G.R. No.

L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-

appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-
appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An
Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a)
thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and
improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta — Gen. Lucban — Gen.
Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen. Lim)"; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads were "nothing but projected and
planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision (as well as the lands on which said feeder
roads were to be construed) were private properties of respondent Jose C. Zulueta, who, at the time
of the passage and approval of said Act, was a member of the Senate of the Philippines; that on
May, 1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering
to donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the
offer was accepted by the council, subject to the condition "that the donor would submit a plan of the
said roads and agree to change the names of two of them"; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote
another letter to said council, calling attention to the approval of Republic Act. No. 920, and the sum
of P85,000.00 appropriated therein for the construction of the projected feeder roads in question;
that the municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that inasmuch
as the projected feeder roads in question were private property at the time of the passage and
approval of Republic Act No. 920, the appropriation of P85,000.00 therein made, for the
construction, reconstruction, repair, extension and improvement of said projected feeder roads, was
illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by Congress
because its members were made to believe that the projected feeder roads in question were "public
roads and not private streets of a private subdivision"'; that, "in order to give a semblance of legality,
when there is absolutely none, to the aforementioned appropriation", respondents Zulueta executed
on December 12, 1953, while he was a member of the Senate of the Philippines, an alleged deed of
Page178

donation — copy of which is annexed to the petition — of the four (4) parcels of land constituting
said projected feeder roads, in favor of the Government of the Republic of the Philippines; that said
alleged deed of donation was, on the same date, accepted by the then Executive Secretary; that
being subject to an onerous condition, said donation partook of the nature of a contract; that, such,
said donation violated the provision of our fundamental law prohibiting members of Congress from
being directly or indirectly financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the projected feeder roads
in question with public funds would greatly enhance or increase the value of the aforementioned
subdivision of respondent Zulueta, "aside from relieving him from the burden of constructing his
subdivision streets or roads at his own expense"; that the construction of said projected feeder roads
was then being undertaken by the Bureau of Public Highways; and that, unless restrained by the
court, the respondents would continue to execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the irreparable damage, detriment and prejudice not only
to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared unconstitutional
and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta
from ordering or allowing the continuance of the above-mentioned feeder roads project, and from
making and securing any new and further releases on the aforementioned item of Republic Act No.
920, and the disbursing officers of the Department of Public Works and Highways from making any
further payments out of said funds provided for in Republic Act No. 920; and that pending final
hearing on the merits, a writ of preliminary injunction be issued enjoining the aforementioned parties
respondent from making and securing any new and further releases on the aforesaid item of
Republic Act No. 920 and from making any further payments out of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to
sue", and that the petition did "not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the
Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent
is " not aware of any law which makes illegal the appropriation of public funds for the improvements
of . . . private property"; and that, the constitutional provision invoked by petitioner is inapplicable to
the donation in question, the same being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail the appropriation in question
because "there is no actual bona fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a personal and substantial interest"
in said Act "and that its enforcement has caused or will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor
of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite
personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that "the
legislature is without power appropriate public revenues for anything but a public purpose", that the
instructions and improvement of the feeder roads in question, if such roads where private property,
would not be a public purpose; that, being subject to the following condition:

The within donation is hereby made upon the condition that the Government of the Republic
of the Philippines will use the parcels of land hereby donated for street purposes only and for
no other purposes whatsoever; it being expressly understood that should the Government of
the Republic of the Philippines violate the condition hereby imposed upon it, the title to the
land hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
Page178

ZULUETA. (Emphasis supplied.)

which is onerous, the donation in question is a contract; that said donation or contract is "absolutely
forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning contracts "whose cause, objector
purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not be
contested, however, by petitioner herein, because his "interest are not directly affected" thereby; and
that, accordingly, the appropriation in question "should be upheld" and the case dismissed.

At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of
fact made in the petition of appellant herein. According to said petition, respondent Zulueta is the
owner of several parcels of residential land situated in Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the projected feeder roads
aforementioned, which, admittedly, were private property of said respondent when Republic Act No.
920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and
improvement" of said roads, was passed by Congress, as well as when it was approved by the
President on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect of relieving
respondent Zulueta of the burden of constructing his subdivision streets or roads at his own
expenses, 1and would "greatly enhance or increase the value of the subdivision" of said respondent.
The lower court held that under these circumstances, the appropriation in question was "clearly for a
private, not a public purpose."

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However,
respondent Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of any law
which makes illegal the appropriation of public funds for the improvement of what we, in the
meantime, may assume as private property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of the
Government established under the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws. 3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:

It is a general rule that the legislature is without power to appropriate public revenue
for anything but a public purpose. . . . It is the essential character of the direct object
of the expenditure which must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to which the general advantage
of the community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results from the promotion of private
interest and the prosperity of private enterprises or business, does not justify their aid by the
use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:

In accordance with the rule that the taxing power must be exercised for public purposes only,
discussed suprasec. 14, money raised by taxation can be expended only for public
Page178
 purposes and not for the advantage of private individuals. (85 C.J.S. pp. 645-646;
emphasis supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public funds
may be used only for public purpose. The right of the legislature to appropriate funds
is correlative with its right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for one purpose and
the devotion thereof to another purpose, no appropriation of state funds can be made
for other than for a public purpose.

xxx xxx xxx

The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interest, as opposed to the
furtherance of the advantage of individuals, although each advantage to individuals
might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis supplied.)

Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional law. lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon
the ground that petitioner may not contest the legality of the donation above referred to because the
same does not affect him directly. This conclusion is, presumably, based upon the following
premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of the
aforementioned appropriation; (2) that the latter may not be annulled without a previous declaration
of unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421 of the Civil
Code is absolute, and admits of no exception. We do not agree with these premises.

The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for the
projected feeder roads in question, the legality thereof depended upon whether said roads were
public or private property when the bill, which, latter on, became Republic Act 920, was passed by
Congress, or, when said bill was approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which
the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result is
that said appropriation sought a private purpose, and hence, was null and void. 4 The donation to
the Government, over five (5) months after the approval and effectivity of said Act, made, according
to the petition, for the purpose of giving a "semblance of legality", or legalizing, the appropriation in
question, did not cure its aforementioned basic defect. Consequently, a judicial nullification of said
donation need not precede the declaration of unconstitutionality of said appropriation.

Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions.
For instance, the creditors of a party to an illegal contract may, under the conditions set forth in
Article 1177 of said Code, exercise the rights and actions of the latter, except only those which are
Page178

inherent in his person, including therefore, his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in the manner indicated in said legal
provision.

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a
direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the
instance of taxpayers, laws providing for the disbursement of public funds, 5upon the theory that "the
expenditure of public funds by an officer of the State for the purpose of administering
an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as follows:

In the determination of the degree of interest essential to give the requisite standing to attack
the constitutionality of a statute, the general rule is that not only persons individually
affected, but also taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys. (11 Am. Jur. 761;
emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon
(262 U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a municipal
corporation to its government. Indeed, under the composite system of government existing in the
U.S., the states of the Union are integral part of the Federation from an international viewpoint, but,
each state enjoys internally a substantial measure of sovereignty, subject to the limitations imposed
by the Federal Constitution. In fact, the same was made by representatives of each state of the
Union, not of the people of the U.S., except insofar as the former represented the people of the
respective States, and the people of each State has, independently of that of the others, ratified said
Constitution. In other words, the Federal Constitution and the Federal statutes have become binding
upon the people of the U.S. in consequence of an act of, and, in this sense, through the respective
states of the Union of which they are citizens. The peculiar nature of the relation between said
people and the Federal Government of the U.S. is reflected in the election of its President, who is
chosen directly, not by the people of the U.S., but by electors chosen by each State, in such manner
as the legislature thereof may direct (Article II, section 2, of the Federal Constitution).
lawphi1 .net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of the Philippines is more fully
direct than that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal Government in the interest of the
Union. For this reason, the rule recognizing the right of taxpayers to assail the constitutionality of a
legislation appropriating local or state public funds — which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater application in the Philippines
than that adopted with respect to acts of Congress of the United States appropriating federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by
the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of
contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Page178

Government was not permitted to question the constitutionality of an appropriation for backpay of
members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and
Barredo vs.Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of
taxpayers impugning the validity of certain appropriations of public funds, and invalidated the same.
Moreover, the reason that impelled this Court to take such position in said two (2) cases — the
importance of the issues therein raised — is present in the case at bar. Again, like the petitioners in
the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The Province of Rizal,
which he represents officially as its Provincial Governor, is our most populated political
subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of taxation, in the
Philippines.

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should not
have been dismissed by the lower court; and that the writ of preliminary injunction should have been
maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to
the lower court for further proceedings not inconsistent with this decision, with the costs of
this instance against respondent Jose C. Zulueta. It is so ordered.

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez David,
Paredes, and Dizon, JJ., concur.

Page178
G.R. No. L-7859 December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma,plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres
and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the
taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to
the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the
Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market";
wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from
the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to
prepare it for the eventuality of the loss of its preferential position in the United States market and
the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture
of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on
owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others
for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine
Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid
out only for any or all of the following purposes or to attain any or all of the following
objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the gradual loss of
the preferntial position of the Philippine sugar in the United States market, and ultimately to
insure its continued existence notwithstanding the loss of that market and the consequent
necessity of meeting competition in the free markets of the world;
Page178
 Second, to readjust the benefits derived from the sugar industry by all of the component
elements thereof — the mill, the landowner, the planter of the sugar cane, and the laborers in
the factory and in the field — so that all might continue profitably to engage
therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the production
thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their living and
working conditions: Provided, That the President of the Philippines may, until the adjourment
of the next regular session of the National Assembly, make the necessary disbursements
from the fund herein created (1) for the establishment and operation of sugar experiment
station or stations and the undertaking of researchers (a) to increase the recoveries of the
centrifugal sugar factories with the view of reducing manufacturing costs, (b) to produce and
propagate higher yielding varieties of sugar cane more adaptable to different district
conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the
buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the
possibility of utilizing the other by-products of the industry, (f) to determine what crop or crops
are suitable for rotation and for the utilization of excess cane lands, and (g) on other
problems the solution of which would help rehabilitate and stabilize the industry, and (2) for
the improvement of living and working conditions in sugar mills and sugar plantations,
authorizing him to organize the necessary agency or agencies to take charge of the
expenditure and allocation of said funds to carry out the purpose hereinbefore enumerated,
and, likewise, authorizing the disbursement from the fund herein created of the necessary
amount or amounts needed for salaries, wages, travelling expenses, equipment, and other
sundry expenses of said agency or agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950;
alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar
industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be
constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs
appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory
purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In
other words, the act is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is one of the great industries of
our nation, sugar occupying a leading position among its export products; that it gives employment
to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of
the important sources of foreign exchange needed by our government, and is thus pivotal in the
plans of a regime committed to a policy of currency stability. Its promotion, protection and
advancement, therefore redounds greatly to the general welfare. Hence it was competent for the
legislature to find that the general welfare demanded that the sugar industry should be stabilized in
turn; and in the wide field of its police power, the lawmaking body could provide that the distribution
of benefits therefrom be readjusted among its components to enable it to resist the added strain of
the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson
Page178

vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —

The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great a portion of the population
of the State is affected to such an extent by public interests as to be within the police power
of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of
public concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion must be
allowed fully play, subject only to the test of reasonableness; and it is not contended that the means
provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are
oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen
why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be
made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S.
412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat.
316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation, or exemption infringe
no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed.
1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the Sugar
Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is
that very enterprise that is being protected. It may be that other industries are also in need of similar
protection; that the legislature is not required by the Constitution to adhere to a policy of "all or
none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the
law presumably hits the evil where it is most felt, it is not to be overthrown because there are other
instances to which it might have been applied;" and that "the legislative authority, exerted within its
proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel
Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in sugar production, utilization of by-
products and solution of allied problems, as well as to the improvements of living and working
conditions in sugar mills or plantations, without any part of such money being channeled directly to
private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs.
Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ.,
concur.
Page178
G.R. No. 215427 December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity
as Commissioner of the Bureau of Internal Revenue, and JOHN DOE and JANE DOE, who are
Promulgated: persons acting for, in behalf or under the authority of respondent, Respondents.

DECISION

PERALTA, J.:

The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement
and Gaming Corporation (PAGCOR) on September 13, 2013 in the case entitled Philippine
Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et al., which 1

was promulgated on March 15, 2011. The Motion for Clarification essentially prays for the
clarification of our Decision in the aforesaid case, as well the issuance of a Temporary Restraining
Order and/or Writ of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their
employees, agents and any other persons or entities acting or claiming any right on BIR’s behalf, in
the implementation of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.

At the onset, it bears stressing that while the instant motion was denominated as a "Motion for
Clarification," in the session of the Court En Bancheld on November 25, 2014, the members thereof
ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of Court, given that
petitioner essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or
excess of jurisdiction in issuing RMC No. 33-2013. Consequently, a new docket number has been
assigned thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant to
the Resolution dated November 25,2014, the pertinent portion of which reads:

G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue,
et al.). – The Court Resolved to

(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order
and/or Preliminary Injunction Application dated September 6, 2013 filed by PAGCOR;

(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for
Clarification, subject to payment of the appropriate docket fees; and

(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification
within five (5) days from notice hereof. Brion, J., no part and on leave. Perlas-Bernabe, J., on
official leave.

Considering that the parties havefiled their respective pleadings relative to the instant petition, and
the appropriate docket fees have been duly paid by petitioner, this Court considers the instant
petition submitted for resolution.
Page178

The facts are briefly summarized as follows:

On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition
(With Prayer for the Issuance of a Temporary Restraining Order and/or Preliminary Injunction)
seeking the declaration of nullity of Section 1 of Republic Act (R.A.)No. 9337 insofar as it amends
2 3

Section 27(C) of R.A. No. 8424, otherwise known as the National Internal Revenue Code (NIRC) by
4 5

excluding petitioner from the enumeration of government-owned or controlled corporations (GOCCs)

exempted from liability for corporate income tax.

On March 15, 2011, this Court rendered a Decision granting in part the petition filed by petitioner. Its
6

fallo reads:

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending
Section 27(c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue
Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being
contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs.

SO ORDERED. 7

Both petitioner and respondent filed their respective motions for partial reconsideration, but the
samewere denied by this Court in a Resolution dated May 31, 2011.
8

Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated
March 15, 2011 and the Resolution dated May 31, 2011, which clarifies the "Income Tax and
Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR), its
Contractees and Licensees." Relevant portions thereof state:

II. INCOME TAX

Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is
no longer exempt from corporate income tax as it has been effectively omitted from the list of
government-owned or controlled corporations (GOCCs) that are exempt from income tax.
Accordingly, PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs
and other similar recreation or amusement places, gaming pools, and other related operations, are
subject to corporate income tax under the NIRC, as amended. This includes, among others:

a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) Income from mobile bingo operations operated by it, with agents on commission basis.
Provided, however, that the agents’ commission income shall be subject to regular income
tax, and consequently, to withholding tax under existing regulations.

Income from "other related operations" includes, butis not limited to:
Page178
 a) Income from licensed private casinos covered by authorities to operate issued to private
operators;

b) Income from traditional bingo, electronic bingo and other bingo variations covered by
authorities to operate issued to private operators;

c) Income from private internet casino gaming, internet sports betting and private mobile
gaming operations;

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

g) Income from other necessary and related services, shows and entertainment.

PAGCOR’s other income that is not connected with the foregoing operations are likewise subject to
corporate income tax under the NIRC, as amended.

PAGCOR’s contractees and licensees are entities duly authorized and licensed by PAGCOR to
perform gambling casinos, gaming clubs and other similar recreation or amusement places, and
gaming pools. These contractees and licensees are subject to income tax under the NIRC, as
amended.

III. FRANCHISE TAX

Pursuant to Section 13(2) (a) of P.D. No. 1869, PAGCOR is subject to a franchise tax of five percent
9

(5%) of the gross revenue or earnings it derives from its operations and licensing of gambling
casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other
related operations as described above.

On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax
treatment of its income from gaming operations and other related operations under RMC No. 33-
2013. The request was, however, denied by the BIR Commissioner.

On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was,
accordingly, recorded in the Book of Entries of Judgment.
10

Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an
erroneous interpretation and application of the aforesaid Decision, and seeking clarification with
respect to the following:

1. Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes with
respect toits gaming income, pursuant to its Charter – P.D. 1869, as amended by R.A. 9487,
is deemed repealed or amended by Section 1 (c) of R.A. 9337.

2. If it is deemed repealed or amended, whether PAGCOR’s gaming income is subject to

both 5% franchise tax and income tax.
Page178
 3. Whether PAGCOR’s income from operation of related services is subject to both income
tax and 5% franchise tax.

4. Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit of third
parties with contractual relationship with PAGCOR in connection with the operation of
casinos.11

In our Decision dated March 15, 2011, we have already declared petitioner’s income tax liability in
view of the withdrawal of its tax privilege under R.A. No. 9337. However, we made no distinction as
to which income is subject to corporate income tax, considering that the issue raised therein was
only the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the
enumeration of GOCCs exempted from corporate income tax.

For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is classified
into two: (1) income from its operations conducted under its Franchise, pursuant to Section 13(2) (b)
thereof (income from gaming operations); and (2) income from its operation of necessary and related
services under Section 14(5) thereof (income from other related services). In RMC No. 33-2013,
respondent further classified the aforesaid income as follows:

1. PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other
similar recreation or amusement places, gaming pools, includes, among others:

(a) Income from its casino operations;

(b) Income from dollar pit operations;

(c) Income from regular bingo operations; and

(d) Income from mobile bingo operations operated by it, with agents on commission basis.
Provided, however, that the agents’ commission income shall be subject to regular income
tax, and consequently, to withholding tax under existing regulations.

2. Income from "other related operations"includes, but is not limited to:

(a) Income from licensed private casinos covered by authorities to operate issued to private
operators;

(b) Income from traditional bingo, electronic bingo and other bingo variations covered by
authorities to operate issued to private operators;

(c) Income from private internet casino gaming, internet sports betting and private mobile
gaming operations;

(d) Income from private poker operations;

(e) Income from junket operations;

(f) Income from SM demo units; and

Page178

(g) Income from other necessary and related services, shows and entertainment. 12
After a thorough study of the arguments and points raised by the parties, and in accordance with our
Decision dated March 15, 2011, we sustain petitioner’s contention that its income from gaming
operations is subject only to five percent (5%) franchise tax under P.D. 1869, as amended, while its
income from other related services is subject to corporate income tax pursuant to P.D. 1869, as
amended, as well as R.A. No. 9337. This is demonstrable.

First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its
operation of related services. Accordingly, the income tax exemption ordained under Section 27(c) of
R.A. No. 8424 clearly pertains only to petitioner’sincome from operation of related services. Such
income tax exemption could not have been applicable to petitioner’s income from gaming operations
as it is already exempt therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions. –

xxxx

(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be
assessed and collected under this Franchise from the Corporation; nor shall any form of tax or
charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%)
percent of the gross revenue or earnings derived by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in
lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial, or national government authority.13

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity
involved is subject to tax. This is the most sound and logical interpretation because petitioner could
not have been exempted from paying taxes which it was not liable to pay in the first place. This is
clear from the wordings of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on
its gross revenue or earnings derived by petitioner from its operation under the Franchise in lieuof all
taxes of any kind or form, as well as fees, charges or leviesof whatever nature, which necessarily
include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to petitioner with respect to
its income from gaming operations as the same is already exempted from all taxes of any kind or
form, income or otherwise, whether national or local, under its Charter, save only for the five percent
(5%) franchise tax. The exemption attached to the income from gaming operations exists
independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise would be
downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption
was granted (then withdrawn) than when it was not granted at all in the first place.

Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of
the Committee on Ways and Means dated October 27, 1997, the exemption of petitioner from the
payment of corporate income tax was due to the acquiescence of the Committee on Ways and
Means to the request of petitioner that it be exempt from such tax. Based on the foregoing, it would
be absurd for petitioner to seek exemption from income tax on its gaming operations when under its
Charter, it is already exempted from paying the same.

Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in that manner. 14

As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former
lays down the taxes imposable upon petitioner, as follows: (1) a five percent (5%) franchise tax of
Page178

the gross revenues or earnings derived from its operations conducted under the Franchise, which
shall be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature
or description, levied, established or collected by any municipal, provincial or national government
authority; (2) income tax for income realized from other necessary and related services, shows and
15

entertainment of petitioner. With the enactment of R.A. No. 9337, which withdrew the income tax
16

exemption under R.A. No. 8424, petitioner’s tax liability on income from other related services was
merely reinstated.

It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of
activity oroperation. There is no inconsistency between the statutes; and in fact, they complement
each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly
provides the tax treatment of petitioner’s income prevails over R.A. No. 9337, which is a general law.
It is a canon of statutory construction that a special law prevails over a general law — regardless of
their dates of passage — and the special is to be considered as remaining an exception to the
general. The rationale is:
17

Why a special law prevails over a general law has been put by the Court as follows: x x x x

x x x The Legislature consider and make provision for all the circumstances of the particular case.
The Legislature having specially considered all of the facts and circumstances in the particular case
in granting a special charter, it will not be considered that the Legislature, by adopting a general law
containing provisions repugnant to the provisions of the charter, and without making any mention of
its intention to amend or modify the charter, intended to amend, repeal, or modify the special act.
(Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.) 18

Where a general law is enacted to regulate an industry, it is common for individual franchises
subsequently granted to restate the rights and privileges already mentioned in the general law, or to
amend the later law, as may be needed, to conform to the general law. However, if no provision or
19

amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that
the same is the intent of the lawmakers, for repeal of laws by implication is not favored.
20

In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioner’s tax
exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should have been amended
expressly in R.A. No. 9487, or the same, at the very least, should have been mentioned in the
repealing clause of R.A. No. 9337. However, the repealing clause never mentioned petitioner’s
21

Charter as one of the laws being repealed. On the other hand, the repeal of other special laws,
namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is
categorically provided under Section 24 (a) (b) of R.A. No. 9337, to wit:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
persons and/or transactions affected herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National
Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of
generated power by generation companies; and
Page178
 (C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or
parts thereof which are contrary to and inconsistent with any provisions of this Act are hereby
repealed, amended or modified accordingly. 22

When petitioner’s franchise was extended on June 20, 2007 without revoking or withdrawing itstax
exemption, it effectively reinstated and reiterated all of petitioner’s rights, privileges and authority
granted under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and
privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege
to a person. Thus, the extension of petitioner’s franchise under the sameterms and conditions
means a continuation of its tax exempt status with respect to its income from gaming operations.
Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the provisions
ofP.D. 1869, as amended, a special law, are considered repealed, amended and modified,
consistent with Section 2 of R.A. No. 9487, thus:

SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and
regulations and other issuances, or parts thereof, which are inconsistent with the provisions of this
Act, are hereby repealed, amended and modified.

It is settled that where a statute is susceptible of more than one interpretation, the court should adopt
such reasonable and beneficial construction which will render the provision thereof operative and
effective, as well as harmonious with each other. 23

Given that petitioner’s Charter is notdeemed repealed or amended by R.A. No. 9337, petitioner’s
income derived from gaming operations is subject only to the five percent (5%)franchise tax, in
accordance with P.D. 1869, as amended. With respect to petitioner’s income from operation of other
related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no
application with respect to petitioner’s income from other related services, inview of the express
provision of Section 14(5) of P.D. 1869, as amended, to wit:

Section 14. Other Conditions.

xxxx

(5) Operation of related services. — The Corporation is authorized to operate such necessary and
related services, shows and entertainment. Any income that may be realized from these related
services shall not be included as part of the income of the Corporation for the purpose of applying
the franchise tax, but the same shall be considered as a separate income of the Corporation and
shall be subject to income tax. 24

Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from
other related services without basis therefor.

For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013 (i.e.,
income from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gambling pools) should be interpreted in relation to Section 13(2)
of P.D. 1869, which pertains to the income derived from issuing and/or granting the license to
operate casinos to PAGCOR’s contractees and licensees, as well as earnings derived by PAGCOR
from its own operations under the Franchise. On the other hand, the second classification of
PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related operations) should be
interpreted in relation to Section 14(5) of P.D. 1869, which pertains to income received by PAGCOR
from its contractees and licensees in the latter’s operation of casinos, as well as PAGCOR’s own
Page178

income from operating necessary and related services, shows and entertainment.
As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the benefit
of third parties with contractual relationship with petitioner in connection with the operation of
casinos, we find no reason to rule upon the same. The resolution of the instant petition is limited to
clarifying the tax treatment of petitioner’s income vis-à-visour Decision dated March 15, 2011. This
Decision is not meant to expand our original Decision by delving into new issues involving
petitioner’s contractees and licensees. For one, the latter are not parties to the instant case, and
may not therefore stand to benefit or bear the consequences of this resolution. For another, to
answer the fourth issue raised by petitioner relative to its contractees and licensees would be
downright premature and iniquitous as the same would effectively countenance sidesteps to judicial
process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion
amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from
gaming operations and other related services to corporate income tax and five percent (5%)
franchise tax. This unduly expands our Decision dated March 15, 2011 without due process since
1âwphi1

the imposition creates additional burden upon petitioner. Such act constitutes an overreach on the
part of the respondent, which should be immediately struck down, lest grave injustice results. More,
it is settled that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.

