
scales for the graduation of the tax depending upon the output capacity (P3,000.00, P4,000.00, P5,000.00,
P10,000.00, P15,000.00, P20,000.00, P25,000.00, P30,000.00, P35,000.00 and P40,000.00). But it is only where
a refinery has an output capacity of 1,750,001 or more bags that the present ordinance imposes a tax of
P40,000.00. The happenstance that plaintiff's refinery is in the last bracket calling upon it to pay P40,000.00 per
annum does not make the ordinance in question unreasonable.

Neither may we tag the ordinance with excessiveness if we consider the capital invested by plaintiff in both its
sugar central and sugar refinery and its annual income from both. Plaintiff's capital investment in the sugar central
and sugar refinery is more or less P26,000,000.00. 43 And here are its annual net income: for the year 1956 —
P3,852,910; for the year 1957 — P3,854,520; for the year 1958 — P7,230,493; for the year 1959 — P5,951,187;
and for the year 1960 — P7,809,250. 44 If these figures mean anything at all, they show that the ordinance in
question is neither confiscatory nor unjust and unreasonable.
5. Upon the averment that in the Municipality of Victorias plaintiff is the only operator of a sugar central and sugar
refinery, plaintiff now presses its argument that Ordinance No. 1, series of 1956, is discriminatory. The ordinance
does not single out Victorias as the only object of the ordinance. Said ordinance is made to apply to any sugar
central or sugar refinery which may happen to operate in the municipality. So it is, that the fact that plaintiff is
actually the sole operator of a sugar central and a sugar refinery does not make the ordinance discriminatory.
Argument along the same lines was rejected in Shell Co. of P.I., Ltd. vs. Vaño, 45 this Court holding that the
circumstance "that there is no other person in the locality who exercises" the occupation designated as installation
manager "does not make the ordinance discriminatory and hostile, inasmuch as it is and will be applicable to any
person or firm who exercises such calling or occupation." And in Ormoc Sugar Company, Inc. vs. Municipal Board
of Ormoc City, 46 declaratory relief was sought to test the validity of a municipal ordinance which provides a city tax
of twenty centavos per picul of centrifugal sugar and one per centum on the gross sale of its derivatives and by-
products "produced by the Ormoc Sugar Company, Incorporated, or by any other sugar mill in Ormoc City." Mr.
Justice Enrique Fernando, delivering the opinion of this Court, declared that the ordinance did not suffer "from a
constitutional or statutory infirmity." And yet, in Ormoc, it is to be observed that Section 1 of the ordinance spelled
out Ormoc Sugar Company, Incorporated specifically by name. Not even the name of plaintiff herein was ever
mentioned in the ordinance now disputed.

No discrimination exists.

6. As infirm is plaintiff's stand that its business is not confined to the Municipality of Victorias. It suffices that plantiff
engages in a business or occupation subject to an exaction by the municipality — within the territorial boundaries
of that municipality. Plaintiff's sugar central and sugar refinery are located within the Municipality of Victorias. In
this central and refinery, plaintiff manufactures centrifugal sugar and refined sugar, respectively.

But plaintiff insists that plaintiff's sugar milling and refining operations are not wholly performed within the territorial
limits of Victorias. According to plaintiff, transportation of canes from plantation to the mill site, operation and
maintenance of telephone system, inspection of crop progress and other related activities, are conducted not only
in defendant's municipality but also in the municipalities of Cadiz, Manapla, Sagay and Saravia as well. 47 We fail
to see the relevance of these facts. Because, if we follow plaintiff's ratiocination, neither Victorias nor any of the
municipalities just adverted to would be able to impose the tax. One thing certain, of course, is that the tax is
imposed upon the business of operating a sugar central and a sugar refinery. And the situs of that business is
precisely the Municipality of Victorias.

7. Plaintiff finally impleads double taxation. Its reason is that in computing the amount of taxes to be paid by the
sugar refinery the cost of the raw sugar coming from the sugar central is not deducted; ergo, plaintiff is taxed twice
on the raw sugar.

Double taxation has been otherwise described as "direct duplicate taxation." 48 For double taxation to exist, "the
same property must be taxed twice, when it should be taxed but once." 49 Double taxation has also been "defined
as taxing the same person twice by the same jurisdiction for the same thing." 50 As stated in Manila Motor
Company, Inc. vs. Ciudad de Manila, 51 there is double taxation "cuando la misma propiedad se sujeta a dos
impuestos por la misma entidad o Gobierno, para el mismo fin y durante el mismo periodo de tiempo."

With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double taxation does
not inspire assent. First. The two taxes cover two different objects. Section 1 of the ordinance taxes a person
operating sugar centrals or engaged in the manufacture of centrifugal sugar. While under Section 2, those taxed
are the operators of sugar refinery mills. One occupation or business is different from the other. Second. The
disputed taxes are imposed on occupation or business. Both taxes are not on sugar. The amount thereof depends
on the annual output capacity of the mills concerned, regardless of the actual sugar milled. Plaintiff's argument
perhaps could make out a point if the object of taxation here were the sugar it produces, not the business of
producing it.

There is no double taxation.

G.R. No. L-26521 December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.

Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo declaring illegal
Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License Tax On Persons Engaged In
The Business Of Operating Tenement Houses," and ordering the City to refund to the plaintiffs-appellees the sums
of collected from them under the said ordinance.

On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as
follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly engaged in
or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement
house, partly or wholly engaged in business in any other streets, P12.00 per apartment. The validity and
constitutionality of this ordinance were challenged by the spouses Eusebio Villanueva and Remedies Sian
Villanueva, owners of four tenement houses containing 34 apartments. This Court, in City of Iloilo vs. Remedios
Sian Villanueva and Eusebio Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires, "it not
appearing that the power to tax owners of tenement houses is one among those clearly and expressly granted to
the City of Iloilo by its Charter."

On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of Republic Act
2264, otherwise known as the Local Autonomy Act, it had acquired the authority or power to enact an ordinance
similar to that previously declared by this Court as ultra vires, enacted Ordinance 11, series of 1960, hereunder
quoted in full:

AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE BUSINESS

OF OPERATING TENEMENT HOUSES

Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of Republic Act No.
2264, otherwise known as the Autonomy Law of Local Government, that:

Section 1. — A municipal license tax is hereby imposed on tenement houses in accordance with the
schedule of payment herein provided.

Section 2. — Tenement house as contemplated in this ordinance shall mean any building or dwelling for
renting space divided into separate apartments or accessorias.

Section 3. — The municipal license tax provided in Section 1 hereof shall be as follows:

I. Tenement houses:

(a) Apartment house made of strong materials P20.00 per door p.a.

(b) Apartment house made of mixed materials P10.00 per door p.a.

II Rooming house of strong materials P10.00 per door p.a.

Rooming house of mixed materials P5.00 per door p.a.

III. Tenement house partly or wholly engaged in or dedicated to business

in the following streets: J.M. Basa, Iznart, Aldeguer, Guanco and
Ledesma from Plazoleto Gay to Valeria. St. P30.00 per door p.a.

IV. Tenement house partly or wholly engaged in or dedicated to business

in any other street P12.00 per door p.a.

V. Tenement houses at the streets surrounding the super market as soon

as said place is declared commercial P24.00 per door p.a.

Section 4. — All ordinances or parts thereof inconsistent herewith are hereby amended.

Section 5. — Any person found violating this ordinance shall be punished with a fine note exceeding Two
Hundred Pesos (P200.00) or an imprisonment of not more than six (6) months or both at the discretion of
the Court.

Section 6 — This ordinance shall take effect upon approval.

ENACTED, January 15, 1960.

In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five tenement houses,
aggregately containing 43 apartments, while the other appellees and the same Remedios S. Villanueva are
owners of ten apartments. Each of the appellees' apartments has a door leading to a street and is rented by either
a Filipino or Chinese merchant. The first floor is utilized as a store, while the second floor is used as a dwelling of
the owner of the store. Eusebio Villanueva owns, likewise, apartment buildings for rent in Bacolod, Dumaguete
City, Baguio City and Quezon City, which cities, according to him, do not impose tenement or apartment taxes.

By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva and
Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza,
Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of P1,317.00. Eusebio
Villanueva has likewise been paying real estate taxes on his property.

On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended complaint,
respectively, against the City of Iloilo, in the aforementioned court, praying that Ordinance 11, series of 1960, be
declared "invalid for being beyond the powers of the Municipal Council of the City of Iloilo to enact, and
unconstitutional for being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the
equal protection clause of the Constitution," and that the City be ordered to refund the amounts collected from
them under the said ordinance.

On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the grounds that (a)
"Republic Act 2264 does not empower cities to impose apartment taxes," (b) the same is "oppressive and
unreasonable," for the reason that it penalizes owners of tenement houses who fail to pay the tax, (c) it constitutes
not only double taxation, but treble at that and (d) it violates the rule of uniformity of taxation.

The issues posed in this appeal are:

1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double taxation?

2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?

3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal clause?

4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?

1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:

SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged in
any occupation or business, or exercising privileges in chartered cities, municipalities or municipal districts
by requiring them to secure licences at rates fixed by the municipal board or city council of the city, the
municipal council of the municipality, or the municipal district council of the municipal district; to collect
fees and charges for services rendered by the city, municipality or municipal district; to regulate and
impose reasonable fees for services rendered in connection with any business, profession or occupation
being conducted within the city, municipality or municipal district and otherwise to levy for public
purposes, just and uniform taxes, licenses or fees; Provided, That municipalities and municipal districts
shall, in no case, impose any percentage tax on sales or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax, except gasoline, under the provisions of the National
Internal Revenue Code; Provided, however, That no city, municipality or municipal district may levy or
impose any of the following:

(a) Residence tax;

(b) Documentary stamp tax;

(c) Taxes on the business of persons engaged in the printing and publication of any newspaper,
magazine, review or bulletin appearing at regular intervals and having fixed prices for for subscription and
sale, and which is not published primarily for the purpose of publishing advertisements;

(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light, heat
and power;

(e) Taxes on forest products and forest concessions;

(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;

(g) Taxes on income of any kind whatsoever;

(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses or
permits for the driving thereof;

(i) Customs duties registration, wharfage dues on wharves owned by the national government, tonnage,
and all other kinds of customs fees, charges and duties;

(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and

(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign insurance
companies.
 A tax ordinance shall go into effect on the fifteenth day after its passage, unless the ordinance shall
provide otherwise: Provided, however, That the Secretary of Finance shall have authority to suspend the
effectivity of any ordinance within one hundred and twenty days after its passage, if, in his opinion, the tax
or fee therein levied or imposed is unjust, excessive, oppressive, or confiscatory, and when the said
Secretary exercises this authority the effectivity of such ordinance shall be suspended.

In such event, the municipal board or city council in the case of cities and the municipal council or
municipal district council in the case of municipalities or municipal districts may appeal the decision of the
Secretary of Finance to the court during the pendency of which case the tax levied shall be considered as
paid under protest.

It is now settled that the aforequoted provisions of Republic Act 2264 confer on local governments broad taxing
authority which extends to almost "everything, excepting those which are mentioned therein," provided that the tax
so levied is "for public purposes, just and uniform," and does not transgress any constitutional provision or is not
repugnant to a controlling statute.2 Thus, when a tax, levied under the authority of a city or municipal ordinance, is
not within the exceptions and limitations aforementioned, the same comes within the ambit of the general rule,
pursuant to the rules of expressio unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti.

Does the tax imposed by the ordinance in question fall within any of the exceptions provided for in section 2 of the
Local Autonomy Act? For this purpose, it is necessary to determine the true nature of the tax. The appellees
strongly maintain that it is a "property tax" or "real estate tax,"3 and not a "tax on persons engaged in any
occupation or business or exercising privileges," or a license tax, or a privilege tax, or an excise tax. 4 Indeed, the
title of the ordinance designates it as a "municipal license tax on persons engaged in the business of operating
tenement houses," while section 1 thereof states that a "municipal license tax is hereby imposed on tenement
houses." It is the phraseology of section 1 on which the appellees base their contention that the tax involved is a
real estate tax which, according to them, makes the ordinance ultra vires as it imposes a levy "in excess of the one
per centum real estate tax allowable under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.

It is our view, contrary to the appellees' contention, that the tax in question is not a real estate tax. Obviously, the
appellees confuse the tax with the real estate tax within the meaning of the Assessment Law, 6 which, although not
applicable to the City of Iloilo, has counterpart provisions in the Iloilo City Charter.7 A real estate tax is a direct tax
on the ownership of lands and buildings or other improvements thereon, not specially exempted,8 and is payable
regardless of whether the property is used or not, although the value may vary in accordance with such
factor.9 The tax is usually single or indivisible, although the land and building or improvements erected thereon are
assessed separately, except when the land and building or improvements belong to separate owners. 10 It is a fixed
proportion11 of the assessed value of the property taxed, and requires, therefore, the intervention of assessors. 12 It
is collected or payable at appointed times,13 and it constitutes a superior lien on and is enforceable against the
property14 subject to such taxation, and not by imprisonment of the owner.

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

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

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

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

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

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

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

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

At all events, there is no constitutional prohibition against double taxation in the Philippines. 24 It is something not
favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the
requirement that taxes must be uniform."25.