In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A.
No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from corporate income
tax, is valid and constitutional. In addition, we hold that:

1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes
with respect to its income from gaming operations, pursuant to P.D. 1869, as amended, is
not repealed or amended by Section l(c) ofR.A. No. 9337;

2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise
tax only; and

3. Petitioner's income from other related services is subject to corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the
implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner's
income derived from its gaming operations; and (2) franchise tax on petitioner's income from other
related services.

WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease

and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax
on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's
income from other related services.

SO ORDERED.
Page178
 November 9, 2016

G.R. No. 177387

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
SECRET ARY OF JUSTICE, and PHILIPPINE AMUSEMENT AND GAMING CORPORATION,
Respondents

DECISION

BERSAMIN, J.:

Petitioner Commissioner of Internal Revenue (CIR) commenced this special civil action
for certiorari to annul the December 22, 2006 resolution and the March 12, 2007 resolution, both
1 2

issued by the Secretary of Justice in OSJ Case No. 2004-1, alleging that respondent Secretary of
Justice acted without or in excess of his jurisdiction, or in grave abuse of discretion amounting to
lack or excess of jurisdiction.

The dispositive portion of the assailed December 22, 2006 resolution states:

WHEREFORE, premises considered, PAGCOR is declared exempt from payment [oil all taxes, save
for the franchise tax as provided for under Section 13 of PD 1869, as amended, the presidential
issuance not having been expressly repealed by RA 7716. 3

while the March 12, 2007 resolution denied the CIR’s motion for reconsideration of the December
22, 2006 resolution.

Antecedents

Respondent Philippine Amusement and Gaming Corporation (PAGCOR) has operated under a
legislative franchise granted by Presidential Decree No. 1869 (P.O. No. 1869), its Charter, whose
4

Section 13(2) provides that:

(2) Income and other Taxes - (a) Franchise Holder:

No tax of any kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall he assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the
earnings of the Corporation, except a Franchise Tax of five percent (S(X1) of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise. Such
tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected
by any municipal, provincial or national government authority. (bold emphasis supplied)

Notwithstanding the aforesaid 5% franchise tax imposed, the Bureau of Internal Revenue (BIR)
issued several assessments against PAGCOR for alleged deficiency value-added tax (VAT), final
withholding tax on fringe benefits, and expanded withholding tax, as follows:
Page178
 TOTAL AMOUNT
DUE
(inclusive of
PERIOD
ASSESSMENT DATE ISSUED interest,
COVERED
surcharge and
compromise
penalty)
No. 33-
1996/1997/1998 (for November 14, 2002 1996/1997/1998 ₱4,078,476,977.26
deficiency VAT)5

No. 33-99 (for

deficiency VAT, final
withholding tax on
November 25, 2002 1999 ₱6,678,346,966.49
fringe benefits, and
expanded withholding
tax)6

No. 33-2000 (for

deficiency VAT and
March 18, 2003 2000 ₱2,953,321,685.92
final withholding tax
on fringe benefits)7

TOTAL ₱13,710,145,629.67

On December 18, 2002, PAGCOR filed a letter-protest with the BIR against Assessment Notice No.
33-1996/1997 /1998 and Assessment Notice No. 33-99. 8

On March 31, 2003, PAGCOR filed a letter-protest against Assessment Notice No. 33-2000, in which
it reiterated the asse1iions made in its December 18, 2002 letter-protest.
9

In reply to both letters-protest, the BIR requested PAGCOR to submit additional documents to
enable the conduct of the reinvestigation.10

The CIR did not act on PAGCOR’s letter-protest against Assessment Notice No. 33-1996/1997 /1998
and Assessment Notice No. 33-99 within the 180-day period from the latter's submission of
additional documents. Hence, PAGCOR filed an appeal with the Secretary of Justice on January 5,
11

2004 relative to Assessment Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99. 12

Meanwhile, in response to PAGCOR’s letter-protest dated March 31, 2003, BIR Regional Director
Teodorica Arcega issued a letter dated December 15, 2003 reiterating the assessment for deficiency
VAT for taxable year 2000, stating thusly:
13

In a memorandum to the Regional Director dated December 15, 2003 the Chief Legal Division, this
Region, confirmed the taxability of PAGCOR under Section 108(A) of the 1997 Tax Code, as
amended, effective Jan. 1, 1996 (VAT Review Committee Ruling No. 041-2001 ).

In view of the confirmation of the Legal Division we hereby reiterate the assessments forwarded to
your office under Final Assessment No. 33-2000 dated March 18, 2003 amounting to
₱2,097,426,943.00.
Page178
However, the BIR only recomputed the deficiency final withholding tax on fringe benefits and
expanded withholding tax, and reduced the assessments to ₱l2,212, 199.85 and ₱6,959,525. l0,
respectively.14

PAGCOR elevated its protest against Assessment Notice No. 33-2000 to the CIR, but the 180-day
period prescribed by law also lapsed without any action on the part of the CIR. Consequently, on
15

August 4, 2004, PAGCOR brought another appeal to the Secretary of Justice covering Assessment
Notice No. 33-2000. 16

The Secretary of Justice consolidated PAGCOR's two appeals.

After the parties traded pleadings, the Secretary of Justice summoned them to a preliminary
conference to discuss, inter alia, any possible settlement or compromise. When no amicable
17

settlement was reached, the consolidated appeals were considered submitted for resolution. 18

On December 22, 2006, Secretary of Justice Raul M. Gonzales rendered the first assailed resolution
declaring PAGCOR exempt from the payment of all taxes except the 5% franchise tax provided in its
Charter.19

On March 12, 2007, Secretary Gonzales issued the second assailed resolution denying the CIR's
motion for reconsideration. 20

Hence, this special civil action for certiorari.

Issues

The grounds for the petition for certiorari are as follows:

RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS

JURISDICTION AND GRAVELY ABUSED HIS DISCRETION IN ASSUMING JURISDICTION OVER
THE PETITION ON DISPUTED TAX ASSESSMENTS FILED BY RESPONDENT PAGCOR.

II

RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS

JURISDICTION AND GRAVELY ABUSED HIS DISCRETION IN HOLDING THAT R.A. NO. 7716
(VAT LAW) DID NOT REPEAL P.D. NO. 1869 (CHARTER OF PAGCOR); HENCE, PAGCOR HAS
NOT BECOME LIABLE FOR THE PAYMENT OF THE 10% VAT IN LIEU OF THE 5% FRANCHISE
TAX.

III

RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS

JURISDICTION AND GRAVELY ABUSED HIS DISCRETION IN ABSOLVING PAGCOR OF ITS
DUTY AND RESPONSIBILITY AS WITHHOLDING AGENT TO WITHHOLD AND REMIT FRINGE
BENEFITS TAX, FINAL WITHHOLDING TAX AND EXPANDED WITHHOLDING TAX. 21
Page178
Otherwise put, the issues to be resolved are: (1) whether or not the Secretary of Justice has
jurisdiction to review the disputed assessments; (2) whether or not PAGCOR is liable for the
payment of VAT; and (3) whether or not P AGCOR is liable for the payment of withholding taxes.

Ruling

The petition for certiorari is partly granted.

1.The Secretary of Justice has no jurisdiction to

review the disputed assessments

The petitioner contends that it is the Court of Tax Appeals (CTA), not the Secretary of Justice, that
has the exclusive appellate jurisdiction in this case, pursuant to Section 7(1) of Republic Act No.
1125 (R.A. No. 1125), which grants the CTA the exclusive appellate jurisdiction to review, among
others, the decisions of the Commissioner of Internal Revenue "in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other law or
part of law administered by the Bureau of Internal Revenue."

PAGCOR counters, however, that it is the Secretary of Justice who should adjudicate the dispute by
virtue of Chapter 14 of the Revised Administrative Code of 1987, which provides:

CHAPTER 14. CONTROVERSIES AMONG GOVERNMENT OFFICES AND CORPORATIONS.

SEC. 66. How settled. - All disputes/claims and controversies, solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government, including
government-owned and controlled corporations, such as those arising from the interpretation and
application of statues, contracts or agreements shall be administratively settled or adjudicated in the
manner provided for in this Chapter. This Chapter shall, however, not apply to disputes involving the
Congress, the Supreme Court, the Constitutional Commission and local governments.

SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be
submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the
National Government and as ex-officio legal adviser of all government-owned or controlled
corporations. His ruling or decision thereon shall be conclusive and binding on all the parties
concerned.

SEC. 68. Disputes Involving Questions of Fact and Law. – Cases involving mixed questions of law
and of fact or only factual issues shall be submitted to and settled or adjudicated by:

(1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus,
offices and other agencies of the National Government as well as government-owned or controlled
corporations or entities of whom he is the principal law officer or general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1).

Although acknowledging the validity of the petitioner's contention, the Secretary of Justice still
resolved the disputed assessments on the basis that the prevailing doctrine at the time of the filing of
the petitions in the Department of Justice (DOJ) on January 5, 2004 was that enunciated
in Development Bank of the Philippines v. Court of Appeals, whereby the Court ruled that:
22
Page178
x x x (T)here is an "irreconcilable repugnancy x x between Section 7(2) of R.A. NO. 1125 and P.D.
No. 242," and hence, that the latter enactment (P.O. No. 242), being the latest expression of the
legislative will, should prevail over the earlier.

Later on, the Court reversed itself in Philippine National Oil Company v. Court of Appeals, and held
23

as follows:

Following the rule on statutory construction involving a general and a special law previously
discussed, then P.O. No. 242 should not affect R.A. No. 1125. R.A. No. 1125, specifically Section 7
thereof on the jurisdiction of the CTA, constitutes an exception to P.O. No. 242. Disputes, claims and
controversies, falling under Section 7 of R.A. No. 1125, even though solely among government
offices, agencies, and instrumentalities, including government-owned and controlled corporations,
remain in the exclusive appellate jurisdiction of the CTA. Such a construction resolves the alleged
inconsistency or conflict between the two statutes, x x x.

Despite the shift in the construction of P.D. No. 242 in relation to R.A. No. 1125, the Secretary of
Justice still resolved PAGCOR's petitions on the merits, stating that:

While this ruling (DBP) has been superseded by the ruling in Philippine National Oil Company vs.
CA, in view of the prospective application of the PNOC ruling, we (the DOJ) are of the view that this
Office can continue to assume jurisdiction over this case which was filed and has been pending with
this Office since January 5, 2004 and rule on the merits of the case.24

We disagree with the action of the Secretary of Justice.

PAGCOR filed its appeals in the DOI on January 5, 2004 and August 4, 2004. Philippine National
25

Oil Company v. Court of Appeals was promulgated on April 26, 2006. The Secretary of Justice
resolved the petitions on December 22, 2006. Under the circumstances, the Secretary of Justice had
ample opportunity to abide by the prevailing rule and should have referred the case to the CTA
because judicial decisions applying or interpreting the law formed part of the legal system of the
country, and are for that reason to be held in obedience by all, including the Secretary of Justice
26

and his Department. Upon becoming aware of the new proper construction of P.D. No. 242 in
relation to R.A. No. 1125 pronounced in Philippine National Oil Company v. Court of
Appeals, therefore, the Secretary of Justice should have desisted from dealing with the petitions,
and referred them to the CTA, instead of insisting on exercising jurisdiction thereon. Therein lay the
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the Secretary of
Justice, for he thereby acted arbitrarily and capriciously in ignoring the pronouncement in Philippine
National Oil Company v. Court of Appeals. Indeed, the doctrine of stare decisis required him to
adhere to the ruling of the Court, which by tradition and conformably with our system of judicial
administration speaks the last word on what the law is, and stands as the final arbiter of any
justiciable controversy. In other words, there is only one Supreme Court from whose decisions all
other courts and everyone else should take their bearings. 27

Nonetheless, the Secretary of Justice should not be taken to task for initially entertaining the
petitions considering that the prevailing interpretation of the law on jurisdiction at the time of their
filing was that he had jurisdiction. Neither should PAGCOR to blame in bringing its appeal to the DOJ
on January 5, 2004 and August 4, 2004 because the prevailing rule then was the interpretation
in Development Bank of the Philippines v. Court of Appeals. The emergence of the later ruling was
beyond PAGCOR's control. Accordingly, the lapse of the period within which to appeal the disputed
assessments to the CTA could not be taken against P AGCOR. While a judicial interpretation
becomes a part of the law as of the date that the law was originally passed, the reversal of the
Page178
interpretation cannot be given retroactive effect to the prejudice of parties who may have relied on
the first interpretation.
28

The Court now undertakes to settle the controversy because of the urgent need to promptly decide
it. We cannot lose sight of the fact that PAGCOR is among the most prolific income-generating
institutions that contribute immensely to the country's developing economy. Any controversy
involving PAGCOR should be resolved expeditiously considering the underlying public interest in the
matter at hand. To dismiss the petitions in order to have PAGCOR bring a similar petition in the CTA
would not serve the interest of justice. On previous occasions, the Court has overruled the defense
29

of jurisdiction in the interest of public welfare and for the advancement of public policy whenever, as
in this case, an extraordinary situation existed. 30

2.PAGCOR is exempt from payment of VAT

The CIR insists that under VAT Ruling No. 04-96 (dated May 14, 1996), VAT Ruling No. 030-99
(dated March 18, 1999), and VAT Ruling No. 067-01 (dated October 8, 2001), R.A. No. 7716 has 31

expressly repealed, amended, or withdrawn the 5% franchise tax provision in PAGCOR's Charter;
hence, PAGCOR was liable for the 10% VAT. 32

The relevant provisions of R.A. No. 7716 on which the insistence has been anchored are the
following:

SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

"SEC. l 02. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base
of tax. - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross
receipts derived from the sale or exchange of services, including the use or lease of properties.

"The phrase 'sale or exchange of services' means the performance of all kinds of service in the
Philippines for others for a fee, remuneration or consideration, including x x x service of franchise
grantees of telephone and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 117 of this Code; x x x"

SEC. 12. Section 117 of the National Internal revenue Code, as amended, is hereby further
amended further to read as follows:

"SEC.117. Tax on Franchises. - Any provision of general or special law to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchises on electric,
gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business
covered by the law granting the franchise. x x x"

SEC. 20. Repealing Clauses. - The provisions of any special law relative to the rate of franchise
taxes are hereby expressly repealed.x x x

The CIR argues that PAGCOR' s gambling operations are embraced under the phrase sale or
exchange of services, including the use or lease of properties; that such operations are not among
those expressly exempted from the 10% VAT under Section 3 of R.A. No. 7716; and that the
legislative purpose to withdraw PAGCOR's 5% franchise tax was manifested by the language used
in Section 20 of R.A. No.7716.
Page178
The CIR' s arguments lack merit.

Firstly, a basic rule in statutory construction is that a special law cannot be repealed or modified by a
subsequently enacted general law in the absence of any express provision in the latter law to that
effect. A special law must be interpreted to constitute an exception to the general law in the absence
of special circumstances warranting a contrary conclusion. R.A. No. 7716, a general law, did not
33

provide for the express repeal of PAGCOR's Charter, which is a special law; hence, the general
repealing clause under Section 20 of R.A. No. 7716 must pertain only to franchises of electric, gas,
and water utilities, while the term other franchises in Section 102 of the NIRC should refer only to
transport, communications and utilities, exclusive of PAGCOR's casino operations.

Secondly, R.A. No. 7716 indicates that Congress has not intended to repeal PAGCOR's privilege to
enjoy the 5% franchise tax in lieu of all other taxes. A contrary construction would be unwarranted
and myopic nitpicking. In this regard, we should follow the following apt reminder uttered in Fort
Bonifacio Development Corporation v. Commissioner of Internal Revenue: 34

A law must not be read in truncated parts: its provisions must be read in relation to the whole law. It
is the cardinal rule in statutory construction that a statute’s clauses and phrases must not be taken
as detached and isolated expressions but the whole and every part thereof must be considered in
fixing the meaning of any of its parts in order to produce a harmonious whole. Every part of the
statute must be interpreted with reference to the context, i.e., that every part of the statute must be
considered together with other parts of the statute and kept subservient to the general intent of the
whole enactment.

In constructing a statute courts have to take the thought conveyed by the statute as a whole:
construe the constituent parts together; ascertain the legislative intent from the whole act; consider
each and every provision thereof in the light of the general purpose of the statute; and endeavor to
make every part effective, harmonious and sensible.

Although Section 3 of R.A. No. 7716 imposes 10% VAT on the sale or exchange of services,
including the use or lease of properties, the provision also considers transactions that are subject to
0% VAT. On the other hand, Section 4 of R.A. No. 7716 enumerates the transactions exempt from
35

VAT, viz.:

SEC. 4. Section 103 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

"SEC.103. Exempt transactions. - The following shall he exempt from the value-added tax:

xxxx

"(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, and 1590, and nonelectric cooperatives under republic Act No.
6938, or international agreements to which the Philippines is a signatory;

x x x x" (bold emphasis supplied.)

Anent the effect of R.A. No. 7716 on franchises, the Court has observed in Tolentino v. The
Secretary of Finance that:
36
Page178

Among the provisions of the NIRC amended is §103, which originally read:
§103. Exempt transactions.-The following shall be exempt from the value-added tax:

....

(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory.

Among the transactions exempted from the VAT were those of PAL because it was exempted under
its franchise (P.D. No. 1590) from the payment of all "other taxes ... now or in the near future," in
consideration of the payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, §103 of the NIRC now provides:

§103. Exempt transactions.-The following shall be exempt from the value-added tax:

……..

(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590 .....

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is
concerned.

xxxx

x x x Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by specifically
excepting from the grant of exemptions from the VAT PAL's exemption under P.D. No. 1590. This is
within the power of Congress to do under Art. XII, § 11 of the Constitution, which provides that the
grant of a franchise for the operation of a public utility is subject to amendment, alteration or repeal
by Congress when the common good so requires. 37

Unlike the case of PAL, however, R.A. No. 7716 does not specifically exclude PAGCOR's exemption
under P.D. No. 1869 from the grant of exemptions from VAT; hence, the petitioner's contention that
R.A. No. 7716 expressly amended PAGCOR's franchise has no leg to stand on.

Moreover, PAGCOR's exemption from VAT, whether under R.A. No. 7716 or its amendments, has
been settled in Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal
Revenue, whereby the Court, citing Commissioner of Internal Revenue v. Acesite (Philippines)
38

Hotel Corporation, has declared:

39

Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a
special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby
further amended to read as follows:
Page178

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: x x x

xxxx

(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate;

xxxx

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A.
No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of
Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons
to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly
and extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation. x x x The Court ruled that PAGCOR and Acesite were both exempt from paying VAT,
thus:

xxxx

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating P AGCOR, grants the latter an exemption from
the payment of taxes. Section 13 of P.O. 1869 pertinently provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise,
as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed
and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax
shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected
by any municipal, provincial, or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations conducted
under the franchise specifically from the payment of any tax, income or otherwise, as well as any
Page178

form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other remuneration from the
Corporation or operator as a result of essential facilities furnished and/or technical services rendered
to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not
to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes
with no distinction on whether the taxes arc direct or indirect. We arc one with the CA ruling
that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.O. 1869], the term "Corporation" or operator refers
to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although, differently
worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step
further by granting tax exempt status to persons dealing with PAGCOR in casino
operations. The unmistakable conclusion is that PAGCOR is not liable for the ₱30, 152,892.02 VAT
and neither is Acesitc as the latter is effectively subject to zero percent rate under Sec. 108 B (3 ),
R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entitles or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods,
properties, or services subject to VAT. Thus, by extending the tax exemption to entities or
individuals dealing with P AGCOR in casino operations, it is exempting P AGCOR from being
liable to indirect taxes.

The manner of charging VAT docs not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the
value. Verily, the seller or lessor has the option to follow either way in charging its clients and
customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10%
of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first
method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Aeesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the fo1mer Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any
Page178
person engaged in the sale of services x x x; Provided, that the following services performed in the
Philippines by VAT registered persons shall be subject to 0%.

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.O. 1869 and the extension of
such exemption to entities or individuals dealing with PAGCOR in casino operations are best
elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons,
Inc., where the absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption of contractee WHO
should be implemented to mean that the entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and such does not violate the rule that tax
exemptions are personal because the manifest intention of the agreement is to exempt the
contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the proviso in
P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino
operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The
Commissioner of Internal Revenue v. Acesite (Philippines)Hotel Corporation was Section 102 (b) of
the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No.
8424, it is still applicable to this case, since the provision relied upon has been retained in R.A. No.
9337. 40

Clearly, the assessments for deficiency VAT issued against PAGCOR should be cancelled for lack of
legal basis.

The Court also deems it warranted to cancel the assessments for deficiency withholding VAT
pertaining to the payments made by PAGCOR to its catering service contractor.

In two separate letters dated December 12, 2003 and December 15, 2003, the BIR conceded that
41 42

the unmonetized meal allowances of PAGCOR's employees were not subject to fringe benefits tax
(FBT). However, the BIR held PAGCOR liable for expanded withholding VAT for the payments made
to its catering service contractor who provided the meals for its employees. Accordingly, the BIR
assessed PAGCOR with deficiency withholding VAT for taxable year 1999 in the amount of ₱4,077 ,
667.40, inclusive of interest and compromise penalty; and for taxable year 2000 in the amount of
₱l2,212, 199.85, exclusive of interest and penalties.

The payments made by PAGCOR to its catering service contractor are subject to zero-rated (0%)
VAT in accordance with Section 13(2) of P.D. No. 1869 in relation to Section 3 of R.A. No. 7716, viz.:

SEC. 13. Exemptions.-

(1) x x x

(2) (a) x x x
Page178
(b) Others: The exemption herein granted for earnings derived from the operations conducted under
the franchise, specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees, or levies, shall inure to the benefit and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship
in connection with the operations of casino(s) authorized to be conducted under this Franchise and
to those receiving compensation or other remuneration from the Corporation or operator as a result
of essential facilities furnished and/or technical services rendered to the Corporation or operator.

xxxx

SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

"SEC.102. Value-added tax on sale of service and use or lease of properties. - x x x

"(b) Transaction subject to zero-rate. - The following services performed in the Philippines by Vat-
registered persons shall be subject to 0%:

"x x xx

"(3) Services rendered to persons or entities whose exemptions under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero rate.

As such, the catering service contractor, who is presumably a VAT-registered person, shall impose a
zero rate (0%) output tax on its sale or lease of goods, services or properties to PAGCOR.
Consequently, no withholding tax is due on such transaction.

3.

PAGCOR is liable for the payment of withholding taxes

Through the letters dated December 12, 2003 43 and December 15, 2003, 44 the BIRrecomputed the
assessments for deficiency final withholding taxes on fringe benefits under Assessment No. 33-99
and Assessment No. 33-2000, respectively, as follows:

Period
Recomputed Amount
Covered
Assessment No. 33-99
₱13,337,414.58, inclusive of
Final Withholding Tax on Fringe Benefits 1999
penalty and interest
Assessment No. 33-2000
₱12,212,199.85, exclusive of
Final Withholding Tax on Fringe Benefits 2000
penalty and interest

The amount of the assessment for deficiency expanded withholding tax under Assessment No. 33-
99 remained at ₱3,790,916,809.16.
Page178
We now resolve the validity of the foregoing assessments. 1âwphi1

a. Final Withholding Tax on

Fringe Benefits

The recomputed assessment for deficiency final withholding taxes related to the car plan granted to
PAGCOR's employees and for its payment of membership dues and fees.

Under Section 33 of the NIRC, FBT is imposed as:

A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective
January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby
imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee
(except rank and file employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business
or profession of the employer, or when the fringe benefit is for the convenience or advantage of the
employer). The tax herein imposed is payable by the employer which tax shall be paid in the same
manner as provided for under Section 57 (A) of this Code.

FBT is treated as a final income tax on the employee that shall be withheld and paid by the employer
on a calendar quarterly basis. As such, PAGCOR is a mere withholding agent inasmuch as the FBT
45

is imposed on PAGCOR's employees who receive the fringe benefit. PAGCOR's liability as a
withholding agent is not covered by the tax exemptions under its Charter.

The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe
benefit as defined under Section 33 of the NIRC. To avoid the imposition of the FBT on the benefit
46

received by the employee, and, consequently, to avoid the withholding of the payment thereof by the
employer, PAGCOR must sufficiently establish that the fringe benefit is required by the nature of, or
is necessary to the trade, business or profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer.

PAGCOR asserted that the car plan was granted "not only because it was necessary to the nature of
the trade of PAGCOR but it was also granted for its convenience." The records are lacking in proof
47

as to whether such benefit granted to PAGCOR's officers were, in fact, necessary for PAGCOR's
business or for its convenience and advantage. Accordingly, PAGCOR should have withheld the FBT
from the officers who have availed themselves of the benefits of the car plan and remitted the same
to the BIR.

As for the payment of the membership dues and fees, the Court finds that this is not considered a
fringe benefit that is subject to FBT and which holds PAGCOR liable for final withholding tax.
According to PAGCOR, the membership dues and fees are:

57. x x x expenses borne by [respondent] to cover various memberships in social, athletic clubs and
similar organizations. x x x

58. Respondent's nature of business is casino operations and it derives business from its customers
who play at the casinos. In furtherance of its business, PAGCOR usually attends its VIP customers,
amenities such as playing rights to golf clubs. The membership of PAGCOR to these golf clubs and
other organizations are intended to benefit respondent's customers and not its employees. Aside
from this, the membership is under the name of PAGCOR, and as such, cannot be considered as
Page178
fringe benefits because it is the customers and not the employees of PAGCOR who benefit from
such memberships. 48

Considering that the payments of membership dues and fees are not borne by PAGCOR for its
employees, they cannot be considered as fringe benefits which are subject to FBT under Section 33
of the NIRC. Hence, PAGCOR is not liable to withhold FBT from its employees.

b. Expanded Withholding Tax

The BIR assessed PAGCOR with deficiency expanded withholding tax for the year 1999 under
Assessment No. 33-99 amounting to ₱3,790,916,809.16, inclusive of surcharge and interest, which
was computed as follows:49

Taxable Basis per Investigation ₱ 2,441,948,878.00

Expanded Withholding Tax due per investigation 45,762,839.60

Less: Tax paid 43,490,484.05

Deficiency Expanded Withholding Tax Due ₱ 2,398,458,393. 95

Add: 25% surcharge
20% interest per annum from ___ 12-20-02 1,392,433,415.21
Compromise Penalty

TOTAL AMOUNT DUE & COLLECTIBLE ₱ 3, 790,891,809.16

==================

Later, BIR issued a letter dated December 12, 2003 showing therein a recomputation of the
assessment, to wit:50

Taxable Basis per Investigation ₱ 2,441,948,878.00

================
EWT due per investigation 45,762,839.60
Less: Tax paid 43,490,484.05

Def. EWT ₱ 2,272,355.55

Add: Interest 1-26-00 to 12-26-03 ₱l,780,311.85
Compromise 25,000.00 1,805,311.85

Def. EWT ₱ 4,077,667.40

PAGCOR submits that the BIR erroneously assessed it for thedeficiency expanded withholding
taxes, explaining thusly:
Page178
44. The computation made by the revenue officers for the year 1999 for expanded withholding taxes
against respondent arc also not correct because it included payments amounting to ₱682,120,262
which should not be subjected to withholding tax;

45. Of the said amount, ₱194,999,366 cover importations or various items for the sole and exclusive
use of the casinos x x x:

xxxx

46. The breakdown of respondent's payments which were assessed expanded withholding tax by
the BIR but which should not have been made subject thereto arc as follows:

a) Taxable Compensation Income amounting to ₱7l,6ll,563.60, representing salaries of contractuals

and casuals, clerical and messengerial and other services, cost of COA services and unclaimed
salaries and other benefits recognized as income but subsequently claimed (attached as Annexes
"10" to "18" and made integral parts hereof);

b) Prizes and other promo items amounting to ₱16,185,936.61 which were already subjected to 20%
final withholding tax. Pursuant to Revenue Regulations 2-98, prizes and promo items shall be
subject only to 20% final tax (attached as Annexes "19" to "51" and made integral parts hereof);

c) Reimbursements amounting to ₱18,246,090.35 which were paid directly by agents/employees as

over the counter purchases subsequently liquidated/reimbursed by PAGCOR pursuant to BIR rulings
129-92 and 345-88;

d) Taxes amounting to ₱6,679,807.53, the amount of which should not be subjected to expanded
withholding tax for obvious reasons;

e) Security Deposit amounting to ₱3,450,000.00 which was written off after the Regional Trial Court,
Branch 226 of Quezon City through Presiding Judge, Leah S. Domingo-Regala, rendered a decision
based on a compromise agreement in Civil Case No. 097-31299 entitled 'Felina Rodriguez-Luna, et
al vs. Philippine Amusement and Gaming Corporation" (attached as Annex "52" and made an
integral part hereof);
51

PAGCOR' s submission is partly meritorious. The Court finds that PAGCOR is not liable for
deficiency expanded withholding tax on its payment for: (1) audit services rendered by the
Commission on Audit (COA), amounting to ₱4,243,977.96, and (2) prizes and other promo items
52

amounting to ₱16,185,936.61. 53

PAGCOR's payment to the COA for its audit services is exempted from withholding tax pursuant to
Sec. 2.57.5 (A) of Revenue Regulation (RR) 2-98, which states:

SEC. 2.57.5. Exemption from Withholding Tax –The withholding of creditable withholding tax
prescribed in these Regulations shall not apply to income payments made to the following:

(A) National government and its instrumentalities, including provincial, city or municipal
governments;

On the other hand, the prizes and other promo items amounting to ₱16,185,936.61 were already
subjected to the 20% final withholding tax pursuant to Section 24(B)(l) of the NIRC. To impose
54 55
Page178
another tax on these items would amount to obnoxious or prohibited double taxation because the
taxpayer would be taxed twice by the same jurisdiction for the same purpose.
56

Hence, except for the foregoing, the Court upholds the validity of the assessment against PAGCOR
for deficiency expanded withholding tax.

We explain.

Other than the ₱4,243,977.96 payments made to COA, the remainder of the ₱71,61 l,563.60
compensation income that PAGCOR paid for the services of its contractual, casual, clerical and
messengerial employees are clearly subject to expanded withholding tax by virtue of Section 79 (A)
of the NIRC which reads:

Sec. 79 Income Tax Collected at Source.-

(A) Requirement of Withholding. - Every employer making payment of wages shall deduct and
withhold upon such wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided,
however, That no withholding of a tax shall be required where the total compensation income of an
individual does not exceed the statutory minimum wage, or Five thousand pesos (₱5,000) per
month, whichever is higher.

In addition, Section 2.57.3(C) of RR 2-98 states that:

SEC. 2.57.3 Persons Required to Deduct and Withhold. - The following persons are hereby
constituted as withholding agents for purposes of the creditable tax required to be withheld on
income payments enumerated in Section 2.57.2:

xxxx

(c) All government offices including government-owned or controlled corporations, as well as

provincial, city and municipal governments.

As for the rest of the assessment for deficiency expanded withholding tax arising from PAGCOR's
(1) reimbursement for over-the-counter purchases by its agents amounting to ₱18,246,090.34; (2)
tax payments of ₱6,679,807.53; (3) security deposit totalling ₱3,450,000.00; and (4) importations
w01ih ₱194,999,366.00, the Court observes that PAGCOR did not present sufficient and convincing
proof to establish its non-liability.

With regard to the reimbursement for over-the-counter purchases by its agents, PAGCOR merely
relied on BIR Ruling Nos. 129-92 and 345-88 to support its claim that it should not be liable to
withhold taxes on these payments without submitting any proof to show that there were really actual
payments made. There is also nothing in the records to show that the amount of ₱6,679,807.53
57

really represented PAGCOR's tax payments, or that the amount of ₱194,999,366.00 were, in fact,
58

paid for PAGCOR's importations of various items in furtherance of its business.

Even the ₱3,450,000.00 security deposit that it claims to have been written-off based on the
compromise agreement in Civil Case No. 097-31299 was not sufficiently proved to be tax exempt.
The only document presented by PAGCOR to support its contention was a copy of the trial court's
decision in the civil case. However, nowhere in the decision mentioned the security deposit.
Page178
It is settled that all presumptions are in favor of the correctness of tax assessments. The good faith
1âwphi1

of the tax assessors and the validity of their actions are thus presumed. They will be presumed to
have taken into consideration all the facts to which their attention was called. Hence, it is incumbent
59

upon the taxpayer to credibly show that the assessment was erroneous in order to relieve himself
from the liability it imposes. PAGCOR failed in this regard. Hence, except for the assessment for
deficiency expanded withholding taxes pertaining to the payments made to the COA for its audit
services and for the prizes and other promo items, the Court upholds the BIR's assessment for
deficiency expanded withholding taxes.

WHEREFORE, the Court PARTIALLY GRANTS the petition for certiorari; ANNULS and SETS
ASIDE the Resolutions dated December 22, 2006 and March 12, 2007 of the Secretary of Justice in
OSJ Case No. 2004-1FOR LACK OF JURISDICTION; DECLARES that Republic Act No. 7716 did
not repeal Section 13(2) of Presidential Decree 1869, and, ACCORDINGLY, the PHILIPPINE
AMUSEMENT AND GAMING CORPORATION is EXEMPT from value-added tax.

The Court FURTHER RESOLVES to:

(1) CANCEL Assessment No. 33-1996/1997 /1998 dated November 14, 2002, which
assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency value-added
tax;

(2) CANCEL Assessment No. 33-99 dated November 25, 2002, insofar as it assessed PHILIPPINE
AMUSEMENT AND GAMING CORPORATION for deficiency -

(a) value-added tax;

(b) expanded withholding value-added tax on payments made by PHILIPPINE

AMUSEMENT AND GAMING CORPORATION to its catering service contractor;

(c) final withholding tax on fringe benefits relating to the membership fees and dues paid
by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its clients
and customers; and

(d) expanded withholding tax on compensation income paid by PHILIPPINE AMUSEMENT

AND GAMING CORPORATION to the Commission on Audit for its audit services, and
expanded withholding tax on the prizes and other promo items, which were already
subjected to the 20% final withholding tax;

(3) CANCEL Assessment No. 33-2000 dated March 18, 2003, insofar as it assessed PHILIPPINE
AMUSEMENT AND GAMING CORPORATION for deficiency –

(a) value-added tax;

(b)expanded withholding value-added tax on payments made by PHILIPPINE AMUSEMENT

AND GAMING CORPORATION to its catering service contractor; and

(c) final withholding tax on fringe benefits relating to the membership fees and dues paid
by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its clients
and customers;
Page178
Respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION is DIRECTED TO PAY to
the Bureau of Internal Revenue:

(l) its deficiency final withholding tax on fringe benefits arising from the car plan it granted to its
qualified officers and employees under Assessment No. 33-99 and Assessment No. 33-2000; and

(2) its deficiency expanded withholding tax under Assessment No. 33-99, except on compensation
income paid to the Commission on Audit for its audit services and on prizes and other promo items.

Upon receipt of respondent PHILIPPINE AMUSEMENT AND GAMING COH.PORA TIO N's
payment for the foregoing tax deficiencies, the Bureau of Internal Revenue is DIRECTED TO
WITHHOLD 5% thereof and TO REMIT the same to the Office of the Solicitor General pursuant to
Section 11(1) 60 of Republic Act No. 9417 (An Act to Strengthen the Office of the Solicitor General,
by Expanding and Streamlining its Bureaucracy, Upgrading Employee Skills and Augmenting
Benefits, and Appropriating Funds Therefor and for Other Purposes).

No pronouncement on costs of suit.

SO ORDERED.

Page178
 June 5, 2017

G.R. No. 175772

MITSUBISHI CORPORATION - MANILA BRANCH, Petitioner

vs
COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari are the Decision . dated May 24, 2006 and the
1 2 3

Resolution dated December 4, 2006 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 5,
reversing the CTA Division's ruling in CTA Case No. 6139 which granted the claim for refund of
4

erroneously paid income tax and branch profit remittance tax (BPRT; collectively, subject taxes) filed
by petitioner Mitsubishi Corporation - Manila Branch (petitioner) for the fiscal year that ended on
March 31, 1998.

The Facts

On June 11, 1987, the governments of Japan and the Philippines executed an Exchange of
Notes, whereby the former agreed to extend a loan amounting to Forty Billion Four Hundred Million
5

Japanese Yen (¥40,400,000,000) to the latter through the then Overseas Economic Cooperation
Fund (OECF, now Japan Bank for International Cooperation) for the implementation of the Calaca II
Coal-Fired Thermal Power Plant Project (Project). In Paragraph 5 (2) of the Exchange of Notes, the
6

Philippine Government, by itself or through its executing agency, undertook to assume all taxes
imposed by the Philippines on Japanese contractors engaged in the Project:

(2) The Government of the Republic of the Philippines will, itself or through its executing agencies or
instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in
connection with any income that may accrue from the supply of products of Japan and services of
Japanese nationals to be provided under the Loan. (Emphases, underscoring, and italics supplied)
7

Consequently, the OECF and the Philippine Government entered into Loan Agreement No. PH-
P76 dated September 25, 1987 for Forty Billion Four Hundred Million Japanese Yen
8

(¥40,400,000,000). Due to the need for additional funding for the Project, they also executed Loan
Agreement No. PH-P141 dated December 20, 1994 for Five Billion Five Hundred Thirteen Million
9

Japanese Yen (¥5,513,000,000). 10

Meanwhile, on June 21, 1991, the National Power Corporation (NPC), as the executing government
agency, entered into a contract with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for
the engineering, supply, construction, installation, testing, and commissioning of a steam generator,
auxiliaries, and associated civil works for the Project (Contract). The Contract's foreign currency
11

portion was funded by the OECF loans. In line with the Exchange of Notes, Article VIII (B) (1) of the
12

Contract indicated NPC' s undertaking to pay any and all forms of taxes that are directly imposable
under the Contract:

Article VIII (B) (1)

Page178
B. FOR ONSHORE PORTION.

1.) [The] CORPORATION (NPC) shall, subject to the provisions under the Contract [Document] on
Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT,
that may be imposed by the Philippine Government, or any of its agencies and political
subdivisions. (Emphases supplied)
13

Petitioner completed the project on December 2, 1995, but it was only accepted by NPC on January
31, 1998 through a Certificate of Completion and Final Acceptance. 14

On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year that ended on March 31,
1998 with the Bureau of Internal Revenue (BIR). Petitioner included in its income tax due the 15

amount of ₱44,288,712.00, representing income from the OECF-funded portion of the Project. On 16

the same day, petitioner also filed its Monthly Remittance Return of Income Taxes Withheld and
remitted ₱8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its
income for the fiscal year that ended on March 31, 1998 . 17

On June 30, 2000, petitioner filed with the respondent Commissioner on Internal Revenue (CIR) an
administrative claim for refund of Fifty Two Million Six Hundred Twelve Thousand, Eight Hundred
Twelve Pesos (P52,612,812.00), representing the erroneously paid amounts of P44,288,712.00 as
income tax and ₱8,324,100.00 as BPRT corresponding to the OECF-funded portion of the
Project. To suspend the running of the two-year period to file a judicial claim for refund, petitioner
18

filed on July 13, 2000 a petition for review before the CTA pursuant to Section 229 of the National
19

Internal Revenue Code (NIRC), which was docketed as C.T.A. Case No. 6139. Petitioner anchored
20

its claim for refund on BIR Ruling No. DA-407-98 dated September 7, 1998, which interpreted21

paragraph 5 (2) of the Exchange of Notes, to wit:

In reply, please be informed that the aforequoted provisions of Notes-NAIA and Notes-Calaca are not
grants of direct tax exemption privilege to Japanese firms, Mitsubishi in this case, and Japanese
nationals operating as suppliers, contractors or consultants involved in either of the two projects
because the said provisions state that it is the Government of the Republic of the Philippines that is
obligated to pay whatever fiscal levies or taxes they may be liable to. Thus, there is no tax exemption
to speak of because the said taxes shall be assumed by the Philippine Government; hence, the said
provision is not violative of the Constitutional prohibition against the grants of tax exemption without
the concurrence of the majority of the members of Congress. (Citation omitted)

In view thereof, x x x, this office is of the opinion and hereby holds that Mitsubishi has no liability for
income tax and other taxes and fiscal levies, including VAT, on the 75% of the NAIA II Project and on
the 100% of the foreign currency portion of the Calaca II Project since the said taxes were assumed
by the Philippine Government.22 (Emphases and underscoring supplied)

In a Decision dated December 17, 2003, the CTA Division granted the petition and ordered the CIR
23

to refund to petitioner the amounts it erroneously paid as income tax and BPRT. It held that based
24

on the Exchange of Notes, the Philippine Government, through the NPC as its executing agency,
bound itself to assume or shoulder petitioner's tax obligations. Therefore, petitioner's payments of
income tax and BPR T to the CIR, when such payments should have been made by the NPC,
undoubtedly constitute erroneous payments under Section 229 of the NIRC. 25

The CTA Division acknowledged that based on Revenue Memorandum Circular (RMC) No. 42-99
dated June 2, 1999, amending RMC No. 32-99, the proper remedy for a Japanese contractor who
previously paid the taxes directly to the BIR is to recover or obtain a refund from the government
Page178

executing agency - the NPC in this case. It held, however, that RMC No. 42-99 does not apply to
petitioner as it filed its ITR on July 15, 1998 or almost a year before the issuance of the same. It
added that RMC No. 42-99 cannot be given retroactive effect as it would be unfair • • to petitioner.
26

The CIR moved for reconsideration27 but was denied in a Resolution 28

dated April 23, 2004; thus,
the CIR elevated the matter to the CTA En Banc. 29

The CTA En Bane's Ruling

In a Decision dated May 24, 2006, the CTA En Banc reversed the CTA Division's rulings and
30

declared that petitioner is not entitled to a refund of the taxes it paid to the CIR. It held
that, first, petitioner failed to establish that its tax payments were "erroneous" under the law to justify
the refund, adding that the CIR has no power to grant a refund under Section 229 of the NIRC
absent any tax exemption. It further observed that by its clear terms, the Exchange of Notes granted
no tax exemption to petitioner. Second, the Exchange of Notes cannot be read as a treaty validly
31

granting tax exemption considering the lack of Senate concurrence as required under Article VII,
Section 21 of the Constitution. Third, RMC No. 42-99, which was already in effect when petitioner
32

filed its administrative claim for refund on June 30, 2000, specifies petitioner's proper remedy - that
is, to recover the subject taxes from NPC, and not from the CIR. 33

Petitioner sought reconsideration, but the CTA En Banc denied the motion in a Resolution
34 35
dated
December 4, 2006; hence, this petition.

The Issues Before the Court

The issues before the Court are two-fold: (a) whether petitioner is entitled to a refund; and (b) if in
the affirmative, from which government entity should the refund be claimed.

The Court's Ruling

The petition is meritorious.

I.

Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are
erroneously collected by the government: 36

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

x x xx

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

x x xx (Emphases and underscoring supplied)

Page178
The authority of the CIR to refund erroneously collected taxes 1s likewise reflected in Section 229 of
the NIRC, which reads: SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or
proceeding shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessively or
in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or
sum has been paid under protest or duress."

x x x x (Emphases and underscoring supplied)

In this case, it is fairly apparent that the subject taxes in the amount of ₱52,612,812.00 was
erroneously collected from petitioner, considering that the obligation to pay the same had already
been assumed by the Philippine Government by virtue of its Exchange of Notes with the Japanese
Government. Case law explains that an exchange of notes is considered as an executive
agreement, which is binding on the State even without Senate concurrence. In Abaya v. Ebdane: 37

An "exchange of notes" is a record of a routine agreement that has many similarities with the private
law contract. The agreement consists of the exchange of two documents, each of the parties being
in the possession of the one signed by the representative of the other. Under the usual procedure,
the accepting State repeats the text of the offering State to record its assent. The signatories of the
letters may be government Ministers, diplomats or departmental heads. The technique of exchange
of notes is frequently resorted to, either because of its speedy procedure, or, sometimes, to avoid
the process of legislative approval.

It is stated that "treaties, agreements, conventions, charters, protocols, declarations, memoranda of

understanding, modus vivendi and exchange of notes" all refer to "international instruments binding
at international law."

xxxx

Significantly, an exchange of notes is considered a form of an executive agreement, which becomes

binding through executive action without the need of a vote by the Senate or Congress. 38

Paragraph 5 (2) of the Exchange of Notes provides for a tax assumption provision whereby:

(2) The Government of the Republic of the Philippines will, itself or through its executing agencies or
instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in
connection with any income that may accrue from the supply of products of Japan and services of
Japanese nationals to be provided under the Loan. (Emphases and underscoring supplied)

To "assume" means "[t]o take on, become bound as another is bound, or put oneself in place of
another as to an obligation or liability." This means that the obligation or liability remains, although
39

the same is merely passed on to a different person. In this light, the concept of an assumption is
therefore different from an exemption, the latter being the "[f]reedom from a duty, liability or other
requirement" or "[a] privilege given to a judgment debtor by law, allowing the debtor to retain [a]
certain property without liability." Thus, contrary to the CTA En Bane's opinion, the constitutional
40

provisions on tax exemptions would not apply.

Page178
As explicitly worded, the Philippine Government, through its executing agencies (i.e., NPC in this
case) particularly assumed "all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in
connection with any income that may accrue from the supply of products of Japan and services of
Japanese nationals to be provided under the [OECF] Loan." The Philippine Government's
assumption of "all fiscal levies and taxes," which includes the subject taxes, is clearly a form of
concession given to Japanese suppliers, contractors or consultants in consideration of the OECF
Loan, which proceeds were used for the implementation of the Project. As part of this, NPC entered
into the June 21, 1991 Contract with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for
the engineering, supply, construction, installation, testing, and commissioning of a steam generator,
auxiliaries, and associated civil works for the Project, which foreign currency portion was funded by
41

the OECF loans. Thus, in line with the tax assumption provision under the Exchange of Notes,
42

Article VIII (B) (1) of the Contract states that NPC shall pay any and all forms of taxes that are
directly imposable under the Contract:

Article VIII (B) (1)

B. FOR ONSHORE PORTION.

1.) [The] CORPORATION (NPC) shall, subject to the provisions under the Contract [Document] on
Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT,
that may be imposed by the Philippine Government, or any of its agencies and political
subdivisions. (Emphases supplied)
43

This notwithstanding, petitioner included in its income tax due the amount of ₱44,288,712.00,
representing income from the OECF-funded portion of the Project, and further remitted
₱8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for
the fiscal year that ended on March 31, 1998. These taxes clearly fall within the ambit of the tax
45

assumption provision under the Exchange of Notes, which was further fleshed out in the Contract.
Hence, it is the Philippine Government, through the NPC, which should shoulder the payment of the
same.

It bears stressing that the CIR had already acknowledged, through its administrative issuances, that
Japanese contractors involved in the Project are not liable for the subject taxes. In RMC No. 42-99,
the CIR interpreted the effect of the tax assumption clause in the Exchange of Notes on petitioner's
tax liability, to wit:

The foregoing provisions of the Exchange of Notes mean that the Japanese contractors or nationals
engaged in EOCF-funded projects in the Philippines shall not be required to shoulder all fiscal levies
or taxes associated with the project. x x xx

x x xx

x x x Since the executing government agencies are mandated to assume the payment of [income
taxes] under the Exchange of Notes, the said Japanese firms or nationals need not pay taxes due
thereunder. (Emphases and underscoring supplied)
46

The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement to tax refunds by
issuing Revenue Memorandum Order (RMO) No. 24-2005 addressed to specified BIR offices. The
47

RMO provides:
Page178
Pursuant to the provisions of [RMC] No. 32-99 as amended by RMC No. 42-99, Japanese
contractors and nationals engaged in OECF funded projects in the Philippines shall not be required
to shoulder the fiscal levies or taxes associated with the project. Thus, the concerned Japanese
contractors are entitled to claim for the refund of all taxes paid and shouldered by them relative to
the conduct of the Project.

You are, therefore, directed to expedite/ prioritize the processing of the claims for refund of Japanese
contractors and nationals so [as] not to delay and jeopardize the release of the funds for OECF
funded projects. (Emphases and underscoring supplied)
48

Therefore, considering that petitioner paid the subject taxes in the aggregate amount of
₱52,612,812.00, which it was not required to pay, the BIR erroneously collected such amount.
Accordingly, petitioner is entitled to its refund.

As above-stated, the NIRC vests upon the CIR, being the head of the BIR, the authority to credit or
refund taxes which are erroneously collected by the government. This specific statutory mandate
cannot be overridden by averse interpretations made through mere administrative issuances, such
as RMC No. 42-99, which - as argued by the CIR - shifts to the executing agencies (particularly,
NPC in this case) the power to refund the subject taxes: 49

B) INCOME TAX

1. Japanese firms or nationals operating as suppliers, contractors or consultants on and/or in

connection with any income that accrue from the supply of products and/or services to be provided
under the Project Loan, shall file the prescribed income tax returns. Since the executing government
agencies are mandated to assume the payment thereof under the Exchange of Notes, the said
Japanese firms or nationals need not pay taxes thereunder.

2. The concerned Revenue District Officer shall, in turn, collect the said income taxes from the
concerned executing government agencies. 1âwphi1

3. In cases where income taxes were previously paid directly by the Japanese contractors or
nationals, the corresponding cash refund shall be recovered from the government executing
agencies upon the presentation of proof of payment by the Japanese contractors or nationals."
(Emphasis and underscoring supplied)

3. In cases where income taxes were previously paid directly by the Japanese contractors or
nationals, the corresponding cash refund shall be recovered from the government executing
agencies upon the presentation of proof of payment by the Japanese contractors or
nationals. (Emphasis and underscoring supplied)
50

A revenue memorandum circular is an administrative ruling issued by the CIR to interpret tax laws. It
is widely accepted that an interpretation by the executive officers, whose duty is to enforce the law, is
entitled to great respect from the courts. However, such interpretation is not conclusive and will be
disregarded if judicially found to be incorrect. Verily, courts will not tolerate administrative issuances
51

that override, instead of remaining consistent and in harmony with, the law they seek to
implement, as in this case. Thus, Item B (3) of RMC No. 42-99, an administrative issuance directing
52

petitioner to claim the refund from NPC, cannot prevail over Sections 204 and 229 of the NIRC,
which provide that claims for refund of erroneously collected taxes must be filed with the CIR.
Page178
All told, petitioner correctly filed its claim for tax refund under Sections 204 and 229 of the NIRC to
recover the erroneously paid taxes amounting to ₱44,288,712.00 as income tax and ₱8,324,100.00
as BPRT from the BIR. To reiterate, petitioner's entitlement to the refund is based on the tax
assumption provision in the Exchange of Notes. Given that this is a case of tax assumption and not
an exemption, the BIR is, therefore, not without recourse; it can properly collect the subject taxes
from the NPC as the proper party that assumed petitioner's tax liability.
53

WHEREFORE, the petition is GRANTED. The Decision dated May 24, 2006 and the Resolution
dated December 4, 2006 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 5 are hereby
REVERSED and SET ASIDE. The Decision dated December 17, 2003 of the CTA in C.T.A. Case No.
6139 is REINSTATED.