3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not only oppressive
because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months or both, if the owner or owners
of the tenement buildings divided into apartments do not pay the tenement or apartment tax fixed in said
ordinance," but also unconstitutional as it subjects the owners of tenement houses to criminal prosecution for non-
payment of an obligation which is purely sum of money." The lower court apparently had in mind, when it made the
above ruling, the provision of the Constitution that "no person shall be imprisoned for a debt or non-payment of a
poll tax."26 It is elementary, however, that "a tax is not a debt in the sense of an obligation incurred by contract,
express or implied, and therefore is not within the meaning of constitutional or statutory provisions abolishing or
prohibiting imprisonment for debt, and a statute or ordinance which punishes the non-payment thereof by fine or
imprisonment is not, in conflict with that prohibition."27 Nor is the tax in question a poll tax, for the latter is a tax of a
fixed amount upon all persons, or upon all persons of a certain class, resident within a specified territory, without
regard to their property or the occupations in which they may be engaged.28 Therefore, the tax in question is not
oppressive in the manner the lower court puts it. On the other hand, the charter of Iloilo City29 empowers its
municipal board to "fix penalties for violations of ordinances, which shall not exceed a fine of two hundred pesos or
six months' imprisonment, or both such fine and imprisonment for each offense." In Punsalan, et al. vs. Mun.
Board of Manila, supra, this Court overruled the pronouncement of the lower court declaring illegal and void an
ordinance imposing an occupation tax on persons exercising various professions in the City of Manilabecause it
imposed a penalty of fine and imprisonment for its violation.30.

4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.

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

Complementing the above ruling of the lower court, the appellees argue that there is "lack of uniformity" and
"relative inequality," because "only the taxpayers of the City of Iloilo are singled out to pay taxes on their tenement
houses, while citizens of other cities, where their councils do not enact a similar tax ordinance, are permitted to
escape such imposition." .
It is our view that both assertions are undeserving of extended attention. This Court has already ruled that
tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform and equal
when imposed upon all property of the same class or character within the taxing authority."31 The fact, therefore,
that the owners of other classes of buildings in the City of Iloilo do not pay the taxes imposed by the ordinance in
question is no argument at all against uniformity and equality of the tax imposition. Neither is the rule of equality
and uniformity violated by the fact that tenement taxesare not imposed in other cities, for the same rule does not
require that taxes for the same purpose should be imposed in different territorial subdivisions at the same
time.32 So long as the burden of the tax falls equally and impartially on all owners or operators of tenement houses
similarly classified or situated, equality and uniformity of taxation is accomplished. 33 The plaintiffs-appellees, as
owners of tenement houses in the City of Iloilo, have not shown that the tax burden is not equally or uniformly
distributed among them, to overthrow the presumption that tax statutes are intended to operate uniformly and
equally.34.

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

G.R. No. L-22814 August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-appellees.

Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing plaintiff's
complaint, with costs.

Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal place
of business in Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its municipal
board and its City Treasurer. Plaintiff — seeks to recover the sums paid by it to the City of Butuan — hereinafter
referred to as the City and collected by the latter, pursuant to its Municipal Ordinance No. 110, as amended by
Municipal Ordinance No. 122, both series of 1960, which plaintiff assails as null and void, and to prevent the
enforcement thereof. Both parties submitted the case for decision in the lower court upon a stipulation to the
effect:

1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-Cola"
soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province of Agusan.
These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan City warehouse of
plaintiff for distribution and sale in the City of Butuan and all municipalities of Agusan. .

2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently
amended by Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110, Series
of 1960 and Ordinance No. 122 are incorporated herein as Exhibits "A" and "B", respectively.

3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per
case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from August
16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961.

4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of P14,177.03 paid
under protest and those that if may later on pay until the termination of this case on the ground that
Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed is excessive and that
it is unconstitutional.

5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has prepared a
form to be accomplished by the plaintiff for the computation of the tax. A copy of the form is enclosed
herewith as Exhibit "C".
 6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to July 30, 1961
of its warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this Profit and
Loss Statement, the defendants claim that the plaintiff is not entitled to a depreciation of P3,052.63 but
only P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to P3,104.52. The
plaintiff differs only on the claim of depreciation which the company claims to be P3,052.62. This is in
accordance with the findings of the representative of the undersigned City Attorney who verified the
records of the plaintiff.

7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was increased to
P1.92 which price is uniform throughout the Philippines. Said increase was made due to the increase in
the production cost of its manufacture.

8. That the parties reserve the right to submit arguments on the constitutionality and illegality of Ordinance
No. 110, as amended of the City of Butuan in their respective memoranda.

xxx xxx x x x1äwphï1.ñët

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the purview thereof.
Section 2 provides for the payment by "any agent and/or consignee" of any dealer "engaged in selling liquors,
imported or local, in the City," of taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles
of the soft drinks and carbonated beverages therein named, and "all other soft drinks or carbonated drinks."
Section 3-A, defines the meaning of the term "consignee or agent" for purposes of the ordinance. Section 4
provides that said taxes "shall be paid at the end of every calendar month." Pursuant to Section 5, the taxes "shall
be based and computed from the cargo manifest or bill of lading or any other record showing the number of cases
of soft drinks, liquors or all other soft drinks or carbonated drinks received within the month." Sections 6, 7 and 8
specify the surcharge to be added for failure to pay the taxes within the period prescribed and the penalties
imposable for "deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or for failure "to furnish
the office of the City Treasurer a copy of the bill of lading or cargo manifest or record of soft drinks, liquors or
carbonated drinks for sale in the City." Section 9 makes the ordinance applicable to soft drinks, liquors or
carbonated drinks "received outside" but "sold within" the City. Section 10 of the ordinance provides that the
revenue derived therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the General
Fund and 20% for the School Fund."

Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature of an import
tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and confiscatory; (4) it is highly unjust and
discriminatory; and (5) section 2 of Republic Act No. 2264, upon the authority of which it was enacted, is an
unconstitutional delegation of legislative powers.

The second and last objections are manifestly devoid of merit. Indeed — independently of whether or not the tax in
question, when considered in relation to the sales tax prescribed by Acts of Congress, amounts to double taxation,
on which we need not and do not express any opinion - double taxation, in general, is not forbidden by our
fundamental law. We have not adopted, as part thereof, the injunction against double taxation found in the
Constitution of the United States and of some States of the Union.1 Then, again, the general principle against
delegation of legislative powers, in consequence of the theory of separation of powers2 is subject to one well-
established exception, namely: legislative powers may be delegated to local governments — to which said theory
does not apply3 — in respect of matters of local concern.

The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks or carbonated
drinks — in the production and sale of which plaintiff is engaged — or less than P0.0042 per bottle, is manifestly
too small to be excessive, oppressive, or confiscatory.

The first and the fourth objections merit, however, serious consideration. In this connection, it is noteworthy that
the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers "engaged
in selling" soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the sale
of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed only upon "any agent
and/or consignee of any person, association, partnership, company or corporation engaged in selling ... soft drinks
or carbonated drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:

... — Definition of the Term Consignee or Agent. — For purposes of this Ordinance, a consignee of agent
shall mean any person, association, partnership, company or corporation who acts in the place of another
by authority from him or one entrusted with the business of another or to whom is consigned or shipped
no less than 1,000 cases of hard liquors or soft drinks every month for resale, either retail or wholesale.

As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject to the
tax, unless they are agents and/or consignees of another dealer, who, in the very nature of things, must be one
engaged in business outside the City. Besides, the tax would not be applicable to such agent and/or consignee, if
less than 1,000 cases of soft drinks are consigned or shipped to him every month. When we consider, also, that
the tax "shall be based and computed from the cargo manifest or bill of lading ... showing the number of cases" —
not sold — but "received" by the taxpayer, the intention to limit the application of the ordinance to soft drinks and
carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from this angle, the tax
partakes of the nature of an import duty, which is beyond defendant's authority to impose by express provision of
law.4

Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still be
invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor,
since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers,
not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same
exceeded those made by said agents or consignees of producers or merchants established outside the City of
Butuan, would be exempt from the disputed tax.

It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or
equality under all circumstances, or negate the authority to classify the objects of taxation. 5 The classification
made in the exercise of this authority, to be valid, must, however, be reasonable 6 and this requirement is not
deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are
germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present conditions,
but, also, to future conditions substantially identical to those of the present; and (4) the classification applies
equally all those who belong to the same class.7

These conditions are not fully met by the ordinance in question.8 Indeed, if its purpose were merely to levy a
burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sealers
other than agents or consignees of producers or merchants established outside the City of Butuan should be
exempt from the tax.

WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered annulling
Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the City of Butuan to refund to plaintiff
herein the amounts collected from and paid under protest by the latter, with interest thereon at the legal rate from
the date of the promulgation of this decision, in addition to the costs, and defendants herein are, accordingly,
restrained and prohibited permanently from enforcing said Ordinance, as amended. It is so ordered.

G.R. No. L-16315 May 30, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HAWAIIAN-PHILIPPINE COMPANY, respondent.

This is a petition filed by the Commissioner of Internal Revenue for the review of the decision of the Court of Tax
Appeals in C.T.A. Case No. 598 ordering him to refund to respondent Hawaiian-Philippine Company the amount of
P8,411.99 representing fixed and percentage taxes assessed against it and which the latter had deposited with
the City Treasurer of Silay, Occidental Negros.

The undisputed facts of this ease, as found by the Court of Tax Appeals, are as follows:

The petitioner, a corporation duly organized in accordance with law, is operating a sugar central in the
City of Silay, Occidental Negros. It produces centrifugal sugar from sugarcane supplied by planters. The
processed sugar is divided between the planters and the petitioner in the proportion stipulated in the
milling contracts, and thereafter is deposited in the warehouses of the latter. (Pp. 4-5, t.s.n.) For the sugar
deposited by the planters, the petitioner issues the corresponding warehouse receipts of "quedans". It
does not collect storage charges on the sugar deposited in its warehouse during the first 90 days period
counted from the time it is extracted from the sugarcane. Upon the lapse of the first ninety days and up to
the beginning of the next milling season, it collects a fee of P0.30 per picul a month. Henceforth, if the
sugar is not yet withdrawn, a penalty of P0.25 per picul or fraction thereof a month is imposed. (Exhibits
"B-1", "C-1", "D-1", "B-2", "C-2", p. 10, t.s.n.)

The storage of sugar is carried in the books of the company under Account No. 5000, denominated
"Manufacturing Cost Ledger Control"; the storage fees under Account No. 521620; the expense accounts
of the factory under Account No. 5200; and the so-called "Sugar Bodega Operations" under Account No.
5216, under which is a Sub-Account No. 20, captioned, "Credits". (Pp. 16-17, t.s.n., Exhibit "F".) The
collections from storage after the lapse of the first 90 days period are entered in the company's books as
debit to CASH, and credit to Expense Account No. 2516-20 (p. 18, t.s.n.).

The credit for storage charges decreased the deductible expense resulting in the corresponding increase
of the taxable income of the petitioner. This is reflected by the entries enclosed in parenthesis in Exhibit
"G", under the heading "Storage Charges". (P. 18, t.s.n.) The alleged reason for this accounting operation
is that, inasmuch as the "Sugar Bodega Operations" is considered as an expense account, entries under
it are "debits". Similarly, since "Storage Charges" constitute "credit", the corresponding figures (see
Exhibit "C") are enclosed in parenthesis as they decrease the expenses of maintaining the sugar
warehouses.

Upon investigation conducted by the Bureau, it was found that during the years 1949 to 1957, the
petitioner realized from collected storage fees a total gross receipts of P212,853.00, on the basis of which
the respondent determined the petitioner's liability for fixed and percentage taxes, 25% surcharge, and
administrative penalty in the aggregate amount of P8,411.99 (Exhibit "5", p. 11, BIR rec.)

On October 20, 1958, the petitioner deposited the amount of P8,411.99 with the Office of the City
Treasurer of Silay. (Exhibits "I" and "I-1", pp. 59-60, CTA rec.) Later, it filed its petition for review before
this Court (Exhibit "K", p. 25, CTA rec.)
After due hearing the Court of Tax Appeals rendered the appealed decision.

The only issue to be resolved in the case at bar is whether or not, upon the facts stated above, petitioner is a
warehouseman liable for the payment of the fixed and percentage taxes prescribed in Sections 182 and 191 of the
National Internal Revenue Code which read as follows:

SEC. 182. FIXED TAXES — (a) ON BUSINESS (1) PERSONS SUBJECT TO PERCENTAGE TAX. —
Unless otherwise provided every person engaging in a business on which the percentage tax is imposed
shall pay a fixed annual tax of twenty pesos. ... .

SEC. 191. PERCENTAGE TAX ON ROAD, BUILDING, IRRIGATION, ARTESIAN WELL,

WATERWORKS, AND OTHER CONSTRUCTION WORK CONTRACTORS, PROPRIETORS OR
OPERATORS OF DOCKYARD, AND OTHERS. ... warehousemen; plumbers, smiths; house or sign
painters; lithographers, publishers, except those engaged in the publication or printing and publication of
any newspaper, magazine, review or bulletin which appear at regular intervals with fixed prices for
subscription and sale, and which is not devoted principally to the publication of advertisements; printers
and bookbinders, business agents and other independent contractors, shall pay a tax equivalent to
THREE PERCENTUM of their gross receipts. ... .

Respondent disclaims liability under the provisions quoted above, alleging that it is not engaged the business of
storing its planters' sugar for profit; that the maintenance of its warehouses is merely incidental to its business of
manufacturing sugar and in compliance with its obligation to its planters. We find this to be without merit.

It is clear from the facts of the case that, after manufacturing the sugar of its planters, respondent stores it in its
warehouses and issues the corresponding "quedans" to the planters who own the sugar; that while the sugar is
stored free during the first ninety days from the date the it "quedans" are issued, the undisputed fact is that, upon
the expiration of said period, respondent charger, and collects storage fees; that for the period beginning 1949 to
1957, respondent's total gross receipts from this particular enterprise amounted to P212,853.00.

A warehouseman has been defined as one who receives and stores goods of another for compensation (44
Words and Phrases, p. 635). For one to be considered engaged in the warehousing business, therefore, it is
sufficient that he receives goods owned by another for storage, and collects fees in connection with the same. In
fact, Section 2 of the General Bonded Warehouse Act, as amended, defines a warehouseman as "a person
engaged in the business of receiving commodity for storage."