SO ORDERED.

Page178
 February 13, 2017

G.R. No. 203514

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent

DECISION

DEL CASTILLO, J.:

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

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the May 9, 2012
2

Decision and the September 17, 2012 Resolution of the Court of Tax Appeals (CTA) in CTA EB
3 4

Case No. 716.

Factual Antecedents

On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received from the Large
Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau of Internal
Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07- 5

000097, assessing respondent SLMC deficiency income tax under Section 27(B) of the 1997
6 7

National Internal Revenue Code (NIRC), as amended, for taxable year 2005 in the amount of
₱78,617,434.54 and for taxable year 2006 in the amount of ₱57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative protest assailing the assessments. SLMC claimed that as a non-stock, non-profit
8

charitable and social welfare organization under Section 30(E) and (G) of the 1997 NIRC, as
9

amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment dated April 9, 2008 increasing the deficiency income for the taxable year 2005 tax to
10

₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, computed as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
Less: Cost of Sales/Services 2,643,049, 769.00
Gross Income From Operation 980,461,847.00
Page178
 Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883 .00
Net Income Subject to Tax 499, 194,964.00
XTaxRate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments
25% Surcharge 12,479,874.10
20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
Total Amount Due ?82,419,522.21

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
XTaxRate 10%
Tax.Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Page178
 Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due ?60,259,885.94 11

Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review, docketed as CTA Case
12

No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision finding SLMC not liable for deficiency
13

income tax under Section 27(B) of the 1997 NIRC, as amended, since it is exempt from paying
income tax under Section 30(E) and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly,
Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097, assessing petitioner for
alleged deficiency income taxes for the taxable years 2005 and 2006, respectively, are hereby
CANCELLED and SET ASIDE.

SO ORDERED. 14

CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010
Resolution.15

This prompted CIR to file a Petition for Review before the CTA En Banc.
16

Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA Division that
SLMC complies with all the requisites under Section 30(E) and (G) of the 1997 NIRC and thus,
entitled to the tax exemption provided therein.
17

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the CTA
erred in exempting SLMC from the payment of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and
195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc., finding SLMC
18

not entitled to the tax exemption under Section 30(E) and (G) of the NIRC of 1997 as it does not
operate exclusively for charitable or social welfare purposes insofar as its revenues from paying
patients are concerned. Thus, the Court disposed of the case in this manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Page178

Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section I,
Rule 45 of the Rules of Court.

SO ORDERED. 19

Considering the foregoing, SLMC then filed a Manifestation and Motion informing the Court that on
20

April 30, 2013, it paid the BIR the amount of basic taxes due for taxable years 1998, 2000-2002, and
2004-2007, as evidenced by the payment confirmation from the BIR, and that it did not pay any
21

surcharge, interest, and compromise penalty in accordance with the above-mentioned Decision of
the Court. In view of the payment it made, SLMC moved for the dismissal of the instant case on the
ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the
quarter/sand/or year/s said payment covers. 22

In reply, SLMC submitted a copy of the Certification issued by the Large Taxpayers Service of the
23 24

BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency income tax for taxable years
2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed, this Office considers the cases closed
due to the payment made on April 30, 2013." SLMC likewise submitted a letter from the BIR dated
25

November 26, 2013 with attached Certification of Payment and application for abatement, which it
26 27

earlier submitted to the Court in a related case, G.R. No. 200688, entitled Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc. 28

Thereafter, the parties submitted their respective memorandum.

CIR 's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under
Section 27(B) of the 1997 NIRC. It likewise asserts that SLMC is liable to pay compromise penalty
29

pursuant to Section 248(A) of the 1997 NIRC for failing to file its quarterly income tax returns.
30 31

As to the alleged payment of the basic tax, CIR contends that this does not render the instant case
moot as the payment confirmation submitted by SLMC is not a competent proof of payment of its tax
liabilities. 32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909
and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.) positing that
33

earning a profit by a charitable, benevolent hospital or educational institution does not result in the
withdrawal of its tax exempt privilege. SLMC further claims that the income it derives from operating
34

a hospital is not income from "activities conducted for profit." Also, it maintains that in accordance
35

with the ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.), it is not liable for compromise penalties.
36 37
Page178
In any case, SLMC insists that the instant case should be dismissed in view of its payment of the
basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013. 38

Our Ruling

SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as
its revenues from paying patients are concerned has been settled in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), where the Court
39

ruled that:

x x x We hold that Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two
specific institutions, namely, proprietary non-profit educational institutions and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section
27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to
Section 27(A)(l).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. 'Proprietary' means private, following the
definition of a 'proprietary educational institution' as 'any private school maintained and administered
by private individuals or groups' with a government permit. 'Non-profit' means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club Filipino,
Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. The
club was non-profit because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. Tue Court
defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to be applied consistently
with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by assisting them to establish themselves in
life or [by] otherwise lessening the burden of government.' A nonprofit club for the benefit of its
members fails this test. An organization may be considered as non-profit if it does not distribute any
part of its income to stockholders or members. However, despite its being a tax exempt institution,
any income such institution earns from activities conducted for profit is taxable, as expressly
provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
Page178

tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for
a tax exemption are specified by the law granting it. The power of Congress to tax implies the power
to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
'[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress.' The requirements for a tax exemption are strictly construed against the
taxpayer because an exemption restricts the collection of taxes necessary for the existence of the
government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise
as Hospital de San Juan and Jesus Sacred Heart College which says that receiving income from
paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether outpatient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that '[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation.' The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution
use property in a certain way, i.e., for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution 'actually, directly and exclusively' use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

Page178

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted 'exclusively'
for charitable purposes. The organization of the institution refers to its corporate form, as shown by
its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as 'one where no part of its income is distributable as dividends to its members,
trustees, or officers' and that any profit 'obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.' However, under Lung Center, any profit by a charitable institution must
not only be plowed back 'whenever necessary or proper,' but must be 'devoted or used altogether to
the charitable object which it is intended to achieve.'

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
'no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.' The use of lands, buildings and improvements of the institution is but
a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is
not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property 'actually, directly and exclusively'
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be 'organized and operated exclusively' for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be 'operated
exclusively' for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and operated
exclusively' by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
'any' activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the '[n]on-stock corporation
or association [must be] organized and operated exclusively for . . . charitable . . . purposes . . . . ' It
likewise qualifies the requirement in Section 30(G) that the civic organization must be 'operated
exclusively' for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable
purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the 'income of whatever
kind and character' of a charitable institution 'from any of its activities conducted for profit, regardless
of the disposition made of such income, shall be subject to tax.' Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under
Page178

Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱l.73 billion from paying patients is not an
institution 'operated exclusively' for charitable purposes. Clearly, revenues from paying patients are
income received from 'activities conducted for profit.' Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared ₱l,730,367,965 as 'Revenues from Services to Patients'
in contrast to its 'Free Services' expenditure of ₱218,187,498. In its Comment in G.R. No. 195909,
St. Luke's showed the following 'calculation' to support its claim that 65.20% of its 'income after
expenses was allocated to free or charitable services' in 1998.

x x xx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a
privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot be substituted for the
words 'used exclusively' without doing violence to the Constitution and thelaw. Solely is synonymous
with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a 'purpose to make profit over and above the cost' of services. The ₱l.73 billion
total revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱2l8,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said
that the income is 'devoted or used altogether to the charitable object which it is intended to
achieve.' The income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable 'regardless of the disposition made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
'any activity conducted for profit.' However, it quoted a deposition of Senator Mariano Jesus Cuenco,
who was a member of the Committee of Conference for the Senate, which introduced the phrase 'or
from any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree V d que es
una actividad esencial dicho hospital para el funcionamiento def colegio de medicina

de dicha universidad?

x x x x x x xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posicion social economica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.'
Page178
The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has
1awp++i1

paid rooms generally occupied by people of good economic standing, then it should be subject to
income tax. He said that this was one of the reasons Congress inserted the phrase 'or any activity
conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution. However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be 'operated exclusively' for charitable or social welfare purposes to be completely exempt
from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be lin1ited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is 'a corporation for purely charitable and social welfare purposes' and thus
exempt from income tax. In Michael J Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court
said that 'good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest.' 40

A careful review of the pleadings reveals that there is no countervailing consideration for the Court to
revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which states that "[o]nce a
case has been decided in one way, any other case involving exactly the same point at issue x x x
should be decided in the same manner," the Court finds that SLMC is subject to 10% income tax
41

insofar as its revenues from paying patients are concerned.

To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the
Page178

1997 NIRC requires said institution to operate exclusively for charitable or social welfare purpose.
But in case an exempt institution under Section 30(E) or (G) of the said Code earns income from its
for-profit activities, it will not lose its tax exemption. However, its income from for-profit activities will
be subject to income tax at the preferential 10% rate pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise

Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC for its
alleged failure to file its quarterly income tax returns, this has also been resolved in G.R Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), where 42

the imposition of surcharges and interest under Sections 248 and 249 of the 1997 NIRC were
43 44

deleted on the basis of good faith and honest belief on the part of SLMC that it is not subject to tax.
Thus, following the ruling of the Court in the said case, SLMC is not liable to pay compromise
penalty under Section 248(A) of the 1997 NIRC.

The Petition is rendered moot by the

payment made by SLMC on April 30,
2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant
Petition has become moot. 1avvphi1

While the Court agrees with the CIR that the payment confirmation from the BIR presented by SLMC
is not a competent proof of payment as it does not indicate the specific taxable period the said
payment covers, the Court finds that the Certification issued by the Large Taxpayers Service of the
BIR dated May 27, 2013, and the letter from the BIR dated November 26, 2013 with attached
Certification of Payment and application for abatement are sufficient to prove payment especially
since CIR never questioned the authenticity of these documents. In fact, in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, lnc., the Court 45

dismissed the petition based on a letter issued by CIR confirming SLMC's payment of taxes, which is
the same letter submitted by SLMC in the instant case.

In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot by the
payment made by SLMC of the basic taxes for the taxable years 2005 and 2006, in the amounts of
₱49,919,496.40 and ₱4 l,525,608.40, respectively. 46

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.

Page178
G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF
PATERNO MILLARE, respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated June 14, 1974,
rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as
Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal
portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against the lot and building of the Abra Valley
Junior College, Inc., represented by Director Pedro Borgonia located at Bangued,
Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all
back taxes in the amount of P5,140.31 and back taxes and penalties from the
promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the
trial, be confiscated to apply for the payment of the back taxes and for the
redemption of the property in question, if the amount is less than P6,000.00, the
remainder must be returned to the Director of Pedro Borgonia, who represents the
plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before
the trial must be returned to said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the plaintiff.

SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning duly incorporated with the
Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the
respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul
and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said
"Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83
duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal
Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said
taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent
treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale
Page178

was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the
highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly
issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion
to dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then
Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs
of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by an amended answer
(Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp.
106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the
respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered
(Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver to
the Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner,
through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB
Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial
court in its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court
respectfully enter into the following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the

complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra under Original Certificate of Title No. 0-
83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra

caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on
the property of said school under Original Certificate of Title No. 0-83 for the
satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of
Seizure being the one attached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc.
was sold at public auction for the satisfaction of the unpaid real property taxes
thereon and the same was sold to defendant Paterno Millare who offered the highest
bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant
Municipal Treasurer.
Page178
 5. That all other matters not particularly and specially covered by this stipulation of
facts will be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit

this stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes

Typ AGRIPINO BRILLANTES
Attorney for Plaintiff

Sgd. Loreto Roldan

Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre

Typ. DEMETRIO V. PRE
Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the
school is recognized by the government and is offering Primary, High School and College Courses,
and has a school population of more than one thousand students all in all; (b) that it is located right
in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the
Court of First Instance building; (c) that the elementary pupils are housed in a two-storey building
across the street; (d) that the high school and college students are housed in the main building; (e)
that the Director with his family is in the second floor of the main building; and (f) that the annual
gross income of the school reaches more than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is
whether or not the lot and building in question are used exclusively for educational purposes. (Rollo,
p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z.
Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental
Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws
applicable, court decisions and jurisprudence, the school building and school lot used for educational
purposes of the Abra Valley College, Inc., are exempted from the payment of taxes." (Annexes "B,"
"B-1" of Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because of the use of the second floor by the Director of
petitioner school for residential purposes. He thus ruled for the government and rendered the
assailed decision.

After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect
Page178

its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead
availed of the instant petition for review on certiorari with prayer for preliminary injunction before this
Court, which petition was filed on August 17, 1974 (Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition
(Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.

II

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY
BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER
TO PAY P5,140.31 AS REALTY TAXES.

IV

THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT
MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See
Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusively for
educational purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the
incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article
VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which
are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as
the Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which
were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational
purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr.
Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial
purposes because the ground floor of the college building is being used and rented by a commercial
establishment, the Northern Marketing Corporation (See photograph attached as Annex "8"
(Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is Section
22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants
Page178

exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or
educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act
No. 409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, scientific or
educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is the basic and
controlling guide, norm and standard to determine tax exemption, and not the mere incidental use
thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court
ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a
restaurant for its members, still these do not constitute business in the ordinary acceptance of the
word, but an institution used exclusively for religious, charitable and educational purposes, and as
such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this
Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used
as a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus,
the exemption from payment of land tax in favor of the convent includes, not only the land actually
occupied by the building but also the adjacent garden devoted to the incidental use of the parish
priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging
place, also qualifies for exemption because this constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in the
cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961]
and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965],
thus —

Moreover, the exemption in favor of property used exclusively for charitable or

educational purposes is 'not limited to property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to
and reasonably necessary for the accomplishment of said purposes, such as in the
case of hospitals, "a school for training nurses, a nurses' home, property use to
provide housing facilities for interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities for student nurses, interns,
and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for the
inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the
Page178

Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI,
Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been
made that exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for
commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of
the second floor of the main building in the case at bar for residential purposes of the Director and
his family, may find justification under the concept of incidental use, which is complimentary to the
main or primary purpose—educational, the lease of the first floor thereof to the Northern Marketing
Corporation cannot by any stretch of the imagination be considered incidental to the purpose of
education.

It will be noted however that the aforementioned lease appears to have been raised for the first time
in this Court. That the matter was not taken up in the to court is really apparent in the decision of
respondent Judge. No mention thereof was made in the stipulation of facts, not even in the
description of the school building by the trial judge, both embodied in the decision nor as one of the
issues to resolve in order to determine whether or not said properly may be exempted from payment
of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not
disputed even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on
appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is
not squarely raised below, still in the interest of substantial justice, this Court is not prevented from
considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to review
palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a
just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building
as well as the lot where it is built, should be taxed, not because the second floor of the same is being
used by the Director and his family for residential purposes, but because the first floor thereof is
being used for commercial purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby
AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner.

SO ORDERED.

Page178
G.R. No. L-9637 April 30, 1957

AMERICAN BIBLE SOCIETY, plaintiff-appellant,

vs.
CITY OF MANILA, defendant-appellee.

City Fiscal Eugenio Angeles and Juan Nabong for appellant.

Assistant City Fiscal Arsenio Nañawa for appellee.

FELIX, J.:

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered

and doing business in the Philippines through its Philippine agency established in Manila in
November, 1898, with its principal office at 636 Isaac Peral in said City. The defendant appellee is a
municipal corporation with powers that are to be exercised in conformity with the provisions of
Republic Act No. 409, known as the Revised Charter of the City of Manila.

In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles
and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines
and translating the same into several Philippine dialects. On May 29 1953, the acting City Treasurer
of the City of Manila informed plaintiff that it was conducting the business of general merchandise
since November, 1945, without providing itself with the necessary Mayor's permit and municipal
license, in violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and
3364, and required plaintiff to secure, within three days, the corresponding permit and license fees,
together with compromise covering the period from the 4th quarter of 1945 to the 2nd quarter of
1953, in the total sum of P5,821.45 (Annex A).

Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit
and pay under protest the sum of P5,891.45, if suit was to be taken in court regarding the same
(Annex B). To avoid the closing of its business as well as further fines and penalties in the premises
on October 24, 1953, plaintiff paid to the defendant under protest the said permit and license fees in
the aforementioned amount, giving at the same time notice to the City Treasurer that suit would be
taken in court to question the legality of the ordinances under which, the said fees were being
collected (Annex C), which was done on the same date by filing the complaint that gave rise to this
action. In its complaint plaintiff prays that judgment be rendered declaring the said Municipal
Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and
unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of P5,891.45
paid under protest, together with legal interest thereon, and the costs, plaintiff further praying for
such other relief and remedy as the court may deem just equitable.

Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the
Municipal Board of the City of Manila by virtue of the power granted to it by section 2444, subsection
(m-2) of the Revised Administrative Code, superseded on June 18, 1949, by section 18, subsection
(1) of Republic Act No. 409, known as the Revised Charter of the City of Manila, and praying that the
complaint be dismissed, with costs against plaintiff. This answer was replied by the plaintiff
reiterating the unconstitutionality of the often-repeated ordinances.

Before trial the parties submitted the following stipulation of facts:

COME NOW the parties in the above-entitled case, thru their undersigned attorneys and
respectfully submit the following stipulation of facts:
Page178
1. That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac Peral,
Manila, Bibles, New Testaments, bible portions and bible concordance in English and other
foreign languages imported by it from the United States as well as Bibles, New Testaments
and bible portions in the local dialects imported and/or purchased locally; that from the fourth
quarter of 1945 to the first quarter of 1953 inclusive the sales made by the plaintiff were as
follows:

Quarter Amount of Sales

4th quarter 1945 P1,244.21

1st quarter 1946 2,206.85

2nd quarter 1946 1,950.38

3rd quarter 1946 2,235.99

4th quarter 1946 3,256.04

1st quarter 1947 13,241.07

2nd quarter 1947 15,774.55

3rd quarter 1947 14,654.13

4th quarter 1947 12,590.94

1st quarter 1948 11,143.90

2nd quarter 1948 14,715.26

3rd quarter 1948 38,333.83

4th quarter 1948 16,179.90

1st quarter 1949 23,975.10

2nd quarter 1949 17,802.08

3rd quarter 1949 16,640.79

4th quarter 1949 15,961.38

1st quarter 1950 18,562.46

2nd quarter 1950 21,816.32

3rd quarter 1950 25,004.55

4th quarter 1950 45,287.92

1st quarter 1951 37,841.21

2nd quarter 1951 29,103.98

Page178
 3rd quarter 1951 20,181.10

4th quarter 1951 22,968.91

1st quarter 1952 23,002.65

2nd quarter 1952 17,626.96

3rd quarter 1952 17,921.01

4th quarter 1952 24,180.72

1st quarter 1953 29,516.21

2. That the parties hereby reserve the right to present evidence of other facts not herein
stipulated.

WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties
may present further evidence on their behalf. (Record on Appeal, pp. 15-16).

When the case was set for hearing, plaintiff proved, among other things, that it has been in existence
in the Philippines since 1899, and that its parent society is in New York, United States of America;
that its, contiguous real properties located at Isaac Peral are exempt from real estate taxes; and that
it was never required to pay any municipal license fee or tax before the war, nor does the American
Bible Society in the United States pay any license fee or sales tax for the sale of bible therein.
Plaintiff further tried to establish that it never made any profit from the sale of its bibles, which are
disposed of for as low as one third of the cost, and that in order to maintain its operating cost it
obtains substantial remittances from its New York office and voluntary contributions and gifts from
certain churches, both in the United States and in the Philippines, which are interested in its
missionary work. Regarding plaintiff's contention of lack of profit in the sale of bibles, defendant
retorts that the admissions of plaintiff-appellant's lone witness who testified on cross-examination
that bibles bearing the price of 70 cents each from plaintiff-appellant's New York office are sold here
by plaintiff-appellant at P1.30 each; those bearing the price of $4.50 each are sold here at P10 each;
those bearing the price of $7 each are sold here at P15 each; and those bearing the price of $11
each are sold here at P22 each, clearly show that plaintiff's contention that it never makes any profit
from the sale of its bible, is evidently untenable.

After hearing the Court rendered judgment, the last part of which is as follows:

As may be seen from the repealed section (m-2) of the Revised Administrative Code and the
repealing portions (o) of section 18 of Republic Act No. 409, although they seemingly differ in
the way the legislative intent is expressed, yet their meaning is practically the same for the
purpose of taxing the merchandise mentioned in said legal provisions, and that the taxes to
be levied by said ordinances is in the nature of percentage graduated taxes (Sec. 3 of
Ordinance No. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, as
amended by Ordinance No. 3364).

IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so

holds that this case should be dismissed, as it is hereby dismissed, for lack of merits, with
costs against the plaintiff.
Page178
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which certified the
case to Us for the reason that the errors assigned to the lower Court involved only questions of law.

Appellant contends that the lower Court erred:

1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not
unconstitutional;

2. In holding that subsection m-2 of Section 2444 of the Revised Administrative Code under
which Ordinances Nos. 2592 and 3000 were promulgated, was not repealed by Section 18
of Republic Act No. 409;

3. In not holding that an ordinance providing for taxes based on gross sales or receipts, in
order to be valid under the new Charter of the City of Manila, must first be approved by the
President of the Philippines; and

4. In holding that, as the sales made by the plaintiff-appellant have assumed commercial
proportions, it cannot escape from the operation of said municipal ordinances under the
cloak of religious privilege.

The issues. — As may be seen from the proceeding statement of the case, the issues involved in the
present controversy may be reduced to the following: (1) whether or not the ordinances of the City of
Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are constitutional and valid; and (2)
whether the provisions of said ordinances are applicable or not to the case at bar.

Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides
that:

(7) No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof, and the free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed. No religion test shall be
required for the exercise of civil or political rights.

Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529
and 3000, as respectively amended, are unconstitutional and illegal in so far as its society is
concerned, because they provide for religious censorship and restrain the free exercise and
enjoyment of its religious profession, to wit: the distribution and sale of bibles and other religious
literature to the people of the Philippines.

Before entering into a discussion of the constitutional aspect of the case, We shall first consider the
provisions of the questioned ordinances in relation to their application to the sale of bibles, etc. by
appellant. The records, show that by letter of May 29, 1953 (Annex A), the City Treasurer required
plaintiff to secure a Mayor's permit in connection with the society's alleged business of distributing
and selling bibles, etc. and to pay permit dues in the sum of P35 for the period covered in this
litigation, plus the sum of P35 for compromise on account of plaintiff's failure to secure the permit
required by Ordinance No. 3000 of the City of Manila, as amended. This Ordinance is of general
application and not particularly directed against institutions like the plaintiff, and it does not contain
any provisions whatever prescribing religious censorship nor restraining the free exercise and
enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:
Page178
 SEC. 1. PERMITS NECESSARY. — It shall be unlawful for any person or entity to conduct or
engage in any of the businesses, trades, or occupations enumerated in Section 3 of this
Ordinance or other businesses, trades, or occupations for which a permit is required for the
proper supervision and enforcement of existing laws and ordinances governing the
sanitation, security, and welfare of the public and the health of the employees engaged in the
business specified in said section 3 hereof, WITHOUT FIRST HAVING OBTAINED A
PERMIT THEREFOR FROM THE MAYOR AND THE NECESSARY LICENSE FROM THE
CITY TREASURER.

The business, trade or occupation of the plaintiff involved in this case is not particularly mentioned in
Section 3 of the Ordinance, and the record does not show that a permit is required therefor under
existing laws and ordinances for the proper supervision and enforcement of their provisions
governing the sanitation, security and welfare of the public and the health of the employees engaged
in the business of the plaintiff. However, sections 3 of Ordinance 3000 contains item No. 79, which
reads as follows:

79. All other businesses, trades or occupations not

mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00

Therefore, the necessity of the permit is made to depend upon the power of the City to license or tax
said business, trade or occupation.

As to the license fees that the Treasurer of the City of Manila required the society to pay from the 4th
quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including the sum of P50 as
compromise, Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028
prescribes the following:

SEC. 1. FEES. — Subject to the provisions of section 578 of the Revised Ordinances of the
City of Manila, as amended, there shall be paid to the City Treasurer for engaging in any of
the businesses or occupations below enumerated, quarterly, license fees based on gross
sales or receipts realized during the preceding quarter in accordance with the rates herein
prescribed: PROVIDED, HOWEVER, That a person engaged in any businesses or
occupation for the first time shall pay the initial license fee based on the probable gross sales
or receipts for the first quarter beginning from the date of the opening of the business as
indicated herein for the corresponding business or occupation.

xxx xxx xxx

GROUP 2. — Retail dealers in new (not yet used) merchandise, which dealers are not yet
subject to the payment of any municipal tax, such as (1) retail dealers in general
merchandise; (2) retail dealers exclusively engaged in the sale of . . . books, including
stationery.

xxx xxx xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance No.
2529, as amended, are not imposed directly upon any religious institution but upon those engaged in
any of the business or occupations therein enumerated, such as retail "dealers in general
merchandise" which, it is alleged, cover the business or occupation of selling bibles, books, etc.
Page178
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2) of
said legal body, as amended by Act No. 3659, approved on December 8, 1929, empowers the
Municipal Board of the City of Manila:

(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or both,
and (b) retail dealers in new (not yet used) merchandise, which dealers are not yet subject to
the payment of any municipal tax.