That respondent stores its planters' sugar free of charge for the first ninety days does not exempt it from liability
under the legal provisions under consideration. Were such fact sufficient for that purpose, the law imposing the tax
would be rendered ineffectual. 1äwphï1.ñët

Neither is the fact that respondent's warehousing business is carried in addition to, or in relation with, the operation
of its sugar central sufficient to exempt it from payment of the tax prescribed in the legal provisions quoted
heretofore Under Section 178 of the National Internal Revenue Code, the tax on business is payable for every
separate or distinct establishment or place where business subject to the tax is conducted, and one line of
business or occupation does not become exempt by being conducted with some other business or occupation for
which such tax has been paid.

Lastly, respondent's contention that the imposition of the tax under consideration would amount to double taxation
is likewise without merit. As is clear from the facts, respondent's warehousing business, although carried on in
relation to the operation of its sugar central, is a distinct and separate business taxable under a different provision
of the Tax Code. There can be no double taxation where the State merely imposes a tax on every separate and
distinct business in which a party is engaged. Moreover, in Manufacturers Life insurance Co. vs. Meer, G.R. No. L-
2910, June 29, 1951; City of Manila vs. Inter-Island Gas service, G.R. L-8799, August 31, 1956, We have ruled
that there is no prohibition against double or multiple taxation in this jurisdiction.
G.R. No. L-16619 June 29, 1963

COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, plaintiff-appellee,

vs.
CITY OF MANILA, ET AL., defendants-appellants.

Appeal from the decision of the Court of First Instance of Manila ordering the City Treasurer of Manila to refund
the sum of P15,280.00 to Compania General de Tabacos de Filipinas.

Appellee Compania General de Tabacos de Filipinas — hereinafter referred to simply as Tabacalera — filed this
action in the Court of First Instance of Manila to recover from appellants, City of Manila and its Treasurer,
Marcelino Sarmiento — also hereinafter referred to as the City — the sum of P15,280.00 allegedly overpaid by it
as taxes on its wholesale and retail sales of liquor for the period from the third quarter of 1954 to the second
quarter of 1957, inclusive, under Ordinances Nos. 3634, 3301, and 3816.

Tabacalera, as a duly licensed first class wholesale and retail liquor dealer paid the City the fixed license
fees prescribed by Ordinance No. 3358 for the years 1954 to 1957, inclusive, and, as a wholesale and retail dealer
of general merchandise, it also paid the sales taxes required by Ordinances Nos. 3634, 3301, and
3816.1äwphï1.ñët

In its sworn statements of wholesale, retail, and grocery sales of general merchandise from the third quarter of
1954 to the second quarter of 1957, inclusive, Tabacalera included its liquor sales of the same period, and it is not
denied that of the taxes it paid on all its sales of general merchandise, the sum of P15,280.00 subject to the action
represents the tax corresponding to the liquor sales aforesaid.

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

The City, on the other hand, contends that, for the permit issued to it granting proper authority to "conduct or
engage in the sale of alcoholic beverages, or liquors" Tabacalera is subject to pay the license fees prescribed by
Ordinance No. 3358, aside from the sales taxes imposed by Ordinances Nos. 3634, 3301, and 3816; that, even
assuming that Tabacalera is not subject to the payment of the sales taxes prescribed by the said three ordinances
as regards itsliquor sales, it is not entitled to the refund demanded for the following reasons:.

(a) The said amount was paid by the plaintiff voluntarily and without protest;

(b) If at all the alleged overpayment was made by mistake, such mistake was one of law and arose from
the plaintiff's neglect of duty; .

(c) The said amount had been added by the plaintiff to the selling price of the liquor sold by it and passed
to the consumers; and

(d) The said amount had been already expended by the defendant City for public improvements and
essential services of the City government, the benefits of which are enjoyed, and being enjoyed by the
plaintiff.

It is admitted that as liquor dealer, Tabacalera paid annually the wholesale and retail liquor license fees under
Ordinance No. 3358. In 1954, City Ordinance No. 3634, amending City Ordinance No. 3420, and City Ordinance
No. 3816, amending City Ordinance No. 3301 were passed. By reason thereof, the City Treasurer issued the
regulations marked Exhibit A, according to which, the term "general merchandise as used in said ordinances,
includes all articles referred to in Chapter 1, Sections 123 to 148 of the National Internal Revenue Code. Of these,
Sections 133-135 included liquor among the taxable articles. Pursuant to said regulations, Tabacalera included its
sales of liquor in its sworn quarterly declaration submitted to the City Treasurer beginning from the third quarter of
1954 to the second quarter of 1957, with a total value of P722,501.09 and correspondingly paid a wholesaler's tax
amounting to P13,688.00 and a retailer's tax amounting to P1,520.00, or a total of P15,208.00 — the amount
sought to be recovered.

It appears that in the year 1954, the City, through its treasurer, addressed a letter to Messrs. Sycip, Gorres,
Velayo and Co., an accounting firm, expressing the view that liquor dealers paying the annual wholesale and retail
fixed tax under City Ordinance No. 3358 are not subject to the wholesale and retail dealers' taxes prescribed by
City Ordinances Nos. 3634, 3301, and 3816. Upon learning of said opinion, appellee stopped including its sales of
liquor in its quarterly sworn declarations submitted in accordance with the aforesaid City Ordinances Nos. 3634,
3301, and 3816, and on December 3, 1957, it addressed a letter to the City Treasurer demanding refund of the
alleged overpayment. As the claim was disallowed, the present action was instituted.

The term "tax" applies — generally speaking — to all kinds of exactions which become public funds. The term is
often loosely used to include levies for revenue as well as levies for regulatory purposes. Thus license fees are
commonly called taxes. Legally speaking, however, license fee is a legal concept quite distinct from tax; the former
is imposed in the exercise of police power for purposes of regulation, while the latter is imposed under the taxing
power for the purpose of raising revenues (MacQuillin, Municipal Corporations, Vol. 9, 3rd Edition, p. 26).

Ordinance No. 3358 is clearly one that prescribes municipal license fees for the privilege to engage in the
business of selling liquor or alcoholic beverages, having been enacted by the Municipal Board of Manila pursuant
to its charter power to fix license fees on, and regulate, the sale of intoxicating liquors, whether imported or locally
manufactured. (Section 18 [p], Republic Act 409, as amended). The license fees imposed by it are essentially for
purposes of regulation, and are justified, considering that the sale of intoxicating liquor is, potentially at least,
harmful to public health and morals, and must be subject to supervision or regulation by the state and by cities and
municipalities authorized to act in the premises. (MacQuillin, supra, p. 445.)

On the other hand, it is clear that Ordinances Nos. 3634, 3301, and 3816 impose taxes on the sales of general
merchandise, wholesale or retail, and are revenue measures enacted by the Municipal Board of Manila by virtue of
its power to tax dealers for the sale of such merchandise. (Section 10 [o], Republic Act No. 409, as amended.).

Under Ordinance No. 3634 the word "merchandise" as employed therein clearly includes liquor. Aside from this,
we have held in City of Manila vs. Inter-Island Gas Service, Inc., G.R. No. L-8799, August 31, 1956, that the word
"merchandise" refers to all subjects of commerce and traffic; whatever is usually bought and sold in trade or
market; goods or wares bought and sold for gain; commodities or goods to trade; and commercial commodities in
general.

That Tabacalera is being subjected to double taxation is more apparent than real. As already stated what is
collected under Ordinance No. 3358 is a license fee for the privilege of engaging in the sale of liquor, a calling in
which — it is obvious — not anyone or anybody may freely engage, considering that the sale of liquor
indiscriminately may endanger public health and morals. On the other hand, what the three ordinances mentioned
heretofore impose is a tax for revenue purposes based on the sales made of the same article or merchandise. It is
already settled in this connection that both a license fee and a tax may be imposed on the same business or
occupation, or for selling the same article, this not being in violation of the rule against double taxation (Bentley
Gray Dry Goods Co. vs. City of Tampa, 137 Fla. 641, 188 So. 758; MacQuillin, Municipal Corporations, Vol. 9, 3rd
Edition, p. 83). This is precisely the case with the ordinances involved in the case at bar.

Appellee's contention that the City is repudiating its previous view — expressed by its Treasurer in a letter
addressed to Messrs. Sycip, Gorres, Velayo & Co. in 1954 — that a liquor dealer who pays the annual license fee
under Ordinance No. 3358 is exempted from the wholesalers and retailers taxes under the other three ordinances
mentioned heretofore is of no consequence. The government is not bound by the errors or mistakes committed by
its officers, specially on matters of law.

Having arrived at the above conclusion, we deem it unnecessary to consider the other legal points raised by the
City.

G.R. No. L-24265 December 28, 1979

PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION, plaintiff-appellant,

vs.
THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL, defendant-appellee.

A direct appeal by plaintiff company from the judgment of the Court of First Instance of Manila, Branch VI,
upholding the validity of Ordinance No. 4, Series of 1957, enacted by defendant Municipality, which imposed
"storage fees on all exportable copra deposited in the bodega within the jurisdiction of the Municipality of Jagna
Bohol.

Plaintiff-appellant is a domestic corporation with principal offices in Manila. lt is a consolidated corporation of

Procter & Gamble Trading Company and Philippine Manufacturing Company, which later became Procter &
Gamble Trading Company, Philippines. It is engaged in the manufacture of soap, edible oil, margarine and other
similar products, and for this purpose maintains a "bodega" in defendant Municipality where it stores copra
purchased in the municipality and therefrom ships the same for its manufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance No. 4, Series of 1957,
quoted hereinbelow:

AN ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE COPRA DEPOSITED IN

THE BODEGA WITHIN THE JURISDlCTI0N OF THE MUNICIPALITY OF JAGNA BOHOL.

Be it ordained by the Municipal Council of Jagna Bohol, that:

SECTION 1. Any person, firm or corporation having a deposit of exportable copra in the bodega,
within the jurisdiction of the Municipality of Jagna Bohol, shall pay to the Municipal Treasury a
storage fee of TEN (P0.10) CENTAVOS FOR EVERY HUNDRED (100) kilos;

SECTION 2. All exportable copra deposited in the bodega within the Municipality of Jagna Bohol,
is part of the surveillance and lookout of the Municipal Authorities;

SECTION 3. Any person, firm or corporation found violating the provision of the preceding
section of this Ordinance shall be punished by a fine of not less than TWO HUNDRED (P 200.00)
PESOS, nor more than FOUR HUNDRED (P400.00) PESOS, or an imprisonment of hot less
than ONE MONTH, nor more than THREE MONTHS, or both fines and imprisonment at the
discretion of the court.
 SECTION 4. This Ordinance shall take effect on January 1, 1958.

APPROVED December 13,1957.

(Sgd.) TEODORO B. GALACAR Municipal Mayor 1

For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under protest, storage
fees in the total sum of 1142,265.13, broken down as follows:

Procter & Gamble Trading Co. Procter & Gamble Philippine Manufacturing Corp.

19
58 5, ___________
072.13

1959 7, ___________
076.00

1960 9, ___________
950.00

1961 7, ___________
830.00

1962 3, P5, 279.00

648.00

1963 ______ P3, 410. 00

P33, P8, 689.00

576.13

TOTAL P42,
CLAIM 265.13 2

On March 3, 1964, plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it prayed that
1) Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and void
for being beyond the power of the Municipality to enact; and 2) that defendant Municipality be ordered to refund to
it the amount of P42,265.13 which it had paid under protest; and costs.

For its part, defendant Municipality upheld its power to enact the Ordinance in question; questioned the jurisdiction
of the trial Court to take cognizance of the action under section 44(h) of the Judiciary Act in that it seeks to enjoin
the enforcement of a Municipal Ordinance; and pleaded prescription and laches for plaintiff's failure to timely
question the validity of the said Ordinance.

After the parties had agreed to submit the case for judgment on the pleadings, the trial Court upheld its jurisdiction
as well as defendant Municipality's power to enact the Ordinance in question under section 2238 of the Revised
Administrative Code, otherwise known as the general welfare clause, and declared that plaintiff's right of action
had prescribed under the 5-year period provided for by Article 1149 of the Civil Code.

In this appeal, plaintiff interposes the following Assignments of Error:

THE TRIAL COURT ERRED IN HOLDING THAT ORDINANCE NO. 4, SERIES OF 1957,
ENACTED BY THE DEFENDANT MUNICIPALITY OF JAGNA BOHOL, IS A VALID, LEGAL
AND ENFORCEABLE ORDINANCE AGAINST THE PLAINTIFF.

II

THE TRIAL COURT ERRED IN HOLDING THAT PAYMENT OF THE TAX UNDER
ORDINANCE NO. 4, SERIES OF 1957 WAS NOT DONE UNDER PROTEST.

III

THE TRIAL COURT ERRED IN HOLDING THAT THE ACTION OF THE PLAINTIFF TO ANNUL
AND TO DECLARE ORDINANCE NO. 4, SERIES OF 1957 OF THE DEFENDANT HAS
ALREADY PRESCRIBED.

IV

AND, FINALLY, THE TRIAL COURT ERRED IN NOT HOLDING ORDINANCE NO. 4. SERIES
OF 1957 ULTRA-VIRES AND VOID AND IN NOT ORDERING THE REFUND OF TAXES PAID
THEREUNDER. 3
It is plaintiff's submission that the subject Ordinance is inapplicable to it as it is not engaged in the business or
trade of storing copra for others for compensation or profit and that the only copra it stores is for its exclusive use
in connection with its business as manufacturer of soap, edible oil, margarine and other similar products; that the
levy is intended as an "export tax" as it is collected on "exportable copra' , and, therefore, beyond the power of the
Municipality to enact; and that the fee of P0.10 for every 100 kilos of copra stored in the bodega is excessive,
unreasonable and oppressive and is imposed more for revenue than as a regulatory fee.

The main question to determine is whether defendant Municipality was authorized to impose and collect the
storage fee provided for in the challenged Ordinance under the laws then prevailing.