For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in
general merchandise, and (2) retail dealers exclusively engaged in the sale of (a) textiles . . .
(e) books, including stationery, paper and office supplies, . . .: PROVIDED, HOWEVER, That
the combined total tax of any debtor or manufacturer, or both, enumerated under these
subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned herein,
SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS PER ANNUM.

and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were
enacted in virtue of the power that said Act No. 3669 conferred upon the City of Manila. Appellant,
however, contends that said ordinances are longer in force and effect as the law under which they
were promulgated has been expressly repealed by Section 102 of Republic Act No. 409 passed
on June 18, 1949, known as the Revised Manila Charter.

Passing upon this point the lower Court categorically stated that Republic Act No. 409 expressly
repealed the provisions of Chapter 60 of the Revised Administrative Code but in the opinion of the
trial Judge, although Section 2444 (m-2) of the former Manila Charter and section 18 (o) of the new
seemingly differ in the way the legislative intent was expressed, yet their meaning is practically the
same for the purpose of taxing the merchandise mentioned in both legal provisions and,
consequently, Ordinances Nos. 2529 and 3000, as amended, are to be considered as still in full
force and effect uninterruptedly up to the present.

Often the legislature, instead of simply amending the pre-existing statute, will repeal the old
statute in its entirety and by the same enactment re-enact all or certain portions of the
preexisting law. Of course, the problem created by this sort of legislative action involves
mainly the effect of the repeal upon rights and liabilities which accrued under the original
statute. Are those rights and liabilities destroyed or preserved? The authorities are divided as
to the effect of simultaneous repeals and re-enactments. Some adhere to the view that the
rights and liabilities accrued under the repealed act are destroyed, since the statutes from
which they sprang are actually terminated, even though for only a very short period of
time. Others, and they seem to be in the majority, refuse to accept this view of the situation,
and consequently maintain that all rights an liabilities which have accrued under the original
statute are preserved and may be enforced, since the re-enactment neutralizes the repeal,
therefore, continuing the law in force without interruption. (Crawford-Statutory Construction,
Sec. 322).

Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and wider
concept of taxation and is different from the provisions of Section 2444(m-2) that the former cannot
be considered as a substantial re-enactment of the provisions of the latter. We have quoted above
the provisions of section 2444(m-2) of the Revised Administrative Code and We shall now copy
hereunder the provisions of Section 18, subdivision (o) of Republic Act No. 409, which reads as
follows:
Page178
 (o) To tax and fix the license fee on dealers in general merchandise, including importers and
indentors, except those dealers who may be expressly subject to the payment of some other
municipal tax under the provisions of this section.

Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail
dealers. For purposes of the tax on retail dealers, general merchandise shall be classified
into four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential
commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each
class but where commodities of different classes are sold in the same establishment, it shall
not be compulsory for the owner to secure more than one license if he pays the higher or
highest rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax as
such, as may be provided by ordinance.

For purposes of this section, the term "General merchandise" shall include poultry and
livestock, agricultural products, fish and other allied products.

The only essential difference that We find between these two provisions that may have any bearing
on the case at bar, is that, while subsection (m-2) prescribes that the combined total tax of any
dealer or manufacturer, or both, enumerated under subsections (m-1) and (m-2), whether dealing in
one or all of the articles mentioned therein, shall not be in excess of P500 per annum, the
corresponding section 18, subsection (o) of Republic Act No. 409, does not contain any limitation as
to the amount of tax or license fee that the retail dealer has to pay per annum. Hence, and in
accordance with the weight of the authorities above referred to that maintain that "all rights and
liabilities which have accrued under the original statute are preserved and may be enforced, since
the reenactment neutralizes the repeal, therefore continuing the law in force without interruption",
We hold that the questioned ordinances of the City of Manila are still in force and effect.

Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved by the
President of the Philippines as per section 18, subsection (ii) of Republic Act No. 409, which reads
as follows:

(ii) To tax, license and regulate any business, trade or occupation being conducted within the
City of Manila, not otherwise enumerated in the preceding subsections, including percentage
taxes based on gross sales or receipts, subject to the approval of the PRESIDENT, except
amusement taxes.

but this requirement of the President's approval was not contained in section 2444 of the former
Charter of the City of Manila under which Ordinance No. 2529 was promulgated. Anyway, as stated
by appellee's counsel, the business of "retail dealers in general merchandise" is expressly
enumerated in subsection (o), section 18 of Republic Act No. 409; hence, an ordinance prescribing a
municipal tax on said business does not have to be approved by the President to be effective, as it is
not among those referred to in said subsection (ii). Moreover, the questioned ordinances are still in
force, having been promulgated by the Municipal Board of the City of Manila under the authority
granted to it by law.

The question that now remains to be determined is whether said ordinances are inapplicable, invalid
or unconstitutional if applied to the alleged business of distribution and sale of bibles to the people of
the Philippines by a religious corporation like the American Bible Society, plaintiff herein.

With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028,
appellant contends that it is unconstitutional and illegal because it restrains the free exercise and
Page178

enjoyment of the religious profession and worship of appellant.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the
freedom of religious profession and worship. "Religion has been spoken of as a profession of faith to
an active power that binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has
reference to one's views of his relations to His Creator and to the obligations they impose of
reverence to His being and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342).
The constitutional guaranty of the free exercise and enjoyment of religious profession and worship
carries with it the right to disseminate religious information. Any restraints of such right can only be
justified like other restraints of freedom of expression on the grounds that there is a clear and
present danger of any substantive evil which the State has the right to prevent". (Tañada and
Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license
fee herein involved is imposed upon appellant for its distribution and sale of bibles and other
religious literature:

In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a
license be obtained before a person could canvass or solicit orders for goods, paintings,
pictures, wares or merchandise cannot be made to apply to members of Jehovah's
Witnesses who went about from door to door distributing literature and soliciting people to
"purchase" certain religious books and pamphlets, all published by the Watch Tower Bible &
Tract Society. The "price" of the books was twenty-five cents each, the "price" of the
pamphlets five cents each. It was shown that in making the solicitations there was a request
for additional "contribution" of twenty-five cents each for the books and five cents each for
the pamphlets. Lesser sum were accepted, however, and books were even donated in case
interested persons were without funds.

On the above facts the Supreme Court held that it could not be said that petitioners were
engaged in commercial rather than a religious venture. Their activities could not be
described as embraced in the occupation of selling books and pamphlets. Then the Court
continued:

"We do not mean to say that religious groups and the press are free from all financial
burdens of government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L. ed.
660, 668, 56 S. Ct. 444. We have here something quite different, for example, from a tax on
the income of one who engages in religious activities or a tax on property used or employed
in connection with activities. It is one thing to impose a tax on the income or property of a
preacher. It is quite another to exact a tax from him for the privilege of delivering a sermon.
The tax imposed by the City of Jeannette is a flat license tax, payment of which is a condition
of the exercise of these constitutional privileges. The power to tax the exercise of a privilege
is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of this
religious practice can make its exercise so costly as to deprive it of the resources necessary
for its maintenance. Those who can tax the privilege of engaging in this form of missionary
evangelism can close all its doors to all those who do not have a full purse. Spreading
religious beliefs in this ancient and honorable manner would thus be denied the needy. . . .

It is contended however that the fact that the license tax can suppress or control this activity
is unimportant if it does not do so. But that is to disregard the nature of this tax. It is a license
tax — a flat tax imposed on the exercise of a privilege granted by the Bill of Rights . . . The
power to impose a license tax on the exercise of these freedom is indeed as potent as the
power of censorship which this Court has repeatedly struck down. . . . It is not a nominal fee
imposed as a regulatory measure to defray the expenses of policing the activities in
question. It is in no way apportioned. It is flat license tax levied and collected as a condition
to the pursuit of activities whose enjoyment is guaranteed by the constitutional liberties of
Page178
 press and religion and inevitably tends to suppress their exercise. That is almost uniformly
recognized as the inherent vice and evil of this flat license tax."

Nor could dissemination of religious information be conditioned upon the approval of an

official or manager even if the town were owned by a corporation as held in the case
of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself as held in the
case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme Court expressed
the opinion that the right to enjoy freedom of the press and religion occupies a preferred
position as against the constitutional right of property owners.

"When we balance the constitutional rights of owners of property against those of the people
to enjoy freedom of press and religion, as we must here, we remain mindful of the fact that
the latter occupy a preferred position. . . . In our view the circumstance that the property
rights to the premises where the deprivation of property here involved, took place, were held
by others than the public, is not sufficient to justify the State's permitting a corporation to
govern a community of citizens so as to restrict their fundamental liberties and the
enforcement of such restraint by the application of a State statute." (Tañada and Fernando
on the Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).

Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code,
provides:

SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. — The following organizations

shall not be taxed under this Title in respect to income received by them as such —

(e) Corporations or associations organized and operated exclusively for religious,

charitable, . . . or educational purposes, . . .: Provided, however, That the income of whatever
kind and character from any of its properties, real or personal, or from any activity conducted
for profit, regardless of the disposition made of such income, shall be liable to the tax
imposed under this Code;

Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff from this
tax and says that such exemption clearly indicates that the act of distributing and selling bibles, etc.
is purely religious and does not fall under the above legal provisions.

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was
in some instances a little bit higher than the actual cost of the same but this cannot mean that
appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this
reason We believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be
applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious
profession and worship as well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit
before any person can engage in any of the businesses, trades or occupations enumerated therein,
We do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution,
nor tax the exercise of religious practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427,
this point was elucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or
otherwise, circulars, handbooks, advertising, or literature of any kind, whether said articles
are being delivered free, or whether same are being sold within the city limits of the City of
Page178

Griffin, without first obtaining written permission from the city manager of the City of Griffin,
 shall be deemed a nuisance and punishable as an offense against the City of Griffin, does
not deprive defendant of his constitutional right of the free exercise and enjoyment of
religious profession and worship, even though it prohibits him from introducing and carrying
out a scheme or purpose which he sees fit to claim as a part of his religious system.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if
applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not
applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the business of
plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free
exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination
of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said
business, trade or occupation of the plaintiff.

Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision
appealed from, sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected from it.
Without pronouncement as to costs. It is so ordered.

Page178
G.R. No. 152904 June 8, 2007

CITY ASSESSOR OF CEBU CITY, petitioner,

vs.
ASSOCIATION OF BENEVOLA DE CEBU, INC., respondent.

DECISION

VELASCO, JR., J.:

Is a medical arts center built by a hospital to house its doctors a separate commercial establishment
or an appurtenant to the hospital? This is the core issue to be resolved in the instant petition where
petitioner insists on a 35% assessment rate on the building which he considers commercial in nature
contrary to respondent’s position that it is a special real property entitled to a 10% assessment rate
for purposes of realty tax.

The Case

This Petition for Review on Certiorari 1 under Rule 45 assails the October 31, 2001 Decision 2 of the
Court of Appeals (CA) in CA-G.R. SP No. 62548, which affirmed the January 24, 2000 Decision 3 and
October 25, 2000 Resolution4of the Central Board of Assessment Appeals (CBAA); and the March
11, 2002 Resolution5 of the same court denying petitioner’s Motion for Reconsideration. 6 The CBAA
upheld the February 10, 1999 Decision of the Local Board of Assessment Appeals (LBAA), which
overturned the 35% assessment rate of respondent Cebu City Assessor and ruled that petitioner is
entitled to a 10% assessment.

The Facts

Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization organized

under the laws of the Republic of the Philippines and is the owner of Chong Hua Hospital (CHH) in
Cebu City. In the late 1990’s, respondent constructed the CHH Medical Arts Center (CHHMAC).
Thereafter, an April 17, 1998 Certificate of Occupancy 7 was issued to the center with a classification
of "Commercial [Clinic]."

Petitioner City Assessor of Cebu City assessed the CHHMAC building under Tax Declaration (TD)
No. ’97 GR-04-024-02529 as "commercial" with a market value of PhP 28,060,520 and an assessed
value of PhP 9,821,180 at the assessment level of 35% for commercial buildings, and not at the 10%
special assessment currently imposed for CHH and its other separate buildings—the CHH’s Dietary
and Records Departments.

Thus, respondent filed its September 15, 1998 letter-petition with the Cebu City LBAA for
reconsideration, asserting that CHHMAC is part of CHH and ought to be imposed the same special
assessment level of 10% with that of CHH. On September 25, 1998, respondent formally filed its
appeal with the LBAA which was docketed as Case No. 4406, TD No. ’97 GR-04-024-02529 entitled
Association Benevola de Cebu, Inc. v. City Assessor.

In the September 30, 1998 Order, the LBAA directed petitioner to conduct an ocular inspection of the
subject property and to submit a report on the scheduled date of hearing. In the October 7, 1998
Page178

hearing, the parties were required to submit their respective position papers.
In its position paper, petitioner argued that CHHMAC is a newly constructed five-storey building
situated about 100 meters away from CHH and, based on actual inspection, was ascertained that it
is not a part of the CHH building but a separate building which is actually used as commercial
clinic/room spaces for renting out to physicians and, thus, classified as "commercial." Petitioner
contended that in turn the medical specialists in CHHMAC charge consultation fees for patients who
consult for diagnosis and relief of bodily ailment together with the ancillary (or support) services
which include the areas of anesthesia, radiology, pathology, and more. Petitioner concluded the
foregoing set up to be ultimately geared for commercial purposes, and thus having the proper
classification as "commercial" under Building Permit No. B01-9750087 pursuant to Section 10 of the
Local Assessment Regulations No. 1-92 issued by the Department of Finance (DOF).

On the other hand, respondent contended in its position paper that CHHMAC building is actually,
directly, and exclusively part of CHH and should have a special assessment level of 10% as
provided under City Tax Ordinance LXX. Respondent asserted that the CHHMAC building is similarly
situated as the buildings of CHH, housing its Dietary and Records Departments, are completely
separate from the main CHH building and are imposed the 10% special assessment level. In fine,
respondent argued that the CHHMAC, though not actually indispensable, is nonetheless incidental
and reasonably necessary to CHH’s operations.

The Ruling of the Local Board of Assessment Appeals

On February 10, 1999, the LBAA rendered a Decision, 8 the dispositive portion of which reads:

WHEREFORE, premises considered, the appealed decision imposing a thirty five (35) percent
assessment level of TD No. ’97 GR-04-024-02529 on the Chong Hua Hospital Medical Arts building
is reversed and set aside and other [sic] one issued declaring that the building is entitled to a ten
(10) percent assessment level.

In reversing the ruling of petitioner City Assessor of Cebu City, the LBAA reasoned that it is of public
knowledge that hospitals have plenty of spaces leased out to medical practitioners, which is both an
accepted and desirable fact; thus, respondent’s claim is not disputed that such is a must for a tertiary
hospital like CHH. The LBAA held that it is inconsequential that a separate building was constructed
for that purpose pointing out that departments or services of other institutions and establishments
are also not always housed in the same building.

Thus, the LBAA pointed to the fact that respondent’s Dietary and Records Departments which are
housed in separate buildings were similarly imposed with CHH the special assessment level of 10%,
ratiocinating in turn that there is no reason therefore why a higher level would be imposed for
CHHMAC as it is similarly situated with the Dietary and Records Departments of the CHH.

The Ruling of the Central Board of Assessment Appeals

Aggrieved, petitioner filed its March 15, 1999 Notice of Appeal 9 and March 16, 1999 Appeal
Memorandum10 before the CBAA Visayas Field Office which docketed the appeal as CBAA Case No.
V-15, In Re: LBAA Case No. 4406, TD No. ’97 GR-04-024-02529 entitled City Assessor of Cebu City
v. Local Board of Assessment Appeals of Cebu City and Associacion Benevola de Cebu, Inc. On
June 3, 1999, respondent filed its Answer11 to petitioner’s appeal.

Subsequently, on January 24, 2000, the CBAA rendered a Decision 12 affirming in toto the LBAA
Decision and resolved the issue of whether the subject building of CHHMAC is part and parcel of
CHH. It agreed with the above disquisition of the LBAA that it is a matter of public knowledge that
Page178

hospitals lease out spaces to its accredited medical practitioners, and in particular it is of public
knowledge that before the CHHMAC was constructed, the accredited doctors of CHH were housed
in the main hospital building of CHH. Moreover, citing Herrera v. Quezon City Board of Assessment
Appeals13 later applied in Abra Valley College, Inc. v. Aquino,14 the CBAA held that the fact that the
subject building is detached from the main hospital building is of no consequence as the exemption
in favor of property used exclusively for charitable or educational purposes is not only limited to
property actually indispensable to the hospital, but also extends to facilities which are incidental and
reasonably necessary for the accomplishment of such purposes.

Through its October 25, 2000 Resolution,15 the CBAA denied petitioner’s Motion for
Reconsideration.16

The Ruling of the Court of Appeals

Not satisfied, petitioner brought before the CA a petition for review 17 under Rule 43 of the Rules of
Court, docketed as CA-G.R. SP No. 62548, ascribing error on the CBAA in dismissing his appeal
and in affirming the February 10, 1999 Decision18 of the LBAA.

On October 31, 2001, the appellate court rendered the assailed Decision 19 which affirmed the
January 24, 2000 Decision of the CBAA. It agreed with the CBAA that CHHMAC is part and parcel of
CHH in line with the ruling in Herrera20 on what the term "appurtenant thereto" means. Thus, the CA
held that the facilities and utilities of CHHMAC are undoubtedly necessary and indispensable for the
CHH to achieve its ultimate purpose.

The CA likewise ruled that the fact that rentals are paid by CHH accredited doctors and medical
specialists for spaces in CHHMAC has no bearing on its classification as a hospital since CHHMAC
serves also as a place for medical check-up, diagnosis, treatment, and care for its patients as well
as a specialized out-patient department of CHH where treatment and diagnosis are done by
accredited medical specialists in their respective fields of anesthesia, radiology, pathology, and
more.

The appellate court also applied Secs. 215 and 216 of the Local Government Code (Republic Act
No. 7160) which classify lands, buildings, and improvements actually, directly, and exclusively used
for hospitals as special cases of real property and not as commercial. Thus, CHHMAC being an
integral part of CHH is not commercial but special and should be imposed the 10% special
assessment, the same as CHH, instead of the 35% for commercial establishments.

Lastly, the CA pointed out that courts generally will not interfere in matters which are addressed to
the sound discretion of the government agencies entrusted with the regulation of activities under
their special technical knowledge and training—their findings and conclusions are accorded not only
respect but even finality.

Through the assailed March 11, 2002 Resolution, 21 the CA denied petitioner’s Motion for
Reconsideration.

The Issues

Hence, before us is the instant petition with the solitary issue, as follows:

WHETHER OR NOT THERE IS SERIOUS ERROR BY THE COURT OF APPEALS IN AFFIRMING

THE DECISION OF THE CENTRAL BOARD OF ASSESSMENT APPEALS THAT THE NEW
Page178

BUILDING "CHONG HUA HOSPITAL AND MEDICAL ARTS CENTER" (CHHMAC) IS AN

ESSENTIAL PART OF THE OLD BUILDING KNOWN AS "CHONG HUA HOSPITAL." IN THE
NEGATIVE, WHETHER OR NOT THE NEW BUILDING IS LIABLE TO PAY THE 35%
ASSESSMENT LEVEL. AND WHETHER OR NOT THE COURT OF APPEALS COULD INTERFERE
WITH THE FINDINGS OF THE CENTRAL BOARD OF ASSESSMENT APPEALS, A GOVERNMENT
AGENCY HAVING SPECIAL TECHNICAL KNOWLEDGE AND TRAINING ON THE MATTER
SUBJECT OF THE PRESENT CASE.22

The Court’s Ruling

The petition is devoid of merit.

It is petitioner’s strong belief that the subject building, CHHMAC, which is built on a rented land and
situated about 100 meters from the main building of CHH, is not an extension nor an integral part of
CHH and thus should not enjoy the 10% special assessment. Petitioner anchors the classification of
CHHMAC as "commercial," first, on Sec. 10 of Local Assessment Regulations No. 1-92 issued by
the DOF, which provides:

SEC. 10. Actual use of Real Property as basis of Assessment.––Real Property shall be classified,
valued and assessed on the basis of its actual use regardless of where located, whoever owns it,
and whoever uses it. (Sec. 217, R.A. 7160)

A. "Actual use" refers to the purpose for which the property is principally or predominantly utilized by
the person in possession of the property. (Sec. 199 (b), R.A. 7160)

Secondly, the result of the inspection on subject building by the City Assessor’s inspection team
shows that CHHMAC is a commercial establishment based on the following: (1) CHHMAC is
exclusively intended for lease to doctors; (2) there are neither operating rooms nor beds for patients;
and (3) the doctors renting the spaces earn income from the patients who avail themselves of their
services. Thus, petitioner argues that CHHMAC is principally and actually used for lease to doctors,
and respondent as owner of CHHMAC derives rental income from it; hence, CHHMAC was built and
is intended for profit and functions commercially.

Moreover, petitioner asserts that CHHMAC is not part of the CHH main building as it is exclusively
used as private clinics of physicians who pay rental fees to petitioner. And while the private clinics
might be considered facilities, they are not incidental to nor reasonably necessary for the
accomplishment of the hospital’s purposes as CHH can still function and accomplish its purpose
without the existence of CHHMAC. In addition, petitioner contends that the Abra Valley College,
Inc.23 ruling is not applicable to the instant case for schools, the subject matter in said case, are
already entitled to special assessment. Besides, petitioner points CHHMAC is not among the
facilities mentioned in said case. Further, petitioner argues that CHHMAC is not in the same
category as nurses’ homes and housing facilities for the hospital staff as these are clearly not for
profit, that is, not commercial, and are clearly incidental and reasonably necessary for the hospital’s
purposes.

We are not persuaded.

A careful review of the records compels us to affirm the assailed CA Decision as we find no
reversible error for us to reverse or alter it.

Chong Hua Hospital Medical Arts Center is an integral part of Chong Hua Hospital
Page178
We so hold that CHHMAC is an integral part of CHH.

It is undisputed that the doctors and medical specialists holding clinics in CHHMAC are those duly
accredited by CHH, that is, they are consultants of the hospital and the ones who can treat CHH’s
patients confined in it. This fact alone takes away CHHMAC from being categorized as "commercial"
since a tertiary hospital like CHH is required by law to have a pool of physicians who comprises the
required medical departments in various medical fields. As aptly pointed out by respondent:

Chong Hua Hospital is a duly licensed tertiary hospital and is covered by Dept. of Health (DOH)
Adm. Order No. 68-A and the "1989 Revised Rules and Regulations" governing the registration,
licensure and operation of hospitals in the Philippines. Under Sec. 6, sub-sec. 6.3, it is mandated by
law, that respondent appellee in order to retain its classification as a "TERTIARY HOSPITAL," must
be fully departmentalized and equipped with the service capabilities needed to support certified
medical specialists and other licensed physicians rendering services in the field of medicine,
pediatrics, obstetrics and gynecology, surgery, and their sub-specialties, ICCU and ancillary services
which is precisely the function of the Chong Hua Hospital Medical Arts Center. 24

Sec. 6.3, Administrative Order No. (AO) 68-A, Series of 1989, Revised Rules and Regulations
Governing the Registration, Licensure and Operation of Hospitals in the Philippines pertinently
provides:

Tertiary Hospital –– is fully departmentalized and equipped with the service capabilities needed
to support certified medical specialists and other licensed physicians rendering services in the field
of Medicine, Pediatrics, Obstetrics and Gynecology, Surgery, their subspecialties and ancillary
services. (Emphasis supplied.)

Moreover, AO 68-A likewise provides what clinic service and medical ancillary service are, thus:

11.3.2 Clinical Service––The medical services to patients shall be performed by the medical staff
appointed by the governing body of the institution. x x x

11.3.3 Medical Ancillary Service––These are support services which include Anesthesia Department,
Pathology Department, Radiology Department, Out-Patient Department (OPD), Emergency Service,
Dental, Pharmacy, Medical Records and Medical Social Services.

Based on these provisions, these physicians holding offices or clinics in CHHMAC, duly appointed or
accredited by CHH, precisely fulfill and carry out their roles in the hospital’s services for its patients
through the CHHMAC. The fact that they are holding office in a separate building, like at CHHMAC,
does not take away the essence and nature of their services vis-à-vis the over-all operation of the
hospital and the benefits to the hospital’s patients. Given what the law requires, it is clear that
CHHMAC is an integral part of CHH.

These accredited physicians normally hold offices within the premises of the hospital; in which case
there is no question as to the conduct of their business in the ambit of diagnosis, treatment and/or
confinement of patients. This was the case before 1998 and before CHHMAC was built. Verily, their
transfer to a more spacious and, perhaps, convenient place and location for the benefit of the
hospital’s patients does not remove them from being an integral part of the overall operation of the
hospital.

Conversely, it would have been different if CHHMAC was also open for non-accredited physicians,
Page178

that is, any medical practitioner, for then respondent would be running a commercial building for
lease only to doctors which would indeed subject the CHHMAC to the commercial level of 35%
assessment.

Moreover, the CHHMAC, being hundred meters away from the CHH main building, does not
denigrate from its being an integral part of the latter. As aptly applied by the CBAA, the Herrera ruling
on what constitutes property exempt from taxation is indeed applicable in the instant case, thus:

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes
is "not limited to property actually indispensable" therefore (Cooley on Taxation, Vol. 2, p. 1430), but
extends to facilities which are "incidental to and reasonably necessary for" the accomplishment of
said purposes, such as, in the case of hospitals, "a school for training nurses, a nurses’ home,
property use to provide housing facilities for interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities for student nurses, interns and residents"
(84 C.J.S., 621), such as "athletic fields," including "a farm used for the inmates of the institution"
(Cooley on Taxation, Vol. 2, p. 1430). 25

Verily, being an integral part of CHH, CHHMAC should be under the same special assessment level
of as that of the former.

The CHHMAC facility is definitely incidental to and reasonably necessary for the operations
of Chong Hua Hospital

Given our discussion above, the CHHMAC facility, while seemingly not indispensable to the
operations of CHH, is definitely incidental to and reasonably necessary for the operations of the
hospital. Considering the legal requirements and the ramifications of the medical and clinical
operations that have been transferred to the CHHMAC from the CHH main building in light of the
accredited physicians’ transfer of offices in 1998 after the CHHMAC building was finished, it cannot
be gainsaid that the services done in CHHMAC are indispensable and essential to the hospital’s
operation.

For one, as found by the appellate court, the CHHMAC facility is primarily used by the hospital’s
accredited physicians to perform medical check-up, diagnosis, treatment, and care of patients. For
another, it also serves as a specialized outpatient department of the hospital.

Indubitably, the operation of the hospital is not only for confinement and surgical operations where
hospital beds and operating theaters are required. Generally, confinement is required in emergency
cases and where a patient necessitates close monitoring. The usual course is that patients have to
be diagnosed, and then treatment and follow-up consultations follow or are required. Other cases
may necessitate surgical operations or other medical intervention and confinement. Thus, the more
the patients, the more important task of diagnosis, treatment, and care that may or may not require
eventual confinement or medical operation in the CHHMAC.

Thus, the importance of CHHMAC in the operation of CHH cannot be over-emphasized nor
disputed. Clearly, it plays a key role and provides critical support to hospital operations.

Charging rentals for the offices used by its accredited physicians cannot be equated to a
commercial venture

Finally, respondent’s charge of rentals for the offices and clinics its accredited physicians occupy
cannot be equated to a commercial venture, which is mainly for profit.
Page178
Respondent’s explanation on this point is well taken. First, CHHMAC is only for its consultants or
accredited doctors and medical specialists. Second, the charging of rentals is a practical necessity:
(1) to recoup the investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built
on, and (3) to maintain the CHHMAC building and its facilities. Third, as correctly pointed out by
respondent, it pays the proper taxes for its rental income. And, fourth, if there is indeed any net
income from the lease income of CHHMAC, such does not inure to any private or individual person
as it will be used for respondent’s other charitable projects.

Given the foregoing arguments, we fail to see any reason why the CHHMAC building should be
classified as "commercial" and be imposed the commercial level of 35% as it is not operated
primarily for profit but as an integral part of CHH. The CHHMAC, with operations being devoted for
the benefit of the CHH’s patients, should be accorded the 10% special assessment.

In this regard, we point with approbation the appellate court’s application of Sec. 216 in relation with
Sec. 215 of the Local Government Code on the proper classification of the subject CHHMAC
building as "special" and not "commercial." Secs. 215 and 216 pertinently provide:

SEC. 215. Classes of Real Property for Assessment Purposes.—For purposes of assessment, real
property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland
or special.

xxxx

SEC. 216. Special Classes of Real Property.––All lands, buildings, and other improvements
thereon actually, directly and exclusively used for hospitals, cultural or scientific purposes, and
those owned and used by local water districts, and government-owned or controlled corporations
rendering essential public services in the supply and distribution of water and/or generation and
transmission of electric power shall be classified as special. (Emphasis supplied.)

Thus, applying the above provisos in line with City Tax Ordinance LXX of Cebu City, the 10% special
assessment should be imposed for the CHHMAC building which should be classified as "special."

WHEREFORE, the petition is DENIED for lack of merit and the October 31, 2001 Decision and
March 11, 2002 Resolution of the CA are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Page178
 March 8, 2017

G.R. No. 215383

HON. KIM S. JACINTO-HENARES, in her official capacity as COMMISSIONER OF THE

BUREAU OF INTERNAL REVENUE, Petitioner
vs
ST. PAUL COLLEGE OF MAKATI, Respondent

RESOLUTION

CARPIO, J.:

The Case

This petition for review assails the Decision dated 25 July 2014 and Joint Resolution dated 29
1 2

October 2014 of the Regional Trial Court, Branch 143, Makati City (RTC), in Civil Case No. 13-1405,
3

declaring Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional.

The Facts

On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then Commissioner of
Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the Policies and Guidelines in the
Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and
Associations under Section 30 of the National Internal Revenue Code of 1997, as Amended."

On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, non-profit
educational institution organized and existing under Philippine laws, filed a Civil Action to Declare
Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with Prayer for Issuance of
Temporary Restraining Order and Writ of Preliminary Injunction before the RTC. SPCM alleged that
4

"RMO No. 20-2013 imposes as a prerequisite to the enjoyment by non-stock, non-profit educational
institutions of the privilege of tax exemption under Sec. 4(3) of Article XIV of the Constitution both a
registration and approval requirement, i.e., that they submit an application for tax exemption to the
BIR subject to approval by CIR in the form of a Tax[]Exemption Ruling (TER) which is valid for a
period of [three] years and subject to renewal." According to SPCM, RMO No. 20-2013 adds a
5

prerequisite to the requirement under Department of Finance Order No. 137-87, and makes failure
6

to file an annual information return a ground for a non-stock, nonprofit educational institution to
"automatically lose its income tax-exempt status." 7

In a Resolution dated 27 December 2013, the RTC issued a temporary restraining order against the
8

implementation of RMO No. 20- 2013. It found that failure of SPCM to comply with RMO No. 20-
2013 would necessarily result to losing its tax-exempt status and cause irreparable injury.

In a Resolution dated 22 January 2014, the RTC granted the writ of preliminary injunction after
9

finding that RMO No. 20-2013 appears to divest non-stock, non-profit educational institutions of their
tax exemption privilege. Thereafter, the RTC denied the CIR's motion for reconsideration. On 29
April 2014, SPCM filed a Motion for Judgment on the Pleadings under Rule 34 of the Rules of Court.

The Ruling of the RTC

Page178
In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and declared RMO No. 20-2013
unconstitutional. It held that "by imposing the x x x [prerequisites alleged by SPCM,] and if not
1âwphi1

complied with by nonstock, non-profit educational institutions, [RMO No. 20-2013 serves] as
diminution of the constitutional privilege, which even Congress cannot diminish by legislation, and
thus more so by the [CIR] who merely exercise[s] quasi-legislative function."
10

The dispositive portion of the Decision reads:

WHEREFORE, in view of all the foregoing, the Court hereby declares BIR RMO No. 20-2013 as
UNCONSTITUTIONAL for being violative of Article XIV, Section 4, paragraph 3. Consequently, all
Revenue Memorandum Orders subsequently issued to implement BIR RMO No. 20-2013 are
declared null and void.

The writ of preliminary injunction issued on 03 February 2014 is hereby made permanent.

SO ORDERED. 11

On 18 September 2014, the CIR issued RMO No. 34-2014, which clarified certain provisions of
12

RMO No. 20-2013, as amended by RMO No. 28-2013. 13

In a Joint Resolution dated 29 October 2014, the RTC denied the CIR's motion for reconsideration,
to wit:

WHEREFORE, viewed in the light of the foregoing premises, the Motion for Reconsideration filed by
the respondent is hereby DENIED for lack of merit.

Meanwhile, this Court clarifies that the phrase "Revenue Memorandum Order" referred to in the
second sentence of its decision dated July 25, 2014 refers to "issuance/s" of the respondent which
tends to implement RMO 20-2013 for if it is otherwise, said decision would be useless and would be
rendered nugatory.

SO ORDERED. 14

Hence, this present petition.

The Issues

The CIR raises the following issues for resolution:

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO [NO.] 20-2013 IMPOSES
A PREREQUISITE BEFORE A NONSTOCK, NON-PROFIT EDUCATIONAL INSTITUTION MAY
AVAIL OF THE TAX EXEMPTION UNDER SECTION 4(3), ARTICLE XIV OF THE CONSTITUTION.

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO NO. 20-2013 ADDS TO
THE REQUIREMENT UNDER DEPARTMENT OF FINANCE ORDER NO. 137-87. 15

The Ruline of the Court

We deny the petition on the ground of mootness.

Page178
We take judicial notice that on 25 July 2016, the present CIR Caesar R. Dulay issued RMO No. 44-
2016, which provides that:

SUBJECT: Amending Revenue Memorandum Order No. 20- 2013, as amended (Prescribing the
Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations under Section 30 of the National Internal Revenue Code of 1997, as
Amended)

In line with the Bureau's commitment to put in proper context the nature and tax status of non-profit,
non-stock educational institutions, this Order is being issued to exclude non-stock, non-profit
educational institutions from the coverage of Revenue Memorandum Order No. 20-2013, as
amended.

SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-stock, non-profit educational
institutions is directly conferred by paragraph 3, Section 4, Article XIV of the 1987 Constitution, the
pertinent portion of which reads:

"All revenues and assets of non-stock, non-profit educational institutions used actually, directly and
exclusively (or educational purposes shall be exempt from taxes and duties."

This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended,
which provides as follows:

"Sec. 30. Exempt from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:

xxx xxx xxx

(H) A non-stock and non-profit educational institution; x x x."

It is clear and unmistakable from the aforequoted constitutional provision that non-stock, non-profit
educational institutions are constitutionally exempt from tax on all revenues derived in pursuance of
its purpose as an educational institution and used actually, directly and exclusively for educational
purposes. This constitutional exemption gives the non-stock, non-profit educational institutions a
distinct character. And for the constitutional exemption to be enjoyed, jurisprudence and tax rulings
affirm the doctrinal rule that there are only two requisites: (1) The school must be non-stock and non-
profit; and (2) The income is actually, directly and exclusively used for educational purposes. There
are no other conditions and limitations.

In this light, the constitutional conferral of tax exemption upon non-stock and non-profit educational
institutions should not be implemented or interpreted in such a manner that will defeat or diminish
the intent and language of the Constitution.

SECTION 2. Application for Tax Exemption. --- Non-stock, nonprofit educational institutions shall file
their respective Applications for Tax Exemption with the Office of the Assistant Commissioner, Legal
Service, Attention: Law Division.

SECTION 3. Documentary Requirements. --- The non-stock, nonprofit educational institution shall
submit the following documents:
Page178

a. Original copy of the application letter for issuance of Tax Exemption Ruling;
 b. Certified true copy of the Certificate of Good Standing issued by the Securities and
Exchange Commission;

c. Original copy of the Certification under Oath of the Treasurer as to the amount of
the income, compensation, salaries or any emoluments paid to its trustees, officers
and other executive officers;

d. Certified true copy of the Financial Statements of the corporation for the last three
(3) years;

e. Certified true copy of government recognition/permit/accreditation to operate as an

educational institution issued by the Commission on Higher Education (CHED),
Department of Education (DepEd), or Technical Education and Skills Development
Authority (TESDA); Provided, that if the government recognition/permit/accreditation
to operate as an educational institution was issued five (5) years prior to the
application for tax exemption, an original copy of a current Certificate of
Operation/Good Standing, or other equivalent document issued by the appropriate
government agency (i.e., CHED, DepEd, or TESDA) shall be submitted as proof that
the non-stock and non-profit education is currently operating as such; and

f. Original copy of the Certificate of utilization of annual revenues and assets by the
Treasurer or his equivalent of the non-stock and nonprofit educational institution.

SECTION 4. Request for Additional Documents. --- In the course of review of the application for tax
exemption, the Bureau may require additional information or documents as the circumstances may
warrant.

SECTION 5. Validity of the Tax Exemption Ruling. --- Tax Exemption Rulings or Certificates of Tax
Exemption of non-stock, nonprofit educational institutions shall remain valid and effective, unless
recalled for valid grounds. They are not required to renew or revalidate the Tax exemption rulings
previously issued to them.

The Tax Exemption Ruling shall be subject to revocation if there are material changes in the
character, purpose or method of operation of the corporation which are inconsistent with the basis
for its income tax exemption.

SECTION 6. Transitory Provisions. --- To update the records of the Bureau and for purposes of a
better system of monitoring, non-stock, nonprofit educational institutions with Tax Exemption Rulings
or Certificates of Exemption issued prior to June 30, 2012 are required to apply for new Tax
Exemption Rulings.

SECTION 7. Repealing Clause. --- Any revenue issuance which is inconsistent with this Order is
deemed revoked, repealed, or modified accordingly.

SECTION 8. Effectivity. --- This Order shall take effect immediately. (Emphases supplied)

A moot and academic case is one that ceases to present a justiciable controversy by virtue of
supervening events, so that an adjudication of the case or a declaration on the issue would be of no
practical value or use. Courts generally decline jurisdiction over such case or dismiss it on the
16

ground of mootness. 17
Page178
With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this
petition moot and academic, and subject to denial. The CIR, in her petition, assails the RTC
1âwphi1

Decision finding RMO No. 20-2013 unconstitutional because it violated the non-stock, non-
profit educational institutions' tax exemption privilege under the Constitution. However,
subsequently, RMO No. 44-2016 clarified that non-stock, nonprofit educational institutions are
excluded from the coverage of RMO No. 20-2013. Consequently, the RTC Decision no longer
stands, and there is no longer any practical value in resolving the issues raised in this petition.

WHEREFORE, we DENY the petition on the ground of mootness. We SET ASIDE the Decision
dated 25 July 2014 and Joint Resolution dated 29 October 2014 of the Regional Trial Court, Branch
143, Makati City, declaring Revenue Memorandum Order No. 20-2013 unconstitutional. The writ of
preliminary injunction is superseded by this Resolution.

SO ORDERED.

Page178
 November 9, 2016

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

x-----------------------x

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari: 1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals (CTA) in En
Banc Case No. 622; 2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671; and 3

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671. 4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed
from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA)
No. 2794 authorizing its revenue officers to examine the latter's books of accounts and other
Page178
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years. 5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU. 6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income; and
(3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on
August 3, 2005 a petition for review with the CTA Division. 8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV,
Section 4 (3)of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive
portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU]
is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due
computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise agreement between the parties.

SO ORDERED. 9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision. On April 6, 2010, the CTA Division denied the Commissioner's motion for reconsideration
10

while it held in abeyance the resolution on DLSU's motion for reconsideration. 11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution. 12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and exclusively for educational
purposes. The Commissioner did not promptly object to the formal offer of supplemental evidence
13

despite notice. 14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the
Page178

amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED.
[DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge
for the fiscal years 2001, 2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic
deficiency taxes ... until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency
taxes, surcharge and deficiency interest which have accrued ... from September 30, 2004 until fully
paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that
the CTA Division erred in admitting DLSU's additional evidence. 16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review
with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire
assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the
LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo's tax assessment; and (3) the CTA Division erred
17

in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes. 18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the
CTA Division. 19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively for educational purposes; hence,
exempt from tax. The CTA En Banc was satisfied with DLSU's supporting evidence confirming that
20

part of its rental income had indeed been used to pay the loan it obtained to build the university's
Physical Education – Sports Complex. 21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not
shown by supporting documents to have been actually, directly and exclusively used for educational
purposes, must be subjected to income tax and VAT. 22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan
and mortgage documents. The CTA En Banc found that DLSU's DST payments had been remitted
23

to the BIR, evidenced by the stamp on the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code) and Section 2 of
24
Page178

Revenue Regulations (RR) No. 15-2001. 25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even
if DLSU formally offered them only when it moved for reconsideration of the CTA Division's original
decision. Notably, the law creating the CTA provides that proceedings before it shall not be governed
strictly by the technical rules of evidence. 26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10,
2010 decision. Thus, she came to this court for relief through a petition for review on certiorari (G.R.
27

No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47inclusive of surcharge. 28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial; hence, the issue was deemed properly
29

submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
that the practice of issuing a LOA covering audit of unverified prior years is prohibited. The
30

prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if
the audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA. 31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and
2002 are void, but the assessment for taxable year 2003 is valid. 32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses. 33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay the
loan obtained to fund the construction of the Sports Complex, the rental income from other sources
were not shown to have been actually, directly and exclusively used for educational purposes. 34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

Page178

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed
of. DLSU's operations of canteens and bookstores within its campus even though exclusively
35

serving the university community do not negate income tax liability. 36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized
with Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational institution] from any of [its] properties, real
or personal, or from any of [its] activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed by this Code. 37

The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA to support its conclusion that revenues however
38

generated are covered by the constitutional exemption, provided that, the revenues will be used for
educational purposes or will be held in reserve for such purposes. 39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from property. Thus, DLSU's
40

income from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes. 41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment and that it is
42

not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to certain
classes of taxpayers under RR No. 9-2000. 43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The
belated submission of supplemental evidence reopened the case for trial, and worse, DLSU offered
the supplemental evidence only after it received the unfavorable CTA Division's original decision. In44

any case, DLSU's submission of supplemental documentary evidence was unnecessary since its
rental income was taxable regardless of its disposition. 45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior
years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void. 46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior
Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income
tax, VAT and DST for taxable years 2001, 2002 and 2003. DLSU objects to the CTA En
47

Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No.
43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued
to DLSU follows this format, then any assessment arising from it must be entirely voided. 48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
Page178

situated parties, the same set of evidence should be appreciated and weighed in the same
manner. The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it did to
49

the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution. 50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the
same as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on
DLSU's petition docketed as G.R. No. 198841. 51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition. 52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties. 53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational
institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot
amend the 1987 Constitution; (2) Section 30 of the 1997 Tax Code is almost an exact replica of
54

Section 26 of the 1977 Tax Code -with the addition of non-stock, non-profit educational institutions to
the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973
Constitution was only for real property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined. 55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that
is contrary to the Constitution void and without any force and effect. Section 30 (H) of the 1997 Tax
56

Code insofar as it subjects to tax the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes." 57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for
an exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must
prove that: (1) it falls under the classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes. Unlike YMCA, which is not an educational institution, DLSU is undisputedly a
58

non-stock, non-profit educational institution. It had also submitted evidence to prove that it actually,
directly and exclusively used its income for educational purposes. 59
Page178
DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that
the tax exemption was granted "to incentivize private educational institutions to share with the State
the responsibility of educating the youth." 60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled
DLSU' s loan and mortgage transactions had remitted to the BIR the DST through an imprinting
machine, a method allowed under RR No. 15-2001. In any case, DLSU argues that it cannot be
61

held liable for DST owing to the exemption granted under the Constitution. 62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of
supplemental evidence. Because of the Commissioner's failure to timely object, she became bound
by the results of the submission of such supplemental evidence. 63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it
failed to raise this issue in both the administrative and judicial proceedings. That it was asked on
64

cross-examination during the trial does not make it an issue that the CTA could resolve. The 65

Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational
institution is only exempt from property tax but not from tax on the income earned from the property. 66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above. In addition, DLSU prays that the
67

Court award attorney's fees in its favor because it was constrained to unnecessarily retain the
services of counsel in this separate petition. 68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which
we summarize as follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed
by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved
to have been used actually, directly and exclusively for educational purposes are exempt
from duties and taxes.
Page178
 II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is
valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts.
We thus sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and exclusively
for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be

entitled to such exemptions subject to the limitations provided by law including restrictions on
dividends and provisions for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions.
69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a
non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational
institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-
profit educational institutions is conditioned only on the actual, direct and exclusive use of their
Page178

revenues and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations imposed by
Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption granted to
non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax imposed
under this Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock,
non-profit educational institutions such that the revenues and income they derived from their assets,
or from any of their activities conducted for profit, are taxable even if these revenues and income are
used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression, the Court in the YMCA case had
71

in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution.
The Court in that case made doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the
YMCA, established as a "welfare, educational and charitable non-profit corporation," was subject to
income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling
under Article VI, Section 28 (3) of the Constitution, the YMCA is not tax-exempt per se; " what is
73

exempted is not the institution itself... those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes." 74
Page178
The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the income of
exempt organizations from any of their properties, real or personal, are subject to the same tax
imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last
paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from its
property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax
privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution
holding that the term educational institution, when used in laws granting tax exemptions, refers to the
school system (synonymous with formal education); it includes a college or an educational
establishment; it refers to the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system. 76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational purposes. 77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-
stock, non-profit educational institutions, provided, that the non-stock, non-profit educational
institutions prove that its assets and revenues are used actually, directly and exclusively for
educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not

subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income for 78

educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions,
churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from
tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes ... ," Article XIV, Section 4 (3) categorically
states that "[a]ll revenues and assets ... used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is
not without significance.
Page178
We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of
the 1986 Constitutional Commission to provide broader tax privilege to non-stock, non-profit
79

educational institutions as recognition of their role in assisting the State provide a public good. The
tax exemption was seen as beneficial to students who may otherwise be charged unreasonable
tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit
educational institutions.
80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is unqualified
by any reference to the source of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties. 81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations. It may refer to the sale of goods, rendition of services, or the return of an investment.
82

Revenue is a component of the tax base in income tax, VAT, and local business tax (LBT).
83 84 85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity. It 86

may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory
of goods, or any property from which the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT). Also, the landed cost of imported goods is a component of the tax base in
87

VAT on importation and tariff duties.