The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon municipalities by
Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing law when the Ordinance was
enacted (Procter & Gamble Trading Co. vs. Municipality of Medina, 43 SCRA 130 11972]). Section 1 thereof
reads:

Section 1. A municipal council or municipal district council shall have the authority to impose
municipal license taxes upon persons engaged in any occupation or business, or exercising
privileges in the municipality or municipal district, by requiring them to secure licenses at rates
fixed by the municipal council, or municipal district council, and to collect fees and charges for
services rendered by the municipality or municipal district and shall otherwise have power to levy
for public local purposes, and for school purposes, including teachers' salaries, just and uniform
taxes other than percentage taxes and taxes on specified articles.

Under the foregoing provision, a municipality is authorized to impose three kinds of licenses: (1) a license for
regulation of useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or
enterprises; and (3) license for revenue. 4 It is thus unnecessary, as plaintiff would have us do, to determine
whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse defendant Municipality
for service of supervision because defendant Municipality is authorized not only to impose a license fee but also to
tax for revenue purposes.

The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on persons, firms
and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within the Municipality's
territorial jurisdiction. For the term "license tax" has not acquired a fixed meaning. It is often used indiseriminately
to designate impositions exacted for the exercise of various privileges. In many instances, it refers to revenue-
raising exactions on privileges or activities. 5

Not only is the imposition of the storage fee authorized by the general grant of authority under section 1 of CA No.
472. Neither is the storage fee in question prohibited nor beyond the power of the municipal councils and
municipal district councils to impose, as listed in section 3 of said CA No. 472. 6

Moreover, the business of buying and selling and storing copra is property the subject of regulation within the
police power granted to municipalities under section 2238 of the Revised Administrative Code or the "general
welfare clause", which we quote hereunder:

Section 2238. General power of council to enact ordinances and make regulations. — The
municipal council shall enact such ordinances and make such regulations, not repugnant to law,
as may be necessary to carry into effect and discharge the powers and duties conferred upon it
by law and such as shall seem necessary and proper to provide for the health and safety,
promote the prosperity, improve the morals, peace, good order, comfort, and convenience of the
municipality and the inhabitants thereof, and for the protection of property therein.

For it has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the
public safety or likely to give rise to conflagration because the oil content of the copra when ignited is difficult to put
under control by water and the use of chemicals is necessary to put out the fire.7 And as the Ordinance itself
states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of municipal
authorities.

Plaintiff's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within defendant's
territory is beyond the cost of regulation and surveillance is not well taken. As enunciated in the case of Victorias
Milling Co. vs. Municipality of Victorias, supra.

The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a
revenue ordinance. For, 'if the charge exceeds the expense of issuance of a license and costs of
regulation, it is a tax'. And if it is, and it is validly imposed, 'the rule that license fees for regulation
must bear a reasonable relation to the expense of the regulation has no application'.

Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in
cases of purely police power measures. In the absence of proof as to municipal conditions and the nature of the
business being taxed as well as other factors relevant to the issue of arbitrariness or unreasonableness of the
questioned rates, Courts will go slow in writing off an Ordinance. 8 In the case at bar, appellant has not sufficiently
shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive.

Plaintiff's averment that the Ordinance, even if presumed valid, is inapplicable to it because it is not engaged in the
business or occupation of buying or selling of copra but is only storing copra in connection with its main business
of manufacturing soap and other similar products, and that to be compelled to pay the storage fees would amount
to double taxation, does not inspire assent. The question of whether appellant is engaged in that business or not is
irrelevant because the storage fee, as previously mentioned, is an imposition on the privilege of storing copra in a
bodega within defendant municipality by persons, firms or corporations. Section 1 of the Ordinance in question
does not state that said persons, firms or corporations should be engaged in the business or occupation of buying
or selling copra. Moreover, by plaintiff's own admission that it is a consolidated corporation with its trading
company, it will be hard to segregate the copra it uses for trading from that it utilizes for manufacturing.

Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not amount
to double taxation. For double taxation to exist, the same property must be taxed twice, when it should be taxed
but once. Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the
same thing. 9 Surely, a tax on plaintiff's products is different from a tax on the privilege of storing copra in a bodega
situated within the territorial boundary of defendant municipality.

Plaintiff's further contention that the storage fee imposed by the Ordinance is actually intended to be an export tax,
which is expressly prohibited by section 2287 of the Revised Administrative Code, is without merit. Said provision
reads as follows:

Section 2287 ...

It shall not be in the power of the municipal council to impose a tax in any form whatever upon
goods and merchandise carried into the municipality, or out of the same, and any attempt to
impose an import or export tax upon such goods in the guise of an unreasonable charge for
wharfage use of bridges or otherwise, shall be void.

xxx xxx xxx

We have held that only where there is a clear showing that what is being taxed is an export to any foreign country
would the prohibition come into play.10 When the Ordinance itself speaks of "exportable" copra, the meaning
conveyed is not exclusively export to a foreign country but shipment out of the municipality. The storage fee
impugned is not a tax on export because it is imposed not only upon copra to be exported but also upon copra
sold and to be used for domestic purposes if stored in any warehouse in the Municipality and the weight thereof is
100 kilos or more. 11

Thus finding the Ordinance in question to be valid, legal and enforceable, we find it unnecessary to discuss the
ascribed error that the Court a quo erred in declaring that appellant had not paid the taxes under protest.

However, we find merit in plaintiff's contention that the lower Court erred in ruling that its action has prescribed
under Article 1149 of the Civil Code, which provides for a period of five years for all actions whose periods are not
fixed in that Code. The case of Municipality of Opon vs. Caltex Phil., 12 is authority for the view that the period for
prescription of actions to recover municipal license taxes is six years under Article 1145(2) of the Civil Code. Thus,
plaintiff's action brought within six years from the time the right of action first accrued in 1958 has not yet
prescribed.

WHEREFORE, affirming the judgment appealed, from, we sustain the validity of Ordinance No. 4, Series of 1957,
of defendant Municipality of Jagna Bohol, under the laws then prevailing.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS,respondents.

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to
its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%)
withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim
for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24
(b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five
percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for
review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January
1984, the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the
amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held
that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit
here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the
US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty
percent (20%) which represents the difference between the regular tax of thirty-five percent (35%) on
corporations and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends
received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax
rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in
this Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for
refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The
question was not raised by the Commissioner on the administrative level, and neither was it raised by him before
the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim
for refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly
a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is
likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole
stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government
must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is
held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of filing fees from which the Republic of
the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to
raise for the first time on appeal questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level,
demanded that P&G-Phil. produce an express authorization from its parent corporation to bring the claim for
refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the
action in the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive
period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well
which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is
essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; 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 begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: .
. . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner
may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . 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. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under
Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to
taximposed by the Title [on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) 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 3 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." 4 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, 5 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 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. 6 (Emphasis supplied)

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, is 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.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to
claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or
issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government
for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s
implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

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, NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in
the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income
receipt during its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a domestic corporation
liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation,
taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%)
on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent
(15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against
the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if
the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for
"taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-
five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the
Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to
have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an
amount equivalent to the twenty (20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of
section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid
under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for
credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on
accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to
recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war
profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

xxx xxx xxx

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting
stock of a foreign corporation from which itreceives dividends in any taxable year shall —

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which
such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to
such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of
the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess
profits taxes imposed on or with respect to suchprofits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . .
(Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7

shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend
tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a
proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine
subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and
deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines
through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate
income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually
paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under
Section 24 (b) (1), NIRC, it is necessary:
 a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which
hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit
that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by
Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly
complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of
the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this
Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue
Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax
"deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of
income tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S. government
will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by
the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay
P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be
declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal
Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000
composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

———
100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250
———
P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine
subsidiary is clearly more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your
client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling,
are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on
dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to
Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the
CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax
credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore,
pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .

(c) Taxes. — . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax
imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or
excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government—e.g., for taxes
collected by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-
profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from
which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax
deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of
such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term"accumulated
profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-
profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power
to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as
having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, war-profits,
and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection
shall be construed to mean such accounting period. (Emphasis supplied)
 Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes
paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a
proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows
to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a
credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of
fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount
required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question
has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced
fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the
administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes
down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a
credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance
requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes
applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally
applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the
reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to
P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine
dividend tax, at the rate here applicable, was actually imposed and collected. 11
It is this practical or operating circularity that is in fact avoided
by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for
applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins
to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing
implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify to
the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to
P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do change,
such implementing regulations could also provide that failure of P&G-Phil. to submit such certification within a
certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage
points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US law at
a given time. We should leave details relating to administrative implementation where they properly belong — with
the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to
trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into
the statute even if, as in the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent
(35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended
Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing

economyforemost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be
imposed on dividends received by non-resident foreign corporations in the same manner as the tax
imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the
Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to
the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate
unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country
would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor
additional tax credits which would be applicable against the tax payable to such home country. Accordingly,
Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid"
tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines,
in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 — Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA

P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.

P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US
corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA
would after US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of
Philippine taxes. In the calculation of the Philippine Government, this should encourage additional investment or
re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income," 15the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of
twenty percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of
the paying corporation's taxable year which precedes the date of payment of the dividend and during the
whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of
the paying corporation was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the
appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] —. 16 This is, of
course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate
of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage
points which compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes
available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on
15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA
Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement

G.R. No. L-28739 and L-28902 March 29, 1972

DAVAO LIGHT and POWER CO., INC., petitioner-appellant,

vs.
THE COMMISSIONER OF CUSTOMS and COURT OF TAX APPEALS, respondents-appellees.

These are appeals from the decision of the Court of Tax Appeals in CTA Cases Nos. 1337 and 1551, denying the
claim of Davao Light & Power Co., Inc., for refund of the amount paid by said company as customs duties, special
import taxes, compensating taxes and wharfage fees on the importations of electrical supplies and materials for
installation and use at its power plant.

The Davao Light & Power Co., Inc., hereafter referred to as Davao Light, is the grantee of a legislative franchise to
install, operate and maintain an electric light, heat and power plant in the city (then Municipality) of Davao, for a
period of 50 years. On two different occasions in 1962, it imported electrical supplies, materials and equipment for
installation in its power plant. The importations arrived in the port of Cebu City, on which the Collector of Customs
imposed, and Davao light paid under protest, customs duties and taxes in the total amount of P9,928.00. As the
Collector of Customs later ruled unfavorably on the protests (Nos. 267, 268, 269 and 278) and denied its claim for
refund of the taxes and duties paid on the imported articles, Davao Light appealed to the Commissioner of
Customs. And when said official sued the action of the Collector, Davao Light went to the Court of Tax Appeals,
maintaining its claim to exemption from the taxes and duties imposable on the aforementioned motions.

In the Court of Tax Appeals, the parties entered into a stipulation of facts, the pertinent provisions of which read as
follows:

6. — That the petitioner (Davao Light) is a grantee of a legislative franchise under Philippine
Legislature Act No. 3760, ...;

7. — That the petitioner was granted by the Public Service Commission its Certificate of Public
Convenience and Necessity in 1931 and by virtue of said franchise has established and has been
maintaining and operating a power plant generating electric light, heat and power and distributing
the same for sale within the municipality (now City) of Davao;

8. — That the National Power Corporation was created by virtue of Commonwealth Act No. 120,
and under Section 2, par. (g) it was empowered and granted authority:

"To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations and other works, for the purpose of
developing hydraulic power from any river, creek, lake, spring and waterfalls in the Philippines
and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain and
operate and improve gas, oil or steam engines and/or other prime movers, generators and other
machinery in plants and/or auxiliary plants for the production of electric power; to establish,
develop, operate and maintain and administer power and lighting systems for the use of the
Government and the general public; to sell electric power and to fix the rates and provide for the
collection of the charges for any service rendered: Provided, that the rates of charges shall not be
subject to revision by the Public Service Commission."

9. — That by virtue of this authority given the National Power Corporation, it established and
constructed a power plant, power stations and transmission lines in Davao City, for the purpose
of generating electric light, heat and power for the inhabitants of Davao City and its surrounding
areas and that it is presently operating and maintaining said power plant, power station and
transmission lines and selling electric power, heat and light in the City of Davao;
 10. — That Section 17 of (pre-Commonwealth) Act No. 3636 (Standard Electric Power & Light
Franchises Law) provides:

"In the event of any competing individual, association of persons or corporation receiving either a
franchise or permission from the Government of the Philippine Islands, or from any province, city
or municipality thereof, to conduct a similar business in all or any substantial portion of the
territory covered by this franchise to that of the grantee, in which franchise or permission there
shall be any term or terms more favorable than those herein granted or tending to place the
herein grantee at any disadvantage, then such term or terms shall ipso facto become a part of
the terms hereof and shall operate equally in favor of the grantee as in the case of said
competing individual asssociation of persons or corporations."

xxx xxx xxx

12 — That under Section 2 of Republic Act No. 358, as amended by Republic Act No. 937, it is
provided that "to facilitate payment of its indebtedness, the National Power Corporation shall
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges and
restrictions of the Republic of the Philippines, its provinces, cities and municipalities."

It was therein petitioner's contention that pursuant to Section 17 of Act 3636, the provision of Republic Act 987
granting tax exemption privileges to the National Power Corporation ipso facto became part of its franchise; hence,
its claim to exemption from taxes and customs duties on the importations in question.

In its decision of 15 December 1967, the Court of Tax Appeals affirmed the ruling of the Customs Commissioner,
the Court holding that the tax exemption privileges granted to the National Power Corporation were intended to
benefit only said government corporation and did not extend to other bodies or entities. Davao Light thus brought
the present petition for review in this Court, raising the same issue of the correctness of the imposition of taxes
and customs duties on its importations of electrical supplies and materials for use in its electric plant.