88 89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax
from which the entity shall be exempted from shall depend on whether the item is an item of revenue
or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino. We ruled in that case that the test of exemption from taxation is the use of
90

the property for purposes mentioned in the Constitution. We also held that the exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main
purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes
such asset from the property tax exemption granted under the Constitution. There is no exemption
91

because the asset is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to educate its students.
Page178
However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues shall be exempt
from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational
purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used
actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These
are two things that must be viewed and treated separately. But so long as the assets or revenues
are used actually, directly and exclusively for educational purposes, they are exempt from duties and
taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary
educational institutions cannot be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock,
non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is
covered by Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are
nonprofit shall pay a tax of ten percent (10%) on their taxable income .. . Provided, that if the gross
income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions ... [the regular corporate income tax of 30%] shall be
imposed on the entire taxable income ... "92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or activity
does not exceed 50% of its total gross income.
Page178
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-
stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purpose. We
make this declaration in the exercise of and consistent with our duty to uphold the primacy of the
93

Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and
insists that the entire LOA should be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and
other accounting records of the taxpayer in order to determine the taxpayer's correct internal
revenue liabilities and for the purpose of collecting the correct amount of tax, in accordance with
95 96

Section 5 of the Tax Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA commences the audit process and 97

informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The
practice of issuing [LO As] covering audit of unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate LOAs.
Page178
Read in this light, the requirement to specify the taxable period covered by the LOA is simply to
inform the taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without
this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting
records from random unverified years, which may include documents from as far back as ten years
in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years.
This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period
is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA
Division, and thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the
trial. DLSU then raised the issue in its memorandum and motion for partial reconsideration with the
100

CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banc could, as
it did, pass upon the validity of the LOA. Besides, the Commissioner had the opportunity to argue
101

for the validity of the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice. 102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of
documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration
with the CTA Division. The CTA Division admitted the supplemental evidence, which proved that a
103

portion of DLSU's rental income was used actually, directly and exclusively for educational purposes.
Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence. 104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in
the form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal. Because of a party's failure to timely object, the evidence offered becomes part of the
105

evidence in the case. As a consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented.106
Page178
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence
despite notice. The Commissioner objected to the admission of the supplemental evidence only
107

when the case was on appeal to the CTA En Banc. By the time the Commissioner raised her
objection, it was too late; the formal offer, admission and evaluation of the supplemental evidence
were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality
or sufficiency of the supplemental evidence admitted, she was bound by the outcome of the CTA
Division's assessment of the evidence. 108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's
admission of the formal offer of supplemental evidence, without prompt objection from the
Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers'
motion for reconsideration.1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals, the tax refund claimant attached to its
109

motion for reconsideration with the CT A its Final Adjustment Return. The Commissioner, as in the
present case, did not oppose the taxpayer's motion for reconsideration and the admission of
the Final Adjustment Return. We thus admitted and gave weight to the Final Adjustment
110

Return although it was only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings before it
shall not be governed strictly by the technical rules of evidence and that the paramount
111

consideration remains the ascertainment of truth. We ruled that procedural rules should not bar
courts from considering undisputed facts to arrive at a just determination of a controversy.
112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v.
Commissioner of Internal Revenue and Commissioner of Internal Revenue v. PERF Realty
113

Corporation, where the taxpayers also submitted the supplemental supporting document only upon
114

filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application
of the technical rules of evidence in the present tax assessment case. If anything, the liberal
application of the rules assumes greater force and significance in the case of a taxpayer who claims
a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code, DLSU is claiming tax exemption based on the
115

Constitution. If liberality is afforded to taxpayers who paid more than they should have under a
statute, then with more reason that we should allow a taxpayer to prove its exemption from tax
based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because
the Commissioner failed to promptly object, but more so because the strict application of the
technical rules of evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.
Page178
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax problems, has
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority. We thus accord the findings of fact by the CTA with the highest respect. These findings of
116

facts can only be disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect. 117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used
actually, directly and exclusively for educational purposes a portion of its assessed income and that it
had remitted the DST payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed
income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it
deduced that DLSU successfully proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the
supplemental evidence, which consisted of statement of receipts, statement of disbursement and
fund balance and statement of fund changes. 118

These documents showed that DLSU borrowed ₱93.86 Million, which was used to build the
119

university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental
income from its concessionaires were indeed transmitted and used for the payment of this loan. The
CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct
and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account), intended for the university's capital projects, was not
120

proved to have been used actually, directly and exclusively for educational purposes. The
CTA observed that "[DLSU] ... failed to fully account for and substantiate all the disbursements from
the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires
was indeed used for educational purposes." 121

To stress, the CTA's factual findings were based on and supported by the report of the Independent
CPA who reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and
verification of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the same are faithful copies of original
documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the numbers, dates and
amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes
paid; (d) making findings as to compliance with substantiation requirements under pertinent
tax laws, regulations and jurisprudence; (e) submission of a formal report with certification of
authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on
Page178

such formal report; and (g) performing such other functions as the CTA may direct. 122
Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held
that only the portion of the rental income pertaining to the substantiated disbursements (i.e., proved
by receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT. 123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years
2001 and 2002 due to the defective LOA. 124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its
ruling on the evidence on record, which we reiterate, were examined and verified by the Independent
CPA. Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are
bound by its conclusions. In the present case, we do not agree with the method used by the CTA to
arrive at DLSU' s unsubstantiated rental income (i.e., income not proved to have been actually,
directly and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year
2003. DLSU earned this income from leasing a portion of its premises to: 1) MTG-Sports Complex,
125

2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore. 126

To prove that its rental income was used for educational purposes, DLSU identified the transactions
where the rental income was expended, viz.: 1) ₱4,007,724.00 used to pay the loan obtained by
127

DLSU to build the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account. 128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00
transferred to the CF-CPA Account was used actually, directly and exclusively for educational
purposes. According to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income
tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements
from the CF-CPA Account for taxable year 2003 is only 26.68%. The CTA held as follows:
130

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner again
failed to fully account for and substantiate all the disbursements from the CF-CPA Account; thus
failing to prove that the rental income derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-Commissioned Independent CPA show
that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to ₱6,259,078.30
only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is
₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is
26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements
for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the total rent income added to
Page178
and used in the CF-CPA Account in the amount of ₱6,602,655.00 is ₱1,761,588.35. 131
(emphasis
supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the abovementioned
concessionaries. The difference (₱6,602,655.00) was the portion claimed to have been deposited to
the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements
(₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the
rental income (₱4,841,066.65). 132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37) was derived by multiplying

133

the rental income claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68%
or the ratio of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio was the result of dividing the substantiated disbursements from the CF-CPA
134

Account as found by the Independent CPA (₱6,259,078.30) by the total disbursements

(₱23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional
grant of tax exemption to non-stock, non-profit educational institutions. The CTA's reasoning is
flawed because it required DLSU to substantiate an amount that is greater than the rental income
deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental
income (which amounted to a total of ₱10.61 million) were used for educational purposes. This
135

amount was divided into two parts: (a) the ₱4.0l million, which was used to pay the loan obtained for
the construction of the Sports Complex; and (b) the ₱6.60 million, which was transferred to the CF-
136

CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
million. These figures, read in light of the constitutional exemption, raises the question: does DLSU
137

claim that the whole total CF-CPA disbursement of ₱23.46 million is tax-exempt so that it is
required to prove that all these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million
had been for educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61
million for tax-exemption and should thus be required to prove that this amount had been used as
claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed
by the Independent CPA. The amount in issue is therefore the balance of ₱6.60 million which was
transferred to the CF-CPA which in turn made disbursements of ₱23.46 million for various general
purposes, among them the ₱6.60 million transferred by DLSU.
Page178
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational
purposes in year 2003 in the amount ₱6.26 million. Based on these given figures, the CT A
concluded that the expenses for educational purposes that had been coursed through the CF-CPA
should be prorated so that only the portion that ₱6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and
directly used for educational purposes should be tax-exempt. As already mentioned above, DLSU is
not claiming that the whole ₱23.46 million CF-CPA disbursement had been used for educational
purposes; it only claims that ₱6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used for educational
purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital
projects) lends peculiarity to the facts of this case, but does not detract from the fact that the
deposited funds were DLSU revenue funds that had been confirmed and proven to have been
actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might have
had other sources of funding is irrelevant because the assessment in the present case pertains only
to the rental income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA
funds used for educational purposes should not be prorated as part of its total CF-CPA
disbursements for purposes of crediting to DLSU is also logical because no claim whatsoever had
been made that the totality of the CF-CPA disbursements had been for educational purposes. No
prorating is necessary; to state the obvious, exemption is based on actual and direct use and this
DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between
what it claimed and what it has proven. In more concrete terms, DLSU only had to prove that its
rental income for taxable year 2003 (₱10,610,379.00) was used for educational purposes. Hence,
while the total disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU only
had to substantiate its Pl0.6 million rental income, part of which was the ₱6,602,655.00 transferred
to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have been used
for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003
as follows:

CTA
Decision 138
Revised
Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of the Sports 4,007,724.00 4,007,724.00

Complex

Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00

Less: Substantiated portion of CF-CPA 1,761,588.35 6,259,078.30

disbursements
Page178
 Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did
with the evidence submitted by Ateneo in another separate case, the CTA explained that the issue in
the Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes
and VAT under certain BIR and Department of Finance issuances that required the educational
139

institution to own and operate the canteens, or other commercial enterprises within its campus, as
condition for tax exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the exemption.
140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the
separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."
141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it
submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for
being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and
materiality of the evidence supporting their respective claims for tax exemption would necessarily
differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable
years they were assessed varied. The amount of tax assessment also varied. The amount of
income proven to have been used for educational purposes
also varied because the amount substantiated varied. Thus, the amount of tax assessment
142

cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years
2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax
of ₱8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo
was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly
and exclusively for educational purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim
were not produced in court. Indeed, the Independent CPA testified that some disbursements had not
been proven to have been used actually, directly and exclusively for educational purposes. 144

The final nail on the question of evidence is DLSU's own admission that the original of these
documents had not in fact been produced before the CTA although it claimed that there was no bad
Page178
faith on its part. To our mind, this admission is a good indicator of how the Ateneo and the DLSU
145

cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven by its recital
in some other authentic documents on record, can no longer be entertained at this late stage of the
146

proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on DLSU' s
assertion of lack of bad faith. Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. A tax is uniform when it operates with the same force and
147

effect in every place where the subject of it is found. The concept requires that all subjects of
148

taxation similarly situated should be treated alike and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because
their income proved to have been used actually, directly and exclusively for educational purposes
were exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if
they indeed used their revenues for educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its income and
revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a different result
happened because it failed to fully prove that it used actually, directly and exclusively for educational
purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of
taxation similarly situated are treated in literally the same way in all and every occasion. The fact that
the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that the
CTA or this Court would similarly decide every case for (or against) both universities. Success in tax
litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's
evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid
and remitted through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner
argues that DLSU is not allowed to use this method of payment because an educational institution is
excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code
and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the
person making, signing, issuing, accepting, or transferring the same. The Tax Code provides that
150

whenever one party to the document enjoys exemption from DST, the other party not exempt from
DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the
Page178
document, such that the payment and compliance by one shall mean the full settlement of the DST
due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These
agreements are subject to DST. For the purpose of showing that the DST on the loan agreement
151

has been paid, DLSU presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint should be sufficient proof that
DST has been paid. Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay
and remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As
correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line
Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions. RR
No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-Line Electronic
DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48. 152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal

Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total
amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of
the Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case
No. 671, with the MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is ₱343,576.70.

SO ORDERED.

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G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA)
84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving creditable withholding taxes. 3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded
former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong
and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-
98. Petitioner argues that the MCIT violates the due process clause because it levies income tax
even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-
98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for
the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner
contends that these revenue regulations are contrary to law for two reasons: first, they ignore the
different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because
the CWT is being levied upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.

The issues to be resolved are as follows:

Page178
 (1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional
and

(3) whether or not the imposition of CWT on income from sales of real properties classified
as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an
MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax
imposed under Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately succeeding taxable years. Section
27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater
than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable
years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses
on account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection
(E) hereof, the term ‘gross income’ shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
Page178
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less
sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists directly
rendering the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E). 5 The
pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is
hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately
following the taxable year in which such corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or negative taxable income or whenever the
amount of minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000
and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited
against the normal income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or
transfer of real property, other than capital assets, by persons residing in the Philippines and
habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for
the sale, exchange or transfer of. – Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in
Page178

the real estate business in accordance with the following schedule –

 Those which are exempt from a Exempt
withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or
less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In
an exchange, the fair market value of the property received in exchange, as determined in the
Income Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to
be made on the periodic installment payments where the buyer is an individual not engaged in trade
or business. In such a case, the applicable rate of tax based on the entire consideration shall be
withheld on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for
the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the
gross selling price/total amount of consideration or the fair market value determined in accordance
with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be imposed upon the withholding
agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
Page178

seller/transferor is habitually engaged in the real estate

 business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In
an exchange, the fair market value of the property received in exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these
rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer
shall withhold the tax based on the gross selling price or fair market value of the property, whichever
is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the
[CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has
certified that such transfers and conveyances have been reported and the taxes thereof have been
duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and
the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully
paid xxxx.

On February 11, 2003, RR No. 7-2003 8 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the
MCIT, among others. The pertinent portions thereof state:
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Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling
price or current fair market value as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than
land and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-
98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu
of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under
Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is
no actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
Page178
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal
claims which is susceptible of judicial resolution as distinguished from a hypothetical or abstract
difference or dispute.11 On the other hand, a question is considered ripe for adjudication when the act
being challenged has a direct adverse effect on the individual challenging it. 12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut
down their operations as a result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated
(DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is
said to have ripened into a judicial controversy even without any other overt act. Indeed, even a
singular violation of the Constitution and/or the law is enough to awaken judicial duty. 14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to
settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions]. 15

Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute
that the individual members of petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury
arising from the enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition. 20
Page178

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine
taxation system. It came about as a result of the perceived inadequacy of the self-assessment
system in capturing the true income of corporations. 21 It was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income tax which is more difficult to
control and enforce. It is a means to ensure that everyone will make some minimum contribution to
the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing
in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new
concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. … This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement. 22

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market
and to ensure a favorable business climate. It is therefore fair for the government to require them to
make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters. 23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in and
year out and paid no tax. So, if the corporation has been losing for the past five years to ten years,
then that corporation has no business to be in business. It is dead. Why continue if you are losing
year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor. 24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses
after operations of a corporation or consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by
corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations. 25 This grace
period allows a new business to stabilize first and make its ventures viable before it is subjected to
the MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income
tax which shall be credited against the normal income tax for the three immediately succeeding
years.27
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Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers
noted that most developing countries, particularly Latin American and Asian countries, have the
same form of safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries. 29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said provision only considers the cost
of goods sold and other direct expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain." 32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest and the common good. 33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative. 35 Essentially,

this means that in the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. 36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why
it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed
and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility
of the legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
Page178

carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of
life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the
due process clause may properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property.40 But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer. 41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character. 43

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth
which flows into the taxpayer other than a mere return on capital. Capital is a fund or property
existing at one distinct point in time while income denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital.46 For income to be taxable, the following
requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a
tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross
sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates
the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2%
and uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. 49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found
in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base. 51 Since our income tax laws are of
American origin, interpretations by American courts of our parallel tax laws have persuasive effect on
the interpretation of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:53
Page178
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. 54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.55

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax. 56 This is because
deductions are a matter of legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax
base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of
its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the
MCIT is being imposed and collected even when there is actually a loss, or a zero or negative
taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax
due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is
still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the
MCIT on gross income notwithstanding the amount of the net income. But the law also states that
the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the
case that the MCIT would be less than the net income of the corporation which posts a zero or
negative taxable income.
Page178
We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT)
and maintains that the revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value
(FMV) of the real estate as basis for determining the income tax for the sale of real estate classified
as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the
net income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes
of collection and payment of taxes on income from the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real
Property Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement. 64 It is well-settled that an
administrative agency cannot amend an act of Congress. 65

We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the government’s cash
flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of income
payable to any person, national or juridical, residing in the Philippines. Such authority is derived from
Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

Page178
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section
57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is creditable against the income tax
liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in
the Real Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate
business’ income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary
assets remains to be the entity’s net income imposed under Section 24 (resident individuals) or
Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less
allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer
at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the
tax base for the sale of real property classified as ordinary assets remains to be the net taxable
income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.

xxx xxx xxx

Page178
c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-
98], as amended, and consequently, to theordinary income tax under Sec. 27(A) of the Code. In
lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the
tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to
the particular transaction in which he is a party. In such a case, his basis can only be the GSP or
FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax
and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its
GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT)
and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a payments are intended to equal or at
full and final payment of the income tax least approximate the tax due of the
due from the payee on the said income. payee on said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the
right to ask for a refund if the tax withheld
is more than the tax due.
Page178
c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and
CWT disprove petitioner’s contention that ordinary assets are being lumped together with, and
treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment
of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT.
It follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)
(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this
Code on specified items of income shall be withheld by payor-corporation and/or person
and paid in the same manner and subject to the same conditions as provided in Section 58
of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year. (Emphasis supplied)
Page178

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary
purposes, the same is not passive income… 76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties
that return rental income, shares of stock in a corporation that earn dividends or interest income
received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income
payable to natural or juridical persons, residing in the Philippines." There is no requirement that this
income be passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains
to CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it
is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR
may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting
tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at
the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant
to the constitutional guarantee of due process. More importantly, the due process requirement
applies to the power to tax.79 The CWT does not impose new taxes nor does it increase taxes. 80 It
relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a
refund.81 This argument is misleading. The practical problems encountered in claiming a tax refund
do not affect the constitutionality and validity of the CWT as a method of collecting the tax. 1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
Page178

having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s
complaints are essentially matters of policy best addressed to the executive and legislative branches
of the government. Besides, the CWT is applied only on the amounts actually received or receivable
by the real estate entity. Sales on installment are taxed on a per-installment basis. 83 Petitioner’s
desire to utilize for its operational and capital expenses money earmarked for the payment of taxes
may be a practical business option but it is not a fundamental right which can be demanded from the
court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because
the CWT is being levied only on real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of
doing business is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall
be deprived of the same protection of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."85 Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be valid, must (1) rest on
substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation. 88 The real estate industry is, by itself, a class and can
be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails
to realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger
and its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.
Page178
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these
are not similarly subjected to the CWT.89As already discussed, the Secretary may adopt any
reasonable method to carry out its functions.90 Under Section 57(B), it may choose what to subject to
CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate.
The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the
BIR, are also subject to CWT for their transactions with said 5,000 corporations. 91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should
not effect the regisration of any document transferring real property unless a certification is issued by
the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down
this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and
is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax
measure, it has to contend not only with Einstein’s observation but also with the vast and well-
established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner
has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and
CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED. Page178
G.R. No. L-45987 May 5, 1939

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
CAYAT, defendant-appellant.

Sinai Hamada y Cariño for appellant.

Office of the Solicitor-General Tuason for appellee.

MORAN, J.:

Prosecuted for violation of Act No. 1639 (secs. 2 and 3), the accused, Cayat, a native of Baguio,
Benguet, Mountain Province, was sentenced by the justice of the peace court of Baguio to pay a fine
of five pesos (P5) or suffer subsidiary imprisonment in case of insolvency. On appeal of the Court of
First Instance, the following information was filed against him:

That on or about the 25th day of January, 1937, in the City of Baguio, Commonwealth of the
Philippines, and within the jurisdiction of this court, the above-named accused, Cayat, being
a member of the non-Christian tribes, did then and there willfully, unlawfully, and illegally
receive, acquire, and have in his possession and under his control or custody, one bottle of
A-1-1 gin, an intoxicating liquor, other than the so-called native wines and liquors which the
members of such tribes have been accustomed themselves to make prior to the passage of
Act No. 1639.

Accused interposed a demurrer which was overruled. At the trial, he admitted all the facts alleged in
the information, but pleaded not guilty to the charge for the reasons adduced in his demurrer and
submitted the case on the pleadings. The trial court found him guilty of the crime charged and
sentenced him to pay a fine of fifty pesos (P50) or supper subsidiary imprisonment in case of
insolvency. The case is now before this court on appeal. Sections 2 and 3 of Act No. 1639 read:

SEC. 2. It shall be unlawful for any native of the Philippine Islands who is a member of a
non-Christian tribe within the meaning of the Act Numbered Thirteen hundred and ninety-
seven, to buy, receive, have in his possession, or drink any ardent spirits, ale, beer, wine, or
intoxicating liquors of any kind, other than the so-called native wines and liquors which the
members of such tribes have been accustomed themselves to make prior to the passage of
this Act, except as provided in section one hereof; and it shall be the duty of any police
officer or other duly authorized agent of the Insular or any provincial, municipal or township
government to seize and forthwith destroy any such liquors found unlawfully in the
possession of any member of a non-Christian tribe.

SEC. 3. Any person violating the provisions of section one or section two of this Act shall,
upon conviction thereof, be punishable for each offense by a fine of not exceeding two
hundred pesos or by imprisonment for a term not exceeding six months, in the discretion of
the court.
Page178
The accused challenges the constitutionality of the Act on the following grounds:

(1) That it is discriminatory and denies the equal protection of the laws;

(2) That it is violative of the due process clause of the Constitution: and.

(3) That it is improper exercise of the police power of the state.

Counsel for the appellant holds out his brief as the "brief for the non-Christian tribes." It is said that
as these less civilized elements of the Filipino population are "jealous of their rights in a democracy,"
any attempt to treat them with discrimination or "mark them as inferior or less capable rate or less
entitled" will meet with their instant challenge. As the constitutionality of the Act here involved is
questioned for purposes thus mentioned, it becomes imperative to examine and resolve the issues
raised in the light of the policy of the government towards the non-Christian tribes adopted and
consistently followed from the Spanish times to the present, more often with sacrifice and tribulation
but always with conscience and humanity.

As early as 1551, the Spanish Government had assumed an unvarying solicitous attitude toward
these inhabitants, and in the different laws of the Indies, their concentration in so-called
"reducciones" (communities) have been persistently attempted with the end in view of according
them the "spiritual and temporal benefits" of civilized life. Throughout the Spanish regime, it had
been regarded by the Spanish Government as a sacred "duty to conscience and humanity" to civilize
these less fortunate people living "in the obscurity of ignorance" and to accord them the "the moral
and material advantages" of community life and the "protection and vigilance afforded them by the
same laws." (Decree of the Governor-General of the Philippines, Jan. 14, 1887.) This policy had not
been deflected from during the American period. President McKinley in his instructions to the
Philippine Commission of April 7, 1900, said:

In dealing with the uncivilized tribes of the Islands, the Commission should adopt the same
course followed by Congress in permitting the tribes of our North American Indians to
maintain their tribal organization and government, and under which many of those tribes are
now living in peace and contentment, surrounded by civilization to which they are unable or
unwilling to conform. Such tribal government should, however, be subjected to wise and firm
regulation; and, without undue or petty interference, constant and active effort should be
exercised to prevent barbarous practices and introduce civilized customs.

Since then and up to the present, the government has been constantly vexed with the problem of
determining "those practicable means of bringing about their advancement in civilization and
material prosperity." (See, Act No. 253.) "Placed in an alternative of either letting them alone or
guiding them in the path of civilization," the present government "has chosen to adopt the latter
measure as one more in accord with humanity and with the national conscience." (Memorandum of
Secretary of the Interior, quoted in Rubi vs. Provincial Board of Mindoro, 39 Phil., 660, 714.) To this
end, their homes and firesides have been brought in contact with civilized communities through a
network of highways and communications; the benefits of public education have to them been
extended; and more lately, even the right of suffrage. And to complement this policy of attraction and
assimilation, the Legislature has passed Act No. 1639 undoubtedly to secure for them the blessings
of peace and harmony; to facilitate, and not to mar, their rapid and steady march to civilization and
culture. It is, therefore, in this light that the Act must be understood and applied.

It is an established principle of constitutional law that the guaranty of the equal protection of the laws
is not equal protection of the laws is not violated by a legislation based on reasonable classification.
Page178

And the classification, to be reasonable, (1) must rest on substantial distinctions; (2) must be
germane to the purposes of the law; (3) must not be limited to existing conditions only; and (4) must
apply equally to all members of the same class. (Borgnis vs. Falk Co., 133 N.W., 209;
Lindsley vs. Natural Carbonic Gas Co., 220 U.S. 61; 55 Law. ed., Rubi vs. Provincial Board of
Mindoro, 39 Phil., 660; People and Hongkong & Shanghai Banking Corporation vs. Vera and Cu
Unjieng, 37 Off. Gaz ., 187.)

Act No. 1639 satisfies these requirements. The classification rests on real and substantial, not
merely imaginary or whimsical, distinctions. It is not based upon "accident of birth or parentage," as
counsel to the appellant asserts, but upon the degree of civilization and culture. "The term 'non-
Christian tribes' refers, not to religious belief, but, in a way, to the geographical area, and, more
directly, to natives of the Philippine Islands of a low grade of civilization, usually living in tribal
relationship apart from settled communities." (Rubi vs. Provincial Board of Mindoro, supra.) This
distinction is unquestionably reasonable, for the Act was intended to meet the peculiar conditions
existing in the non-Christian tribes. The exceptional cases of certain members thereof who at
present have reached a position of cultural equality with their Christian brothers, cannot affect the
reasonableness of the classification thus established.

That it is germane to the purposes of law cannot be doubted. The prohibition "to buy, receive, have
in his possession, or drink any ardent spirits, ale, beer, wine, or intoxicating liquors of any kind, other
than the so-called native wines and liquors which the members of such tribes have been
accustomed themselves to make prior to the passage of this Act.," is unquestionably designed to
insure peace and order in and among the non-Christian tribes. It has been the sad experience of the
past, as the observations of the lower court disclose, that the free use of highly intoxicating liquors
by the non-Christian tribes have often resulted in lawlessness and crimes, thereby hampering the
efforts of the government to raise their standard of life and civilization.

The law is not limited in its application to conditions existing at the time of its enactment. It is
intended to apply for all times as long as those conditions exist. The Act was not predicated, as
counsel for appellant asserts, upon the assumption that the non-Christians are "impermeable to any
civilizing influence." On the contrary, the Legislature understood that the civilization of a people is a
slow process and that hand in hand with it must go measures of protection and security.

Finally, that the Act applies equally to all members of the class is evident from a perusal thereof. That
it may be unfair in its operation against a certain number non-Christians by reason of their degree of
culture, is not an argument against the equality of its application.

Appellants contends that that provision of the law empowering any police officer or other duly
authorized agent of the government to seize and forthwith destroy any prohibited liquors found
unlawfully in the possession of any member of the non-Christian tribes is violative of the due process
of law provided in the Constitution. But this provision is not involved in the case at bar. Besides, to
constitute due process of law, notice and hearing are not always necessary. This rule is especially
true where much must be left to the discretion of the administrative officials in applying a law to
particular cases. (McGehee, Due Process of Law p. 371, cited with approval in Rubi vs.Provincial
Board of Mindoro, supra.) Due process of law means simply: (1) that there shall be a law prescribed
in harmony with the general powers of the legislative department of the government; (2) that it shall
be reasonable in its operation; (3) that it shall be enforced according to the regular methods of
procedure prescribed; and (4) that it shall be applicable alike to all citizens of the state or to all of the
class. (U.S. vs. Ling Su Fan, 10 Phil., 104, affirmed on appeal by the United States Supreme Court,
218 U.S., 302: 54 Law. ed., 1049.) Thus, a person's property may be seized by the government in
payment of taxes without judicial hearing; or property used in violation of law may be confiscated
(U.S. vs. Surla, 20 Phil., 163, 167), or when the property constitutes corpus delicti, as in the instant
Page178

case (Moreno vs. Ago Chi, 12 Phil., 439, 442).

Neither is the Act an improper exercise of the police power of the state. It has been said that the
police power is the most insistent and least limitable of all powers of the government. It has been
aptly described as a power co-extensive with self-protection and constitutes the law of overruling
necessity. Any measure intended to promote the health, peace, morals, education and good order of
the people or to increase the industries of the state, develop its resources and add to its wealth and
prosperity (Barbier vs. Connolly, 113 U.S., 27), is a legitimate exercise of the police power, unless
shown to be whimsical or capricious as to unduly interfere with the rights of an individual, the same
must be upheld.