Petitioner in this instance reiterates the contention that is legislative franchise to construct, maintain and operate
an electric light, heat and power system (granted by Act 3760) was specifically made subject to Act 3636, which
Act, in its Section 17, provides that any favorable terms granted to any "competing individual, association of
persons or corporation" shall ipso facto become part of a franchise earlier issued. As the National Power
Corporation (NPC) is actually operating a power plant, power stations and transmission lines in Davao City and
selling electric power, heat and light in said locality, and said corporation is enjoying exemption from all taxes,
duties, fees, imposts and charges collectible by the government, it is argued that such tax exemption benefits ipso
facto became part of its franchise and are not available to petitioner.

There is no merit in petitioner's contention. Firstly, the aforecited provision of Section 17 of Act 3636 makes
mention of franchise or permit issued to "competing" individuals, associations or corporations. In short, by express
provision of law favorable terms contained in a subsequent franchise issued to an individual, association, etc. shall
automatically be considered incorporated in the franchise or permit earlier issued to another individual,
association, etc. engaged in the same business. The idea is to place both competing groups or entities on equal
footing and not to give one an advantage over the other. This principle of fair play, which is the basic idea behind
the provision, does not find operation in the present case.

It is undeniable that petitioner's purpose in securing a franchise to establish and operate an electric plant and
power stations was to engage in a business or profit-making venture. The NPC, on the other hand, was
specifically created to undertake the development of hydraulic power throughout the country and the production of
power from other sources, for use of the government and the general public.1 As envisioned by the law creating it,
the activity to be pursued by the NPC can hardly be motivated by profit or income.

In operating and maintaining a power plant, power stations and transmission lines in Davao City, as duly
authorized in its charter, the NPC can not be considered as posing competition to petitioner's business. In fact,
there is evidence on record that the NPC does not sell electric lower directly to the general public; instead, it did
sell lower to petitioner for resale to the latter's customers.2 In other words, the NPC is even the source of
petitioner's merchandise; it is aiding petitioner in its business operations, not competing with it.

Nor would the fact that the NPC supplies electric power to the National Development Company (NDC) plant in
Davao justify the claim that the NPC is a competitor to petitioner's business, because Section 10 of
Commonwealth Act 120 (NPC charter) made it NPC's duty to supply power to the NDC.

Sec. 10. At any time that the Board certifies that the Corporation is able to furnish electric power
for lighting an other purposes to any office, shop, or establishment operated and/or owned or
controlled by the National Government or by any city, province, municipality or other political
subdivision of the Commonwealth of the Philippines, the National Government and the
government of said city, province, municipality or other political subdivision shall be compelled to
secure from the Corporation as soon as practicable such electric power as it may need for
lighting and the operation of its offices, shops or establishments or for any work undertaken by it.

The provisions of this section shall also apply to firms or business owned or controlled by the
National Government or by the government of any city, province, municipality or other political
subdivisions.

Be that as it may, such an isolated case of sale of electric power to one government-owned plant would not be
enough to classify the NPC as a "competing" concern to petitioner's enterprise, which must be assumed to be
catering to the general public to which the NPC has no dealing.
Secondly, petitioner can not rely on the provisions of Republic Act 358, as amended by Republic Act 987 3 , to
support its claim for tax exemption.

Section 1 of Republic Act 358, approved on 4 June 1949, amended Section 2 (k) of Commonwealth Act 120,
which authorized the NPC to "contract indebtedness and issue bonds subject to the approval of the President of
the Philippines, upon recommendation of the Secretary of Finance" in an amount not to exceed one hundred
seventy million five hundred pesos. Then in its Section 2, the same law provided:

SEC 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines,
its provinces, cities, and municipalities." (emphasis supplied).

On the same day, 4 June 1949, Republic Act 357 was approved, authorizing the President of the Philippines to
negotiate and contract loans from time to time from the International Bank for Reconstruction and Development,
on behalf of the NPC, and to guarantee, absolutely and unconditionally, as primary obligator and not merely as
surety, the payment of loans therefore contracted.4 The provisions of Section 2 of Republic Act 358 granting tax
exemption to the NPC, taken in the light of the existing legislation affecting the NPC, notably Republic Act 357,
must be construed as intended to benefit only the NPC, the lawmakers expecting (as so unequivocally expressed
in the law) that by relieving said corporation of tax obligations, the NPC would be enabled to pay easily its
indebtedness or whatever indebtedness it is certain to incur. In granting such tax exemption, the government
actually waived its right to collect taxes from the NPC in order to facilitate the liquidation by said corporation of its
liabilities, and the consequential release by the government itself from its obligation (as principal obligor) in the
transactions entered into by the President on behalf of the NPC. Such condition, peculiar only to the NPC, cannot
be said to exist in petitioner's case; hence, the absolute lack of basis for awarding of equal privileges (granted to
the NPC) to said petitioner.

Similarly, petitioner can not lay claim to the enjoyment of the tax exemption benefits given to NPC because said
corporation happened to be operating a power plant in the same locality where petitioner has a franchise. The
legal principle on the matter is firmly established and well-observed: exemption from taxation is never
presumed;5 for tax exemption to be recognized, the grant must be clear and expressed; it cannot be made to rest
on vague implications.6 The possession by petitioner of a permit to operate an electric plant in Davao City does not
entitle it to the same exemption privileges enjoyed by another operator without an express provision of the law to
that effect.

FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals is hereby affirmed, with
costs against the petitioner.

G.R. No. L-14878 December 26, 1963

SURIGAO CONSOLIDATED MINING CO., INC., petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

This is a petition to review the decision of the Court of Tax Appeals in Manila Civil Case No. 4770 dismissing for
lack of merit the action of the Surigao Consolidated Mining Company for the refund of the total amount of
P17,051.14 allegedly representing overpayment of ad valorem tax for the fourth quarter of 1941.

The record shows that before the outbreak of World War II, the Surigao Consolidated Mining Company (called
SURIGAO CONSOLIDATED, for short), a domestic corporation which then had its principal office in the City of
Iloilo, was operating its mining concessions in Mainit, Surigao. Pursuant to section 246 of the Internal Revenue
Code, which prescribes the time and manner of payment of royalties or ad valorem taxes, it filed a bond and had
been regularly filing its returns for minerals removed from its mines during each calendar quarter and paying ad
valoremtax thereon within 20 days after the close of every quarter. In each case, computation of the ad
valorem tax was based on the market value of the minerals set forth in the returns, subject to adjustment upon the
receipt of the smelter showing the actual market value of the minerals to the United States.

Due to the interruption, of the communications outbreak of the war, the principal office of Surigao Consolidated
lost contact with its mines and never received the production reports for the fourth quarter of 1941. In order to
avoid incurring any tax penalty, said company, on January 19, 1942, deposited a check amount of P27,000.00
payable to and "indorsed in favor of the City Treasurer (of Iloilo) in payment of the ad valorem taxes (approximate
adjustment to be made when circumstances allow it) for the fourth quarter of 1941."

After the termination of the war, Commonwealth Act No. 722 was enacted, which provided for the filing of returns
for minerals removed during the last quarter of 1941 up to December 31, 1945 and the payment of ad valorem tax
on said minerals to February 28, 1946.

Availing of the provisions of the aforementioned Act, the Surigao Consolidated, on December 28, 1945, ad
valoremtax returns for the fourth quarter declaring as its tax liability the amount of P43,486.54. Applying the
amount of P27,000.00 previously deposited with the City Treasurer of Iloilo, the returns indicated an unpaid
balance of P16,486.54 as the " tax subject to revision."
However, on February 26, 1946, the Surigao Consolidated filed an amended ad valorem tax returns under which
amendment it declared a reduced ad valorem tax in the amount of P37,189.00. And crediting itself with the amount
of P27,000.00 previously deposited with the City Treasurer of Iloilo, it paid the remaining balance of P10,189.00.

On September 24, 1946, the Surigao Consolidated again filed a statement of adjustment allegedly containing
figures and data of the complete smelter returns for minerals shipped to the United States. In the accompanying
letter, a request was made, this time not only for the reduction of tax, but for the refund of the amount of
P18,107.87. On October 19, 1946, another statement of adjustment was filed reducing the claim for refund to
P17,158.01. Finally, on March 15, 1947, a third statement of adjustment was submitted further reducing the claim
for refund to the amount of P 17,051.14.

As the Collector of Internal Revenue denied the request for the refund of the said P17,051.14 on the ground that
the money already paid as ad valorem tax was legally due to the Government, the Surigao Consolidated instituted
with the Court of First Instance of Manila civil action for its recovery. However, upon the enactment of Republic Act
No. 1125 creating the Court of Tax Appeals, the case was remanded to the latter court for proper disposition.

After hearing, the Court of Tax Appeals, on July 16, 1958, finding that the amount sought to be refunded been
lawfully collected, rendered its decision denying the claim for refund. The Surigao Consolidated in due time filed a
motion for new trial on the ground that the decision was "not justified by the overwhelming weight of evidence" and
that it was contrary to law. The tax court, however, denied the motion. Hence, this petition for review.lawphil.net

The question to be resolved is whether or not Surigao Consolidated, petitioner herein, is entitled to the refund
of ad valorem tax in the total amount of P17,051.14, itemized as follows:

1. Ad valorem tax on minerals removed from the P1,191.46

mines but allegedly lost in transit on account of war

2. Ad valorem tax on minerals extracted from the 15,609.73

mines but allegedly looted during the Japanese
occupation

3. Alleged overpayment of ad valorem tax on 249.95

minerals shipped to the United States

P17,051.14

The first, item in petitioner's claim for refund in the amount of P1,191.46 represents the amount of ad valorem tax
paid on minerals removed from the mines but alleged to have been lost in transit on account of the war. The
refund is sought under section 1 (d) of Republic Act No. 81, which provides as follows:

SECTION 1. Any provision of existing law to the contrary notwithstanding:

xxx xxx xxx

(d) All unpaid royalties, ad valorem or specific taxes on all minerals mined from mining claims or
concessions existing and in force on January first, nineteen hundred and forty-two, and which minerals
were lost by reason of the war or circumstances arising therefrom, are hereby condoned: Provided, That if
said minerals had been or shall be recovered by the miner or producer, such royalties, ad valorem or
specific taxes on the same shall be immediately due and demandable.

Petitioner argues that since the law condones the taxes due from taxpayers who failed to pay their taxes, it would
be unfair to deny this benefit to those taxpayers who had been prompt in paying theirs. The argument merits
careful consideration. At first it would seem to be sound and logical. But the aforequoted section clearly refers to
the condonation of unpaid taxes only. The condonation of a tax liability is equivalent and is in the nature of a tax
exemption. Being so, it should be sustained only when expressed in explicit terms, and it can not be extended
beyond the plain meaning of those terms. It is the universal rule that he who claims an exemption from his share of
the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by
words too plain to be mistaken. (Statutory Construction by Francisco, citing Government of P. I. v. Monte de
Piedad, 25 Phil. 42.)

The application of a statute creating an exemption for taxation to taxes already assessed depends upon
whether it is retrospective in its operation. Such a statute has no retrospective operation, unless by the
terms thereof it clearly appears to be the intention of the legislature that the exemption shall relate back to
taxes which have already become fixed, as a statute which releases a person or corporation from a
burden common to the whole community should be strictly (Louisville Water Co. v. Hamilton, 81 Ky. 517,
... cited 6 American and English Ann. Cases, p. 438).

Petitioner having failed to point to Us any portion of the law that explicitly provides for a refund of those taxpayers
who had paid their taxes on the items and under circumstances mentioned in the abovequoted provision, We are
constrained to hold that the benefits of said provision does not extend to it.

Even assuming arguendo that the provisions of Republic Act No. 81 authorizes the refund of taxes already paid by
petitioner, the latter would not still be entitled to the refund sought for under the first item. It is to be noted that
petitioner's evidence of the alleged loss in transit as observed by the Court of Tax Appeals, merely of testimony of
witnesses who did not have personal knowledge of the circumstances which gave rise to the loss. Such evidence
cannot, of course be considered sufficient to establish that the minerals were in fact lost. Judge Luciano of the
Court of Tax Appeals during the trial, would be to create a dangerous precendent.

Under the second item, petitioner seeks to recover the amount of P15,609.73 representing the ad valorem tax paid
on minerals extracted from its mines but alleged to have been looted during the enemy occupation. In connection
with the alleged looting of the minerals, the Tax Court has this to say:

We are again confronted with the case where plaintiff has, to our mind, failed to present adequate
evidence to prove such loss. The evidence, if at all, is merely limited to the general and uncorroborated
statements of plaintiff's officers that the same were lost in the mines. These testimonies cannot be taken
on their full face value, especially because they had no direct supervision over the handling of such
minerals at the time of the alleged loss. Much less had these officers have personal knowledge of the
loss. Under the circumstances, we can not make the finding that the minerals were in fact lost.

Going over the record, We find no reason to disturb the above findings of the Court of Tax Appeals, there being no
showing that they are not substantiated by the evidence. With this observation, it would be useless ceremony to
delve into the issue of whether ad valorem tax should be or should not be paid on minerals extracted from the
mines but not removed therefrom.

One more item in petitioner's claim is the alleged overpayment of ad valorem tax in the amount of P249.95 on the
minerals shipped to the United States. It is that an ad valorem tax in the amount of P20,387.81 was originally paid
on the minerals shipped to the United States with a gross value of P410,299.49; that the smelter returns from the
United States show that the actual market value of the minerals shipped to the States was P416,895.28; and that
after deducting all allowable deductions amounting in all to P1,828,34, the true and correct amount of ad
valoremtax on said minerals was P20,137.86. Petitioner, therefore, claims difference between the amount of
P20,387.81 and P20,137.86 is an overpayment.

It is not disputed that, as indicated above, the amount of ad valorem tax on the minerals shipped to the United
States is subject to adjustment upon the receipt of the smelter returns showing their actual market value Petitioner
contends that the statements of adjustment alleged to contain the figures and data set forth in the smelter returns
are adequate evidence of the actual market value of the minerals shipped to the United States.

The best evidence of the actual market value minerals shipped to the United States are the smelter returns
themselves. These returns are admittedly petitioner's possession, but for unknown reasons, petitioner failed to
produce them during the trial. As there is no credible and satisfactory explanation for the non-production of said
returns, there arises the presumption that if produced they would be adverse to petitioner. Under the
circumstances, the Court of Tax Appeals cannot be said to have committed error, much less abused its discretion,
in refusing to give any probative value statements of adjustment.

It is a settled doctrine that in a suit for the recovery of the payment of taxes or any portion thereof as having been
illegally or erroneously collected, the burden is upon the taxpayer to establish the facts which show the illegality of
the tax or that the determination thereof is erroneous. In this case, petitioner failed to show that the amount of
taxes sought to be refunded have been erroneously collected.

Conformably to the above, We are of the opinion that the Court of Tax Appeals did not commit any error in
denying petitioner's claim.
G.R. No. L-19737 August 26, 1968

HENG TONG TEXTILES CO., INC. (before), PHILIP MANUFACTURING CORPORATION (now), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

In 1952 the then Collector of Internal Revenue assessed against the petitioner deficiency sales taxes and
surcharges for the year 1949 and the first four months of 1950 in the aggregate sum of P89,123.58. The
assessment was appealed to the Board of Tax Appeals, whence the case was transferred to the Court of Tax
Appeals upon its organization in 1954, and there was affirmed in its decision dated February 28, 1952. The matter
was thereafter elevated to this Court for review.

The deficiency taxes in question were assessed on importations of textiles from abroad. The goods were
withdrawn from Customs by Pan-Asiatic Commercial Co., Inc., which paid, in the name of the petitioner, the
corresponding advance sales tax under section 183(b) of the Internal Revenue Code. The assessment for the
deficiency, however, was made against the petitioner, Heng Tong Textiles Co., Inc. (now Philip Manufacturing
Corporation) on the ground that it was the real importer of the goods and did not pay the taxes due on the basis of
the gross selling prices thereof. There is no dispute as to the amount as computed by the internal revenue
examiners and confirmed by the Collector. The only issues posed in the instant petition for review are: (1) whether
or not the petitioner was the importer of the goods; and (2) whether or not it was guilty of fraud so as to warrant the
imposition of a penalty of 50% on the deficiency.

The Court of Tax Appeals based its decision of affirmance, finding the petitioner the importer of the goods, on a
number of evidentiary circumstances. First, Heng Tong Textiles Co., Inc. and Pan-Asiatic Commercial were sister
corporations. This is not controverted by the petitioner. Second, the commercial documents covering the
importations (shipping documents, insurance papers, and records of payment of the advance sales tax in the
Bureau of Customs) were all in the name of the petitioner. Third, in connection with advance sales tax aforesaid,
Pan-Asiatic Asiatic Commercial wrote the petitioner the following letter:

In compliance with your request regarding the 5% Sales Tax that we paid for you for the year 1949 and
the first quarter of 1950 against the goods that you ordered from various United States suppliers, through
us, we attach hereto a list giving a breakdown of this 5% Sales Tax, together with the corresponding
Official Receipt Numbers and other details relative to the orders covered by these payments.

Fourth, there is both documentary and testimonial evidence — the latter being declarations of the petitioner's own
witnesses — that Pan-Asiatic Commercial acted merely as indentor. Indeed the original petition for review below
contains the allegation that "during the taxable year 1949, Heng Tong Textiles Co., Inc. placed through Pan-Asiatic
Commercial Co., Inc., orders for importations of textiles from the United States in the sum of P2,190,948.66."

Petitioner excepts to the conclusion of the Court of Tax Appeals and avers that the importation papers were
placed in the name of the petitioner only for purposes of accommodation, that is, to introduce the petitioner to
textile suppliers abroad; and that the petitioner was not in a financial position to make the importations in question,
valued at over a million pesos, since its paid-up capital was only P30,000.00. These circumstances show nothing
but a private arrangement between the petitioner and Pan-Asiatic Commercial, which in no way affected the role of
the petitioner as the importer as far as the Government and its right to collect the taxes were concerned. Pan-
Asiatic Commercial might have furnished the necessary financing for the importations in question, but that did not
militate against the petitioner's being the importer; nor did the idea of building up its reputation among textile
suppliers abroad render it necessary for the withdrawal of the goods from customs and the payment of the
advance sales tax to be made in the petitioner's name, these being purely local operations, or for Pan-Asiatic
Commercial to affirm, in the private communication sent by it to the petitioner, that the latter was the one that
ordered the goods from the United States.

If anything, we perceive in the entire set-up an arrangement through which the sales taxes due could be
minimized, by having Pan-Asiatic Commercial, as indorsee of the goods, withdraw the same from Customs upon
payment of the advance sales tax and then execute a sale thereof to Heng Tong Textiles at cost, or at a negligible
profit. As it turned out, according to the Court of Tax Appeals, "the goods were made to appear as having (thus)
been sold ... so that no sales tax was paid by petitioner upon the sales of such goods ... (and) neither, was any
sales tax paid on the supposed sales of said goods by the Pan-Asiatic Commercial to the petitioner as the sales
were made apparently at cost." This is so because "during the period in question," the Court of Tax Appeals
added, "the sales tax on sales of imported articles was based on the gross selling price thereof, the advance sales
tax paid upon removal of the goods from the customhouse being credited against the tax on the actual gross
selling price paid by the importer. (See Rep. Act No. 253; General Circular No. V-106, February 19, 1951.)"

In our opinion, however, the arrangement resorted to does not by itself alone justify the penalty imposed. Section
183 (a), paragraph 3, of the Internal Revenue Code, as amended by Republic Act No. 253, speaks of willful
neglect to file the return or willful making of a false or fraudulent return. An attempt to minimize one's tax does not
necessarily constitute fraud. It is a settled principle that a taxpayer may diminish his liability by any means which
the law permits. "The intention to minimize taxes, when used in the context of fraud, must be proved to exist by
clear and convincing evidence amounting to more than mere preponderance, and cannot, be justified by mere
speculation. This is because fraud is never lightly to be presumed." (Yutivo Sons Hardware Co. vs. CTA, G.R. No.
L-13203, and cases cited). No such evidence is shown by the record in the case of the herein petitioner. Its
actuation is not incompatible with good faith on its part, that is, with a genuine belief that by indorsing the goods to
Pan-Asiatic Commercial so that the latter could, as it did, take delivery thereof, Pan-Asiatic Commercial would in
law be considered the importer. It may even be true, as the petitioner insists, that it was Pan-Asiatic Commercial
that financed the importations but placed them in the name of the petitioner as a matter of accommodation, in
which case the element of fraud would be ruled out, although from the legal viewpoint and as far as the right of the
Government to collect the taxes was concerned the petitioner was the real importer and hence must shoulder the
tax burden.
The decision of the Court of Tax Appeals is modified, by eliminating therefrom the penalty of 50% on the amount
of deficiency sales taxes imposed, and is affirmed in all other respects. No pronouncement as to costs.

G.R. No. L-21609 September 29, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
KER & COMPANY, LTD., defendant-appellant.

Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and 1950 on
the following dates:

Year Date Filed

1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
1950 May 9, 1951

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively.

In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of accounts
and subsequently issued the following assessments for deficiency income tax:

Year Amount Date Assessed

1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953

due and payable on dates indicated in the accompanying notices of assessment. The assessments for 1948 and
1950 carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing of fraudulent returns.

Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal Revenue reduced the
assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to
P8,542.00, imposed the 50% surcharge for the year 1947 and eliminated the same surcharge from the
assessment for the year 1950. The assessments for years 1948 and 1949 remained the same.

On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a petition for review with preliminary
injunction. No preliminary injunction was issued, for said court dismissed the appeal for having been instituted
beyond the 30-day period provided for in Section 11 of Republic Act 1125. We affirmed the order of dismissal of L-
12396. 1

On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments together
with a surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to pay,
instead in its letters dated March 28, 1962 and April 10, 1962 it set up the defense of prescription of the
Commissioner's right to collect the tax. Subsequently, the Republic of the Philippines filed on March 27, 1962 a
complaint with the Court of First Instance of Manila seeking collection of the aforesaid deficiency income tax for
the years 1947, 1948, 1949 and 1950. The complaint did not allege fraud in the filing of any of the income tax
returns for the years involved, nor did it pray for the payment of the corresponding 50% surcharge, but it prayed for
the payment of 5% surcharge for late payment and interest of 1% per month without however specifying from what
date interest started to accrue.

Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel in the
proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals.

On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez & Associates, moved for the
dismissal of the complaint on the ground that the court did not acquire jurisdiction over the person of the defendant
and that plaintiff's cause of action has prescribed. This motion was denied and defendant filed a motion for
reconsideration. Resolution on said motion, however, was deferred until trial of the case on the merits.

On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein the defense set up in its
motion to dismiss of April 14, 1962.

On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker & Co., Ltd.
adopted the same answer which it had filed on May 18, 1962.

On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which states:
 WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for 1947, but
orders defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950, in the amounts of
P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each amount and
interest of 1% a month computed from March 27, 1962 and until full payment thereof is made, plus the
costs of suit.

On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending that the right of
the Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not prescribed by a lapse
of merely five years and three months, because the taxpayer's income tax return was fraudulent in which case
prescription sets in ten years from October 31, 1951, the date of discovery of the fraud, pursuant to Section 332
(a) of the Tax Codes and that the payment of delinquency interest of 1% per month should commence from the
date it fell due as indicated in the assessment notices instead of on the date the complaint was filed.

On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that the Court of
First Instance did not acquire jurisdiction over its person, and maintaining that since the complaint was filed nine
years, one month and eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and
since the filing of its petition for review in the Court of Tax Appeals did not stop the running of the period of
limitations, the right of the Commissioner of Internal Revenue to collect the tax in question has prescribed.

The two motions for reconsideration having been denied, both parties appealed directly to this Court.

The issues in this case are:

1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co., Ltd.? .

2. Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year
1947 prescribe? .

3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the running of
the statute of limitations to collect the deficiency income for the years 1948, 1949 and 1950?

4. When did the delinquency interest on the deficiency income tax for the years 1948, 1949 and 1950
accrue?

First Issue

Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as summons
was not served upon it but upon Messrs. Leido and Associates who do not come under any of the class of persons
upon whom summons should be served as enumerated in Section 13, Rule 7 of the Rules of Court, 2 which reads:

SEC. 13. Service upon private domestic corporation or partnership.—If the defendant is a corporation
formed under the laws of the Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent, or any of its directors.

Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was in its administrative
stage. The same counsel represented Ker & Co., Ltd., when it appealed said case to the Court of Tax Appeals and
later to this Court. Subsequently, when the Deputy Commissioner of Internal Revenue, by letter dated March 15,
1962, demanded the payment of the deficiency income tax in question, it was Messrs. Leido, Andrada, Perez &
Associates who replied in behalf of Ker & Co., Ltd. in two letters, dated March 28, 1962 and April 10, 1962, both
after the complaint in this case was filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates
received the summons, they were still acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability
involved in this case. Perforce, they were the taxpayer's agent when summons was served. Under Section 13 of
Rule 7, aforequoted, service upon the agent of a corporation is sufficient.

We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction
over defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has
prescribed. By interposing such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative
defense on the basis of which it prayed the court to resolve controversy in its favor. For the court to validly decide
the said plea of defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who,
being the proponent of the affirmative defense, should be deemed to have abandoned its special appearance and
voluntarily submitted itself to the jurisdiction of the court.3

Voluntary appearance cures defects of summons, if any.4 Such defect, if any, was further cured when defendant
filed its answer to the complaint.5 A defendant can not be permitted to speculate upon the judgment of the court by
objecting to the court's jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction over
its person if and when the judgment sustains its defenses.

Second Issue

Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of Internal
Revenue to assess against it a deficiency income tax for the year 1947 has prescribed because the assessment
was issued on July 25, 1953 after a lapse of five years, three months and thirteen days from the date (April 12,
1948) it filed its income tax return. On the other hand, the Republic of the Philippines insists that the taxpayer's
income tax return was fraudulent, therefore the Commissioner of Internal Revenue may assess the tax within ten
years from discovery of the fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code.
The stand of the Republic of the Philippines hinges on whether or not taxpayer's income tax return for 1947 was
fraudulent.

The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was issued
within the five-year period provided for in Section 331 of the Tax Code, ruled that the right of the Commissioner of
Internal Revenue to assess the tax has prescribed. Said the lower court:

The Court resolves the second issue in the negative, because Section 331 of the Revenue Code explicitly
provides, in mandatory terms, that "Internal Revenue taxes shall be assessed within 5 years after the
return was filed, and no proceedings in court without assessment, for the collection of such taxes, shall be
begun after expiration of such period. The attempt by the Commissioner of Internal Revenue to make an
assessment on July 25, 1953, on the basis of a return filed on April 12, 1948, is an exercise of authority
against the aforequoted explicit and mandatory limitations of statutory law. Settled in our system is the
rule that acts committed against the provisions of mandatory or prohibitory laws shall be void (Art. 5, New
Civil Code). . . .

Said court resolved the issue without touching upon fraudulence of the return. The reason is that the complaint
alleged no fraud, nor did the plaintiff present evidence to prove fraud.

In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker & Co., Ltd.
filed a false return and since the fraud penalty of 50% surcharge was imposed in the deficiency income tax
assessment, which has become final and executory, the finding of the Commissioner of Internal Revenue as to the
existence of the fraud has also become final and need not be proved. This contention suffers from a flaw in that it
fails to consider the well-settled principle that fraud is a question of fact6 which must be alleged and proved.7 Fraud
is a serious charge and, to be sustained, it must be supported by clear and convincing proof. 8 Accordingly, fraud
should have been alleged and proved in the lower court. On these premises We therefore sustain the ruling of the
lower court upon the point of prescription.

It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and
executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the assessment, i.e.,
prescription of the Commissioner's right to assess the tax. Such was our ruling in previous cases. 9 In this case
however, Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the Republic of the
Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted
the issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have
waived its right to object to the setting up of such defense.

Third Issue

Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the complaint for the collection
of the deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one month
and eleven days from February 16, 1953, the date the tax was assessed, the right to collect the same has
prescribed pursuant to Section 332 (c) of the Tax Code. The Republic of the Philippines however contends that
the running of the prescriptive period was interrupted by the filing of the taxpayer's petition for review in the Court
of Tax Appeals on March 1, 1956.

If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court were not
counted in reckoning the prescriptive period, less than five years would have elapsed, hence, the right to collect
the tax has not prescribed.

The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have stopped
the running of the prescriptive period to collect because said court did not have jurisdiction over the case, the
appeal having been interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125. Precisely, it
adds, the Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was affirmed by the Supreme
Court in L-12396 aforementioned.

Under Section 333 of the Tax Code, quoted hereunder:

SEC. 333. Suspension of running of statute.—The running of the statute of limitations provided in Section
331 or three hundred thirty-two on the making of assessments and the beginning, of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during
which the Collector of Internal Revenue is prohibited from making the assessment or beginning distraint
or levy or a proceeding in court, and for sixty days thereafter.

the running of the prescriptive period to collect the tax shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in
court, and for sixty days thereafter.

Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the effect
of legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First Instance
for the collection of the tax? Our view is that it did.

From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting the
legality of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner
of Internal Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax
Appeals, 10 from filing an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be
to violate the judicial policy of avoiding multiplicity of suits and the rule on lis pendens. 11
It would be interesting to note that when the Commissioner of Internal Revenue issued the final deficiency
assessments on January 5, 1954, he had already lost, by prescription, the right to collect the tax (except that for
1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd. immediately thereafter requested
suspension of the collection of the tax without penalty incident to late payment pending the filing of a
memorandum in support of its views. As requested, no tax was collected. On May 22, 1954 the projected
memorandum was filed, but as of that date the Commissioner's right to collect by warrant of distraint and levy the
deficiency tax for 1950 had already prescribed. So much so, that on March 1, 1956 when Ker & Co., Ltd. filed a
petition for review in the Court of Tax Appeals, the Commissioner of Internal Revenue had but one remedy left to
collect the tax, that is, by judicial action. 12 However, as stated, an independent ordinary action in the Court of First
Instance was not available to the Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax Appeals,
supra, in view of the pendency of the taxpayer's petition for review in the Court of Tax Appeals. Precisely he
urgently filed a motion to dismiss the taxpayer's petition for review with a view to terminating therein the
proceedings in the shortest possible time in order that he could file a collection case in the Court of First Instance
before his right to do so is cut off by the passage of time. As moved, the Tax Court dismissed the case and Ker &
Co., Ltd. appealed to the Supreme Court. By the time the Supreme Court affirmed the order of dismissal of the
Court of Tax Appeals in L-12396 on January 31, 1962 more than five years had elapsed since the final
assessments were made on January 5, 1954. Thereafter, the Commissioner of Internal Revenue demanded extra-
judicially the payment of the deficiency tax in question and in reply the taxpayer, by its letter dated March 28,
1962, advised the Commissioner of Internal Revenue that the right to collect the tax has prescribed pursuant to
Section 332 (c) of the Tax Code.1awphîl.nèt

Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal
Revenue simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would be
encouraging taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same.

Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting the tax in
question. This being so, the provisions of Section 333 of the Tax Code will apply.

Fourth Issue

The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax for 1948,
1949 and 1950 accrued and should commence from the date of the assessments as shown in the assessment
notices, pursuant to Section 51(e) of the Tax Code, instead of from the date the complaint was filed as determined
in the decision appealed from.

Section 51 (e) of the Tax Code states:

SEC. 51(e). Surcharge and interest in case of delinquency.—To any sum or sums due and unpaid after
the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the
sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a month
upon said tax from the time the same became due, except from the estates of insane, deceased, or
insolvent persons. (emphasis supplied)

Exhibit "F" — the letter of assessment — shows that the deficiency income tax for 1948 and 1949 became due on
March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with Section 51(d) of the Tax
Code. Since the tax in question remained unpaid, delinquency interest accrued and became due starting from said
due dates. The decision appealed from should therefore be modified accordingly.

WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency interest at the
rate of 1% per month shall be computed from March 15, 1953 for the deficiency income tax for 1948 and 1949 and
from February 15, 1954 for the deficiency income tax for 1950. With costs against Ker & Co., Ltd. So ordered.
G.R. No. L-17715 July 31, 1963

JOSE AVELINO, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.

This is an appeal from a decision of the Court of Tax Appeals confirming substantially the assessment of Income
tax deficiencies of the petitioner Jose Avelino for the years 1946, 1947 and 1948. The assessments approved by
the Court of Tax Appeals for the said years are as follows:

1946

Net taxable income in 1946 P106,223.06

===========

Tax due on P106,223.06 P 29,669.22

Less tax previously assessed & paid 1,472.08

Deficiency tax P 28,197.14

50% surcharge 14,098.57

Total deficiency tax & surcharge P 42,295.71

===========

1947

Net taxable income in 1947 P 43,504.34

===========

Tax due on P43,504.34 P 8,361.22

Less tax previously assessed & paid 4,375.72.

Deficiency tax P 3,985.50

50% surcharge 1,992.75

Total deficiency tax & surcharge P 5,978.25

===========

1948

Net taxable income in 1948 P 38,885.81

===========

Tax due on P38,885.81 P 7,090.31

Less tax previously assessed & paid 747.51

Deficiency tax P 6,342.80

50% surcharge 3,171.40

Total deficiency tax & surcharge P 9,514.20

===========

SUMMARY

Deficiency tax & surcharge for 1946 P 42,295.71

Deficiency tax & surcharge for 1947 5,978.25

Deficiency tax & surcharge for 1948 9,414.20

GRAND TOTAL P 57,788.16

===========

In the brief of the petitioner various assignments of errors are made, each error raising specific questions of law
and of fact. The errors will now be considered one by one, each independently of the others.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE NET WORTH METHOD USED BY
RESPONDENT IN DETERMINING PETITIONER'S TAXABLE INCOME IS WITHOUT JUSTIFIABLE BASIS
It is contended under this assignment of error that there is no reasonable certainty of the amount taken as an
opening net worth, there being no sufficient basis for establishing such opening net worth. Included in the opening
net worth as of January 1, 1946, both according to the petitioner as well as to the Commissioner of Internal
Revenue, are P700.00 and P5,500.00, representing cash in bank, PNB savings account and PNB current account,
respectively. But petitioner claims that the cash on hand in the opening net worth should be, on December 31,
1945 (or January 1, 1946), not P100.00 as estimated by respondent but P47,300.00, for the reason that in an
income tax return submitted by the wife of the petitioner, Mrs. Enriqueta Avelino, she made it appear that the
netted a profit of P55,000.00 from her business of importation of shoes, operation of a bar, and of a restaurant,
shortly after liberation. The income tax return submitted by her for the year 1946 was submitted in the year 1949
and was presented at the hearing as Exhibit "A". Petitioner asserts that his wife made a gain of P55,000.00 during
the year 1946, but the supposed copy of the income tax return that she has submitted as evidence does not show
how that amount had been earned. If she did actually earn that amount Exhibit "A" would have contained the
details indicating the transactions in which the big sum was earned. Why none of that amount or the greater part
thereof appears to have been deposited in a bank has not been explained. Apparently the court below considered
the return as a self-serving statement, and We agree that on the basis of that income tax return, without any other
explanation how the gains were used or invested or deposited, there is no reason to disturb the action of the court
below in giving no credence to the said alleged existence of the cash net worth existing at the beginning of the
year 1946. We therefore declare that the alleged error has not been committed.

II

THE COURT OF TAX APPEALS, IN COMPUTING THE DEFICIENCY INCOME TAX ALLEGEDLY DUE FROM
THE PETITIONER, ERRED IN NOT DEDUCTING FROM THE INCREASE IN NET WORTH OF THE
PETITIONER FOR THE YEAR 1948, THE SUM OF P6,508.00 REPRESENTING ONE-HALF (½) OF THE
CAPITAL GAIN REALIZED FROM THE SALE OF TWO PARCELS OF LAND (CAPITAL ASSETS) MADE IN
1948.

The respondent denies that this error have been committed. In Annex 1, the yellow working sheet prepared by
Examiner Lasquety, it is shown that the sum of P6,508.00 was deducted in the year 1948 is the taxable capital
gain. This deduction was sustained by the Court below. The alleged error, therefore, is disproved by Annex I.

III

THE COURT OF TAX APPEALS ERRED IN DISALLOWING THE AMOUNT OF P9,816.78 AS DEPRECIATION
ON RENTAL PROPERTIES IN DETERMINING THE PETITIONER'S NET WORTH FOR THE YEAR 1948.

This supposed error was not committed as evidenced by an examination of Annex I, which shows that P9,816.78
was allowed as deduction for 1948 under the heading "Reserve for Depreciation, Building".

IV

THE COURT OF TAX APPEALS ERRED IN FAILING TO REFLECT OR TAKE UP IN 1947 THE
IMPROVEMENTS VALUED AT P35,000.00. ERECTED IN 1947 IN THE QUEZON CITY LOT OF PETITIONER.

This error again is disproved by Annex I, the yellow working sheet prepared by Bureau of Internal Revenue
Examiner Lasquety. This working sheet was adopted by the Court of Tax Appeals and it shows that P35,000.00
alleged to have been omitted was actually taken into account in the computation of the 1947 accounts of the
petitioner, as improvements on four buildings.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER AND HIS WIFE HAD
INVESTMENT IN THE TALISAY LUMBER COMPANY IN THE SUM OF P20,000.00 WITHOUT CONSIDERING
AN OFFSETTING LIABILITY IN THE SAME AMOUNT.

Neither do we find any merit in this assignment of error. According to the evidence, the articles, of incorporation of
the Talisay Lumber Company, which is under oath, petitioner and his wife invested the sums of P28,000.00 and
P1,000.00 in the company. If these sums were not furnished by the petitioner but by the organizer of the company,
still the total amount of P29,000.00 should be considered as a gift, or an income received by the petitioner and his
wife from the said organizer of the Talisay Lumber Company, which income is liable to tax.

VI

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER HAD INVESTMENT IN
AVELINO, BAGTAS, ALZATE AND COMPANY IN THE SUM OF P5,000.00 FOR EACH OF THE YEARS 1946
TO 1950.

Under this assignment of error, petitioner argues that the appearance of the said amount as having been
contributed to the partnership by petitioner is no proof that that amount was petitioner's actual investment in the
company. The same reasons obtaining in the case of the investment of P29,000.00 of the spouses in the Talisay
Lumber Company obtain in the case of the petitioner's investment in the partnership of Avelino, Bagtas, Alzate and
Company.

VII
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE LOAN OF P10,000.00 FROM ROSARIO
GRAY DE HAYS AND ANOTHER LOAN OF P30,000.00 FROM ANGELA M. VDA. DE BUTTE NEVER EXISTED.

In support of this assignment of error, petitioner contends that he owed the sum of P10,000.00 to Rosario Gray de
Hays, which amount represents one-half of the price of P20,000.00 which was the consideration for the sale of
certain property described in Exhibit "C". But the original of the document shows that the amount of the
consideration was P22,000.00 and the vendor was Severina de Casal, and nothing is said in the original of the
document that any part of the amount under consideration has not been paid.

It is also alleged in support of this error that the petitioner is indebted to Angela M. Vda. de Butte in 1948 in the
sum of P30,000.00. Mrs. Butte testified that petitioner owed her the amount of P30,000.00; that the debt was in the
form of a check and that in 1949 Mr. Avelino, the petitioner, paid P15,000.00, and that he paid the balance in
1951, no interest on the loan having been demanded and paid. Evidence of this character has, as a rule, been
declared insufficient for purposes of the income tax law. (Eugenio Perez vs. Court of Tax Appeals, et al., G.R. No.
L-10507, May 30, 1958; Aurelio P. Reyes vs. Collector of Internal Revenue, G.R. Nos. L-11534 & L-11558, Nov.
25, 1958.) We declare that in consonance with the rule which appears to be reasonable, the alleged loan cannot
be declared as, actually existing.

VIII

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER COMMITTED FRAUD IN
FILING HIS INCOME TAX RETURNS FOR THE YEARS UNDER REVIEW.

Under this alleged error it is contended that there was no evidence of fraud committed by the petitioner. We find
that the acts of the petitioner in declaring an income of only P5,258.99 in the year 1946 when he had an actual
income of P105,223.06; his act in submitting an income tax return for 1947 only for the amount of P12,219.96
when he actually had a net taxable income of P43,504.34; and lastly his act in reporting an income for the year
1948 which is only ten percent of the actual taxable income of P38,885.81 — all these circumstances justify the
finding of the court below that there has been fraud subject to be penalized by law.

IX

APPEALS ERRED IN HOLDING THE COURT OF TAX THAT THE RESPONDENT'S ASSESSMENTS HAVE
NOT YET PRESCRIBED.

In this assignment of error it is contended that the liability of the petitioner for income tax for the years 1946, 1947
and 1948 has already prescribed. The contention is without merit as it has been found out that the petitioner has
been guilty of fraud. The period within which he may be subjected to liability in case of fraud begins from the
moment the fraud is discovered and not when the income tax return was presented. (Sec. 332, Internal Revenue
Law).

THE COURT OF TAX APPEALS ERRED IN HOLDING THE PETITIONER LIABLE FOR P57,788.16 AS
DEFICIENCY INCOME TAX FOR THE YEARS 1946, 1947, AND 1948.

This supposed error is the result of the previous errors and need not be considered.1äwphï1.ñët
G.R. No. L-21731 March 31, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
LIM TIAN TENG SONS and CO., INC., defendant-appellant.

Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal office in Cebu City, engaged in 1951 and
1952, among others, in the exportation of copra. The copra was weighed before shipment in the port of departure
and upon arrival in the port of destination. The weight before shipment was called copra outturn. To allow for lose
in weight due to shrinkage, said exporter collected only 95% of the amount appearing in the letter of credit
covering every copra outturn. The 5% balance remained outstanding until final liquidation and adjustment.

On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income tax return for 1952 based on accrued income
and expenses. Its return showed a loss of P56,109.98. It took up as part of the beginning inventory for 1952 the
copra outturn shipped in 1951 in the sum of P95,500.00 already partially collected, as part of its outstanding stock
as of December 31, 1951.

In the audit and examination of taxpayer's 1952 income tax return, the Collector of Internal Revenue eliminated the
P95,500.00 outturn from the beginning inventory for 1952 and considered it as accrued income for 1951. This
increased taxpayer's 1952 net income by P95,500.00 which, considering disallowances in the sum of P9,980.85,
raised the taxpayer's net taxable income for 1952 to P50,370.87. Accordingly, in a letter dated January 16, 1957
(Exhibit C), received by Lim Tian Teng Sons & Co., Inc. on January 30, 1957, the Collector of Internal Revenue
assessed a deficiency income tax of P10,074.00 and 50% surcharge thereon amounting to P5,037.00 and
demanded payment thereof not later than February 15, 1957.

On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 income tax liability. The
Collector of Internal Revenue did not reply; instead, he referred the case to the Solicitor General for collection by
judicial action.

On September 20, 1957 the Solicitor General demanded from Lim Tian Teng Sons & Co., Inc. the payment of
P15,111.50 within five days, stating that otherwise judicial action would be instituted without further notice. In a
letter dated October 5, 1957, received by the Collector of Internal Revenue on October 7, 1957, Lim Tian Teng
Sons & Co., Inc. reiterated its request for reinvestigation. It also wrote the Solicitor General on October 8, 1957
requesting that it be allowed to present its explanation together with supporting papers relative to its income tax
liability. The Solicitor General transmitted the letter to the Collection of Internal Revenue. Thereupon, the Deputy
Collector of Internal Revenue, by his letter dated October 16, 1957, informed the taxpayer that its request for
reinvestigation would be granted provided it executed within ten days a waiver of the statute of limitations as
required in General Circular V-258 dated August 20, 1957. In his letter dated December 10, 1957, the Deputy
Collector of Internal Revenue extended the period within which to execute and file with him the waiver of the
statute of limitations to December 31, 1957, but advised that if no waiver is forthcoming on or before said date,
judicial action for collection would be instituted without further notice. Receipt of this letter is denied by appellant
company.

As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the Collector of Internal
Revenue instituted eight months after, specifically on September 2, 1958, an action in the Court of First Instance
of Cebu for the collection of deficiency income tax.

After hearing the parties, the court below rendered the following judgment.

IN VIEW OF THE FOREGOING, judgment is hereby rendered, declaring the assessment (Exh. D, D-1) of
income tax in the sum of P15,111.00 due from the defendant to the plaintiff for the year 1952 valid, final
and executory; condemning the defendant to pay the same to the plaintiff with interest at one (1) per
centum monthly from October 28, 1957 until fully paid.

With costs against the defendant.

IT IS SO ORDERED.

Not satisfied with the decision, the Collector of Internal Revenue moved for its reconsideration on the ground that it
did not include the 5% surcharge for late payment of tax. The motion was denied for the reason that the taxpayer
has already been ordered to pay a surcharge of 50%.

Both parties appealed, raising only questions of law.

Plaintiff cites as errors the non-imposition of the 5% surcharge for the late payment of tax and the computation of
delinquency interest from October 8, 1957.

Defendant, on the other hand, assails the jurisdiction of the lower court, its finding that the assessment in question
has become final and executory, the correctness of the assessment and the imposition of the 50%
surcharge.1äwphï1.ñët

We will discuss first the taxpayer's appeal. It maintains that the lower court has no jurisdiction to entertain this case
on the ground that the Collector of Internal Revenue has not yet issued his final decision on its requests for
reinvestigation. The taxpayer's stand is that final decision of the Collector of Internal Revenue on the disputed
assessment is a condition precedent to the filing of an action in the Court of First Instance for the collection of a
tax. This argument has no merit. The Collector of Internal Revenue is authorized to collect delinquent internal
revenue taxes either by distraint and levy or by judicial action or both simultaneously. 1 The only requisite before he
can collect the tax is that he must first assess the same within the time fixed by law.2 And in the case of a false or
fraudulent return with intent to evade the tax or of a failure to file a return, a proceeding in court for the collection of
such tax may be begun without assessment.3

Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's request for
reinvestigation before he can go to court for the purpose of collecting the tax assessed. On the contrary, Section
305 of the same Code withholds from all courts, except the Court of Tax Appeals under Section 11 of Republic Act
1125, the authority to restrain the collection of any national internal-revenue tax, fee or charge, thereby indicating
the legislative policy to allow the Collector of Internal Revenue much latitude in the speedy and prompt collection
of taxes. The reason is obvious. It is upon taxation that the government chiefly relies to obtain the means the carry
on its operations, and it is of the utmost importance that the modes adopted to enforce collection of taxes levied
should be summary and interfered with as little as possible. No government could exist if all litigants were
permitted to delay the collection of its taxes.4

Moreover, before the creation of the Court of Tax Appeals the remedy of a taxpayer who desired to contest an
assessment issued, by the Collector of Internal Revenue was to pay the tax and bring an action in the ordinary
courts for its recovery pursuant to Section 306 of the Code.5 Collection or payment of the tax was not made, to,
wait until after the Collector of Internal Revenue has resolved all issues raised by the taxpayer against an
assessment. Republic Act 1125 creating the Court of Appeals allows the taxpayer to dispute the correctness
legality of an assessment both in the purely administrative level and in said court, but it does not stop the Collector
of Internal Revenue from collecting the tax through any of the means provided for in Section 316 of the Tax Code,
except when enjoined by said Court of Tax Appeals. Section 11 of Republic Act 1125 states in part:

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue ...
shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction
of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court
the collection by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the
interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the
said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for
not more than double the amount with the Court.

We will now resolve the issue of whether or not the court a quo erred in considering as final and executory the
assessment contained in the letter of the Collector of Internal Revenue dated January 16, 1957. As stated,
defendant received said assessment on January 30, 1957 and on the following day requested reinvestigation of its
tax liability. The Collector of Internal Revenue however did not reply to the request for reinvestigation. Instead, he
referred the case to the Solicitor General for collection of the tax. The lower court interpreted this action of the
Collector of Internal Revenue as a denial of defendant's request for reinvestigation.

Said court, to our mind, committed no error. For what is more indicative of the Collector's decision against
reinvestigation than his insistence to collect the tax? This decision was communicated to defendant in a letter
dated September 20, 1957 of the office of the Solicitor General which must have been received by defendant not
later than October 8, 1957 for on said date it acknowledged receipt thereof. It had thirty days from October 8, 1957
within which to appeal to the Court of Tax Appeals pursuant to Section 11 of Republic Act 1125. 6 Instead of
appealing to the Tax Court, however, the defendant herein in a letter dated October 8, 1957 reiterated its request
for reinvestigation.

On October 15, 1957 the Collector of Internal Revenue wrote defendant that its "request for a reinvestigation will
be granted only upon compliance with General Circular No. V-258 dated August 20, 1957, which requires as a
prerequisite to the grant of a reinvestigation the execution of a waiver of the statute of limitations". In a subsequent
letter, he extended the period within which to submit the aforesaid waiver to December 31, 1957.

In effect, the Collector of Internal Revenue placed in the hands of the defendant the holding of a reinvestigation.
However, no such reinvestigation was made inasmuch as taxpayer failed to submit a written waiver of the statute
of limitations on or before December 31, 1957. Such omission automatically brought about the denial of the
request for reinvestigation.

Taxpayer however questions the legality of requiring waiver of the statute of limitations before the grant of
reinvestigation as provided for in General Circular No.
V-258. This question was not raised in the Bureau of Internal Revenue. Suffice it to say in this connection that
General Circular No. V-258 was promulgated pursuant to Section 338 of the Tax Code. The authority thereunder
of the Secretary of Finance to issue rules and regulations for the effective enforcement of the provisions of the Tax
Code has been sustained by this Court in previous cases.7

Even if we do not count the period from October 8, 1957 (the date when taxpayer received notice of the denial of
its request for reinvestigation) to December 31, 1957 (the deadline for the submission of the written waiver of the
statute of limitations) in reckoning the 30-day period within which the taxpayer may appeal to the Court of Tax
Appeals, said period had long lapsed when the Collector of Internal Revenue filed the complaint in this case on
September 2, 1958.

Taxpayer failure to appeal to the Court of Tax Appeals in due time made the assessment in question final,
executory and demandable.8 And when the action was instituted on September 2, 1958 to enforce the deficiency
assessment in question, it was already barred from disputing the correctness of the assessment or invoking any
defense that would reopen the question of his tax liability on merits.9 Otherwise, the period of thirty days for appeal
to the Court of Tax Appeals would make little sense. 10
In a proceeding like this the taxpayer's defenses are similar to those of the defendant in a case for the
enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of Court. No inquiry can be
made therein as to the merits of the original case or the justness of the judgment relied upon, other than by
evidence of want of jurisdiction, of collusion between the parties, or of fraud in the party offering the record with
respect to the proceedings. 11 As held by this Court in Insular Government vs.
Nico 12 the taxpayer may raise only the questions whether or not the Collector of Internal Revenue had jurisdiction
to do the particular act, and whether any fraud was committed in the doing of the act. In that case, Doroteo Nico
was fined by the Collector of Internal Revenue for violation of subparagraphs (d), (e) and (g) of Section 28 as well
as Sections 36, 101 and 107 of Act 1189. Under Section 54 of the same Act the taxpayer was given the right to
appeal from the decision of the Collector of Internal Revenue to the Court of First Instance within a period of ten
days from notice of imposition of the fine. Nico did not appeal, neither did he pay the fine. Pursuant to Section 33
of the Act, the Collector of Internal Revenue filed an action in the Court of First Instance to enforce his decision
and collect the fine. The decision of the Collector of Internal Revenue having become final, this Court, on appeal,
allowed no further inquiry into the merits of the same.

For the satisfaction of defendant, however, it may be worth stating that on its merits, the assessment in question is
correct. It is not controverted that, as appearing from its 1952 income tax return Lim Tian Teng Sons & Co., Inc.
employs the "accrual" method of accounting. Following such accounting method the copra outturn in the amount of
P95,500.00 outstanding as of December 31, 1951, should have been treated as accrued income for 1951, instead
of as stock on hand on January 1, 1952.

Defendant took up the copra outturn in question as copra on hand in the beginning inventory for 1952. Said
beginning inventory, together with expenses, copra purchased during the year and copra on hand as of December
31, 1952 were deducted as "cost of goods sold" from the total gross sales for the purpose of determining the net
sales. Since the P95,500.00 copra outturn formed part of the "cost of goods sold", it diminished the net sales by
P95,500.00, thereby also decreasing defendant's net taxable income by the same amount. This procedure of
treating the copra outturn in question is inconsistent with defendants accounting method.

From the record, then, there is every indication that taxpayer's 1952 income tax return is fraudulent, as alleged in
paragraph (7) of the complaint in this case. Firstly, taxpayer's beginning inventory for 1952 did not state the truth in
considering the copra outturn as copra on hand, for on December 31, 1951 such copra was not any more in
taxpayer's bodega. It was in transit to a foreign port. And the taxpayer no longer owned the copra. As a matter of
fact, it already received payment for the same. Secondly, by observing regularly its own system of accounting,
taxpayer had no choice but to account the copra outturn as accrued income. This it did not do. For such deviation,
we see no other purpose than to lessen, if not obliterate as in fact it did, its income tax liability per its return. The
lower court therefore did not err in imposing the 50% surcharge.

We now come to the appeal of the Government. It maintains that the lower court erred in not imposing on
defendant's tax liability a surcharge of 5% for late payment. Subsection (c), Section 51 of the Tax Code states:

SEC. 51. Assessment and payment of income tax. —

xxx xxx xxx

(c) Surcharge and interest in case of delinquency. - To any sum or sums due and unpaid after the dates
prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of
five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said
tax from the time the same became due . . . . (Emphasis supplied)

As may be gleaned from the above-quoted provision, the 5% surcharge is mandatory and automatically due, once
the tax is not paid on time. "Shall" is the word that law uses a word normally imperative and a "language of
demand". 13 Applicable herein is what has been said of a similar provision — the present Section 183 of the Tax
Code — stating that:

If the percentage tax on any business is not paid within the time prescribed above the amount of the tax
shall be increased by twenty-five per centum, the increment to be part of the tax. (Emphasis supplied)

Said this Court in Lim Co Chui vs. Posadas 14:

This provision is mandatory. It provides a plan which works out automatically. It confers no discretion on
the Collector of Internal Revenue. That, official may not disregard the law and substitute therefor his own
personal judgment.

Finally, the Government questions the computation of the delinquency interest, due on the deficiency tax, from
October 8, 1957. It insists that payment of such interest should commence from February 15, 1957. Such
contention is well-founded. Pursuant to Section 51(d), "the assessment made by the Collector of Internal Revenue
shall be paid ... immediately upon notification of the amount of such assessment." Now, the income tax
assessment notice gave defendant up to February 15, 1957 to pay the deficiency tax in question. No payment was
made. Hence, pursuant to Section 51 (e), quoted earlier, interest on the unpaid tax fell due starting February 16,
1957 and continues to accrue until full payment of the tax.

Wherefore, the decision appealed from is modified. Lim Tian Teng Sons & Co., Inc. is hereby ordered to pay the
sum of P10,074.00 as deficiency income tax for 1952 plus 50% and 5% surcharges thereon for fraud and late
payment, respectively, and 1% monthly interest upon said tax of P10,074.00, computed from February 16, 1957
until the tax is fully paid. With costs against defendant-appellant. So ordered.