Act No. 1639, as above stated, is designed to promote peace and order in the non-Christian tribes
so as to remove all obstacles to their moral and intellectual growth and, eventually, to hasten their
equalization and unification with the rest of their Christian brothers. Its ultimate purpose can be no
other than to unify the Filipino people with a view to a greater Philippines.

The law, then, does not seek to mark the non-Christian tribes as "an inferior or less capable race."
On the contrary, all measures thus far adopted in the promotion of the public policy towards them
rest upon a recognition of their inherent right to equality in tht enjoyment of those privileges now
enjoyed by their Christian brothers. But as there can be no true equality before the law, if there is, in
fact, no equality in education, the government has endeavored, by appropriate measures, to raise
their culture and civilization and secure for them the benefits of their progress, with the ultimate end
in view of placing them with their Christian brothers on the basis of true equality. It is indeed
gratifying that the non-Christian tribes "far from retrograding, are definitely asserting themselves in a
competitive world," as appellant's attorney impressively avers, and that they are "a virile, up-and
-coming people eager to take their place in the world's social scheme." As a matter of fact, there are
now lawyers, doctors and other professionals educated in the best institutions here and in America.
Their active participation in the multifarious welfare activities of community life or in the delicate
duties of government is certainly a source of pride and gratification to people of the Philippines. But
whether conditions have so changed as to warrant a partial or complete abrogation of the law, is a
matter which rests exclusively within the prerogative of the National Assembly to determine. In the
constitutional scheme of our government, this court can go no farther than to inquire whether the
Legislature had the power to enact the law. If the power exists, and we hold it does exist, the wisdom
of the policy adopted, and the adequacy under existing conditions of the measures enacted to
forward it, are matters which this court has no authority to pass upon. And, if in the application of the
law, the educated non-Christians shall incidentally suffer, the justification still exists in the all-
comprehending principle of salus populi suprema est lex. When the public safety or the public
morals require the discontinuance of a certain practice by certain class of persons, the hand of the
Legislature cannot be stayed from providing for its discontinuance by any incidental inconvenience
which some members of the class may suffer. The private interests of such members must yield to
the paramount interests of the nation (Cf. Boston Beer Co. vs. Mass., 97 U.S., 25; 24 law. ed., 989).

Judgment is affirmed, with costs against appellant.

Page178
G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA)
84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving creditable withholding taxes. 3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded
former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong
and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-
98. Petitioner argues that the MCIT violates the due process clause because it levies income tax
even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-
98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for
the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner
contends that these revenue regulations are contrary to law for two reasons: first, they ignore the
different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because
the CWT is being levied upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.

The issues to be resolved are as follows:

Page178
 (1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional
and

(3) whether or not the imposition of CWT on income from sales of real properties classified
as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an
MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax
imposed under Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately succeeding taxable years. Section
27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater
than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable
years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses
on account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection
(E) hereof, the term ‘gross income’ shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
Page178
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less
sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists directly
rendering the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E). 5 The
pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is
hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately
following the taxable year in which such corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or negative taxable income or whenever the
amount of minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000
and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited
against the normal income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or
transfer of real property, other than capital assets, by persons residing in the Philippines and
habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for
the sale, exchange or transfer of. – Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in
Page178

the real estate business in accordance with the following schedule –

 Those which are exempt from a Exempt
withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or
less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In
an exchange, the fair market value of the property received in exchange, as determined in the
Income Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to
be made on the periodic installment payments where the buyer is an individual not engaged in trade
or business. In such a case, the applicable rate of tax based on the entire consideration shall be
withheld on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for
the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the
gross selling price/total amount of consideration or the fair market value determined in accordance
with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be imposed upon the withholding
agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
Page178

seller/transferor is habitually engaged in the real estate

 business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In
an exchange, the fair market value of the property received in exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these
rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer
shall withhold the tax based on the gross selling price or fair market value of the property, whichever
is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the
[CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has
certified that such transfers and conveyances have been reported and the taxes thereof have been
duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and
the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully
paid xxxx.

On February 11, 2003, RR No. 7-2003 8 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the
MCIT, among others. The pertinent portions thereof state:
Page178
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling
price or current fair market value as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than
land and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-
98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu
of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under
Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is
no actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
Page178
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal
claims which is susceptible of judicial resolution as distinguished from a hypothetical or abstract
difference or dispute.11 On the other hand, a question is considered ripe for adjudication when the act
being challenged has a direct adverse effect on the individual challenging it. 12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut
down their operations as a result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated
(DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is
said to have ripened into a judicial controversy even without any other overt act. Indeed, even a
singular violation of the Constitution and/or the law is enough to awaken judicial duty. 14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to
settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions]. 15

Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute
that the individual members of petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury
arising from the enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition. 20
Page178

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine
taxation system. It came about as a result of the perceived inadequacy of the self-assessment
system in capturing the true income of corporations. 21 It was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income tax which is more difficult to
control and enforce. It is a means to ensure that everyone will make some minimum contribution to
the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing
in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new
concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. … This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement. 22

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market
and to ensure a favorable business climate. It is therefore fair for the government to require them to
make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters. 23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in and
year out and paid no tax. So, if the corporation has been losing for the past five years to ten years,
then that corporation has no business to be in business. It is dead. Why continue if you are losing
year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor. 24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses
after operations of a corporation or consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by
corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations. 25 This grace
period allows a new business to stabilize first and make its ventures viable before it is subjected to
the MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income
tax which shall be credited against the normal income tax for the three immediately succeeding
years.27
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Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers
noted that most developing countries, particularly Latin American and Asian countries, have the
same form of safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries. 29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said provision only considers the cost
of goods sold and other direct expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain." 32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest and the common good. 33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative. 35 Essentially,

this means that in the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. 36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why
it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed
and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility
of the legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
Page178

carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of
life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the
due process clause may properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property.40 But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer. 41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character. 43

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth
which flows into the taxpayer other than a mere return on capital. Capital is a fund or property
existing at one distinct point in time while income denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital.46 For income to be taxable, the following
requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a
tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross
sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates
the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2%
and uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. 49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found
in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base. 51 Since our income tax laws are of
American origin, interpretations by American courts of our parallel tax laws have persuasive effect on
the interpretation of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:53
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In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. 54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.55

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax. 56 This is because
deductions are a matter of legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax
base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of
its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the
MCIT is being imposed and collected even when there is actually a loss, or a zero or negative
taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax
due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is
still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the
MCIT on gross income notwithstanding the amount of the net income. But the law also states that
the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the
case that the MCIT would be less than the net income of the corporation which posts a zero or
negative taxable income.
Page178
We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT)
and maintains that the revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value
(FMV) of the real estate as basis for determining the income tax for the sale of real estate classified
as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the
net income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes
of collection and payment of taxes on income from the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real
Property Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement. 64 It is well-settled that an
administrative agency cannot amend an act of Congress. 65

We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the government’s cash
flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of income
payable to any person, national or juridical, residing in the Philippines. Such authority is derived from
Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

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(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section
57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is creditable against the income tax
liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in
the Real Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate
business’ income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary
assets remains to be the entity’s net income imposed under Section 24 (resident individuals) or
Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less
allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer
at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the
tax base for the sale of real property classified as ordinary assets remains to be the net taxable
income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.

xxx xxx xxx

Page178
c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-
98], as amended, and consequently, to theordinary income tax under Sec. 27(A) of the Code. In
lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the
tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to
the particular transaction in which he is a party. In such a case, his basis can only be the GSP or
FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax
and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its
GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT)
and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a payments are intended to equal or at
full and final payment of the income tax least approximate the tax due of the
due from the payee on the said income. payee on said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the
right to ask for a refund if the tax withheld
is more than the tax due.
Page178
c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and
CWT disprove petitioner’s contention that ordinary assets are being lumped together with, and
treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment
of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT.
It follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)
(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this
Code on specified items of income shall be withheld by payor-corporation and/or person
and paid in the same manner and subject to the same conditions as provided in Section 58
of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year. (Emphasis supplied)
Page178

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary
purposes, the same is not passive income… 76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties
that return rental income, shares of stock in a corporation that earn dividends or interest income
received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income
payable to natural or juridical persons, residing in the Philippines." There is no requirement that this
income be passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains
to CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it
is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR
may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting
tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at
the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant
to the constitutional guarantee of due process. More importantly, the due process requirement
applies to the power to tax.79 The CWT does not impose new taxes nor does it increase taxes. 80 It
relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a
refund.81 This argument is misleading. The practical problems encountered in claiming a tax refund
do not affect the constitutionality and validity of the CWT as a method of collecting the tax. 1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
Page178

having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s
complaints are essentially matters of policy best addressed to the executive and legislative branches
of the government. Besides, the CWT is applied only on the amounts actually received or receivable
by the real estate entity. Sales on installment are taxed on a per-installment basis. 83 Petitioner’s
desire to utilize for its operational and capital expenses money earmarked for the payment of taxes
may be a practical business option but it is not a fundamental right which can be demanded from the
court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because
the CWT is being levied only on real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of
doing business is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall
be deprived of the same protection of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."85 Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be valid, must (1) rest on
substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation. 88 The real estate industry is, by itself, a class and can
be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails
to realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger
and its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.
Page178
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these
are not similarly subjected to the CWT.89As already discussed, the Secretary may adopt any
reasonable method to carry out its functions.90 Under Section 57(B), it may choose what to subject to
CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate.
The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the
BIR, are also subject to CWT for their transactions with said 5,000 corporations. 91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should
not effect the regisration of any document transferring real property unless a certification is issued by
the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down
this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and
is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax
measure, it has to contend not only with Einstein’s observation but also with the vast and well-
established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner
has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and
CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED. Page178
G.R. No. L-23794 February 17, 1968

ORMOC SUGAR COMPANY, INC., plaintiff-appellant,

vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY, HON.
ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY, defendants-appellees.

Ponce Enrile, Siguion Reyna, Montecillo & Belo and Teehankee, Carreon & Tañada for plaintiff-
appellant.
Ramon O. de Veyra for defendants-appellees.

BENGZON, J.P., J.:

On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of
1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar
Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to
the United States of America and other foreign countries." 2

Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March
20, 1964 for P7,087.50 and on April 20, 1964 for P5,000, or a total of P12,087.50.

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte,
with service of a copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as
its Treasurer, Municipal Board and Mayor, alleging that the afore-stated ordinance is unconstitutional
for being violative of the equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of
uniformity of taxation (Sec. 22[1]), Art. VI, Constitution), aside from being an export tax forbidden
under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither a
production nor a license tax which Ormoc City under Section 15-kk of its charter and under Section 2
of Republic Act 2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that
the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of Republic
Act 2264 because the tax is on both the sale and export of sugar.

Answering, the defendants asserted that the tax ordinance was within defendant city's power
to enact under the Local Autonomy Act and that the same did not violate the afore-cited
constitutional limitations. After pre-trial and submission of the case on memoranda, the Court of First
Instance, on August 6, 1964, rendered a decision that upheld the constitutionality of the ordinance
and declared the taxing power of defendant chartered city broadened by the Local Autonomy Act to
include all other forms of taxes, licenses or fees not excluded in its charter.

Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant
alleges the same statutory and constitutional violations in the aforesaid taxing ordinance mentioned
earlier.

Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all
Page178

productions of centrifugal sugar milled at the Ormoc Sugar Company, Incorporated, in Ormoc City, a
municipal tax equivalent to one per centum (1%) per export sale to the United States of America and
other foreign countries." Though referred to as a tax on the export of centrifugal sugar produced at
Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time the tax
applies is when the sugar produced is exported.

Appellant questions the authority of the defendant Municipal Board to levy such an export tax,
in view of Section 2287 of the Revised Administrative Code which denies from municipal councils the
power to impose an export tax. Section 2287 in part states: "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."

Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959, gave
chartered cities, municipalities and municipal districts authority to levy for public purposes just and
uniform taxes, licenses or fees. Anent the inconsistency between Section 2287 of the Revised
Administrative Code and Section 2 of Republic Act 2264, this Court, in Nin Bay Mining Co. v.
Municipality of Roxas 4 held the former to have been repealed by the latter. And expressing Our
awareness of the transcendental effects that municipal export or import taxes or licenses will have
on the national economy, due to Section 2 of Republic Act 2264, We stated that there was no other
alternative until Congress acts to provide remedial measures to forestall any unfavorable results.

The point remains to be determined, however, whether constitutional limits on the power of
taxation, specifically the equal protection clause and rule of uniformity of taxation, were infringed.

The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal
protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection
clause applies only to persons or things identically situated and does not bar a reasonable
classification of the subject of legislation, and a classification is reasonable where (1) it is based on
substantial distinctions which make real differences; (2) these are germane to the purpose of the
law; (3) the classification applies not only to present conditions but also to future conditions which
are substantially identical to those of the present; (4) the classification applies only to those who
belong to the same class.

A perusal of the requisites instantly shows that the questioned ordinance does not meet them,
for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and
none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true,
was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in
terms applicable to future conditions as well. The taxing ordinance should not be singular and
exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for
the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to
the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the
entity to be levied upon.

Appellant, however, is not entitled to interest; on the refund because the taxes were not
arbitrarily collected (Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the
ordinance provided a sufficient basis to preclude arbitrariness, the same being then presumed
constitutional until declared otherwise.

WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is
declared unconstitutional and the defendants-appellees are hereby ordered to refund the
Page178

P12,087.50 plaintiff-appellant paid under protest. No costs. So ordered.

G.R. No. 127410 January 20, 1999

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M. JUNGCO, petitioners,

vs.

COURT OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION AND

DEVELOPMENT AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY, BUREAU OF
INTERNAL REVENUE, CITY TREASURER OF OLONGAPO and MUNICIPAL TREASURER OF
SUBIC, ZAMBALES, respondents.

PANGANIBAN, J.:

The constituttional rights to equal protection of the law is not violated by an executive order, issued
pursuant to law, granting tax and duty incentives only to the bussiness and residents within the
"secured area" of the Subic Special Econimic Zone and denying them to those who live within the
Zone but outside such "fenced-in" territory. The Constitution does not require absolute equality
among residents. It is enough that all persons under like circumstances or conditions are given the
same privileges and required to follow the same obligations. In short, a classification based on valid
and reasonable standards does not violate the equal protection clause.

The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking the reversal of the
Court of Appeals' Decision promulgated on August 29, 1996, and Resolution dated November 13,
1 2

1996, in CA-GR SP No. 37788. The challenged Decision upheld the constitutionality and validity of
3

Executive Order No. 97-A (EO 97-A), according to which the grant and enjoyment of the tax and duty
incentives authorized under Republic Act No. 7227 (RA 7227) were limited to the business
enterprises and residents within the fenced-in area of the Subic Special Economic Zone (SSEZ).

The assailed Resolution denied the petitioners' motion for reconsideration.

On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227 entitled
"An Act Accelerating the Conversion of Military Reservations Into Other Productive Uses, Creating
the Bases Conversion and Development Authority for this Purpose, Providing Funds Therefor and for
Other Purposes." Section 12 thereof created the Subic Special Economic Zone and granted there to
special privileges, as follows:

Sec. 12. Subic Special Economic Zone. — Subject to the concurrence by resolution
of the sangguniang panlungsod of the City of Olongapo and the sangguniang
bayan of the Municipalities of Subic, Morong and Hermosa, there is hereby created a
Special Economic and Free-port Zone consisting of the City of Olongapo and the
Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval
Page178

Base and its contiguous extensions as embraced, covered, and defined by the 1947
Military Bases Agreement between the Philippines and the United States of America
as amended, and within the territorial jurisdiction of the Municipalities of Morong and
Hermosa, Province of Bataan, hereinafter referred to as the Subic Special Economic
Zone whose metes and bounds shall be delineated in a proclamation to be issued by
the President of the Philippines. Within thirty (30) days after the approval of this Act,
each local government unit shall submit its resolution of concurrence to join the Subic
Special Economic Zone to the Office of the President. Thereafter, the President of
the Philippines shall issue a proclamation defining the metes and bounds of the zone
as provided herein.

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the Subic
Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in
and around the zone and to attract and promote productive foreign investments;

(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as well as provide incentives
such as tax and duty-free importations of raw materials, capital and equipment.
However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;

(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of Olongapo and the Municipality of
Subic, and other municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor of
the latter;

(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained in the Subic
Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within the Subic Special Economic
Zone;
Page178
 (f) Banking and finance shall be liberalized with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign
banks with minimum Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than two hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under twenty-one (21) years of age, shall be
granted permanent resident status within the Subic Special Economic Zone. They
shall have the freedom of ingress and egress to and from the Subic Special
Economic Zone without any need of special authorization form the Bureau of
Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in
Section 13 of this Act may also issue working visas renewable every two (2) years to
foreign executives and other aliens possessing highly technical skills which no
Filipino within the Subic Special Economic Zone possesses, as certified by the
Department of Labor and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay Metropolitan Authority shall be
reported to the Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof;

(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own security and fire-fighting forces; and

(i) Except as herein provided, the local government units comprising the Subic
Special Economic Zone shall retain their basic autonomy and identity. The cities shall
be governed by their respective charters and the municipalities shall operate and
function in accordance with Republic Act No. 7160, otherwise known as the Local
Government Code of 1991.

On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO 97), clarifying
the application of the tax and duty incentives thus:

Sec. 1. On Import Taxes and Duties. — Tax and duty-free importations shall apply
only to raw materials, capital goods and equipment brought in by business
enterprises into the SSEZ. Except for these items, importations of other goods into
the SSEZ, whether by business enterprises or resident individuals, are subject to
taxes and duties under relevant Philippine laws.

The exportation or removal of tax and duty-free goods from the territory of the SSEZ
to other parts of the Philippine territory shall be subject to duties and taxes under
relevant Philippine laws.

Sec. 2. On All Other Taxes. — In lieu of all local and national taxes (except import
taxes and duties), all business enterprises in the SSEZ shall be required to pay the
tax specified in Section 12(c) of R.A. No. 7227.

Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO 97-A),
specifying the area within which the tax-and-duty-free privilege was operative, viz.:

Sec. 1.1. The Secured Area consisting of the presently fenced-in former Subic Naval
Page178

Base shall be the only completely tax and duty-free area in the SSEFPZ [Subic
 Special Economic and Free Port Zone]. Business enterprises and individuals
(Filipinos and foreigners) residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items tax and duty-free.
Consumption items, however, must be consumed within the Secured Area. Removal
of raw materials, capital goods, equipment and consumer items out of the Secured
Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual
taxes and duties, except as may be provided herein.

On October 26, 1994, the petitioners challenged before this Court the constitutionality of EO 97-A for
allegedly being violative of their right to equal protection of the laws. In a Resolution dated June 27,
1995, this Court referred the matter to the Court of Appeals, pursuant to Revised Administrative
Circular No. 1-95.

Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos. It
delineated the exact metes and bounds of the Subic Special Economic and Free Port Zone,
pursuant to Section 12 of RA 7227.

Ruling of the Court of Appeals

Respondent Court held that "there is no substantial difference between the provisions of EO 97-A
and Section 12 of RA 7227. In both, the 'Secured Area' is precise and well-defined as '. . . the lands
occupied by the Subic Naval Base and its contiguous extensions as embraced, covered and defined
by the 1947 Military Bases Agreement between the Philippines and the United States of America, as
amended . . .'" The appellate court concluded that such being the case, petitioners could not claim
that EO 97-A is unconstitutional, while at the same time maintaining the validity of RA 7227.

The court a quo also explained that the intention of Congress was to confine the coverage of the
SSEZ to the "secured area" and not to include the "entire Olongapo City and other areas mentioned
in Section 12 of the law." It relied on the following deliberarions in the Senate:

Senator Paterno. Thank you, Mr. President. My first question is the extent of the
economic zone. Since this will be a free port, in effect, I believe that it is important to
delineate or make sure that the delineation will be quite precise[. M]y question is: Is it
the intention that the entire of Olongapo City, the Municipality of Subic and the
Municipality of Dinalupihan will be covered by the special economic zone or only
portions thereof?

Senator Shahani. Only portions, Mr. President. In other words, where the actual
operations of the free port will take place.

Senator Paterno. I see. So, we should say, "COVERING THE DESIGNATED

PORTIONS OR CERTAIN PORTIONS OF OLONGAPO CITY, SUBIC AND
DINALUPIHAN" to make it clear that it is not supposed to cover the entire area of all
of these territories.

Senator Shahani. So, the Gentleman is proposing that the words "CERTAIN
AREAS". . .

The President. The Chair would want to invite the attention of the Sponsor and
Senator Paterno to letter "C," which says: "THE PRESIDENT OF THE PHILIPPINES
Page178

IS HEREBY AUTHORIZED TO PROCLAIM, DELINEATE AND SPECIFY THE

 METES AND BOUNDS OF OTHER SPECIAL ECONOMIC ZONES WHICH MAY BE
CREATED IN THE CLARK MILITARY RESERVATIONS AND ITS EXTENSIONS."

Probably, this provision can be expanded since, apparently, the intention is that what
is referred to in Olongapo as Metro Olongapo is not by itself ipso jure already a
special economic zone.

Senator Paterno. That is correct.

The President. Someone, some authority must declare which portions of the same
shall be the economic zone. Is it the intention of the author that it is the President of
the Philippines who will make such delineation?

Senator Shahani. Yes Mr. President.

The Court of Appeals further justified the limited application of the tax incentives as being within the
prerogative of the legislature, pursuant to its "avowed purpose [of serving] some public benefit or
interest." It ruled that "EO 97-A merely implements the legislative purpose of [RA 7227]."

Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals Decision
and Resolution.

The Issue

Petitioners submit the following issue for the resolution of the Court:

[W]hether or not Executive Order No. 97-A violates the equal protection clause of the
Constitution. Specifically the issue is whether the provisions of Executive Order No.
97-A confining the application of R.A. 7227 within the secured area and excluding the
residents of the zone outside of the secured area is discriminatory or not. 4

The Court's Ruling

The petition is bereft of merit.

5

Main Issue:

The Constitionality of EO 37-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City of
Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic
Naval Base. However, EO 97-A, according to them, narrowed down the area within which the special
privileges granted to the entire zone would apply to the present "fenced-in former Subic Naval Base"
only. It has thereby excluded the residents of the first two components of the zone from enjoying the
benefits granted by the law. It has effectively discriminated against them without reasonable or valid
standards, in contravention of the equal protection guarantee.

On the other hand, the solicitor general defends, on behalf of respondents, the validity of EO 97-A,
arguing that Section 12 of RA 7227 clearly vests in the President the authority to delineate the metes
and bounds of the SSEZ. He adds that the issuance fully complies with the requiretnents of a valid
Page178

classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not violative of
the equal protection clause; neither is it discriminatory. Rather, than we find real and substantive
distinctions between the circumstances obtain;ng inside and those outside the Subic Naval Base,
thereby justifying a valid and reasonable classification.

The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable
classification. If the groupings are characterized by substantial distinctions that make real
differences, one class may be treated and regulated differently from another. The classification
6

must also be germane to the purpose of the law and must apply to all those belonging to the same
class. Explaining the nature of the equal protection guarantee, the Court in Ichong v.
Hernandez said:
8

The equal protection of the law clause is against undue favor and individual or class
privilege, as well as hostile discrimination or the oppression of inequality. It is not
intended to prohibit legislation which is limited either [by] the object to which it is
directed or by [the] territory within which it is to operate. It does not demand absolute
equality among residents; it merely requires that all persons shall be treated
alike, under like circumstances and conditions both as to privileges conferred and
liabilities enforced. The equal protection clause is not infringed by legislation which
applies only to those persons falling within a specified class, if it applies alike to all
persons within such class, and reasonable. grounds exist for making a distinction
between those who fall within such class and those who do not.

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of
the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the
same class. 9

We first determine the purpose of the law. From the very title itself, it is clear that RA 7227 aims
primarily to accelerate the conversion of military reservations into productive uses. Obviously, the
"lands covered under the 1947 Military Bases Agreement" are its object. Thus, the law avows this
policy:

Sec. 2. Declaration of Policies. — It is hereby declared the policy of the Government

to accelerate the sound and balanced conversion into alternative productive uses of
the Clark and Subic military reservations and their extensions (John Hay Station,
Wallace Air Station, O'Donnell Transmitter Station, San Miguel Naval
Communications Station and Capas Relay Station), to raise funds by the sale of
portions of Metro Manila military camps, and to apply said funds as provided herein
for the development and conversion to productive civilian use of the lands covered
under the 1947 Military Bases Agreement between the Philippines and the United
States of America, as amended.

To undertake the above objectives, the same law created the Bases Conversion and Development
Authority, some of whose relevant defined purposes are:

(b) To adopt, prepare and implement a comprehensive and detailed development

plan embodying a list of projects including but not limited to those provided in the
Legislative-Executive Bases Council (LEBC) framework plan for the sound and
balanced conversion of the Clark and Subic military reservations and their extensions
consistent with ecological and environmental standards, into other productive uses to
promote the economic and social development of Central Luzon in particular and the
Page178

country in general;
 (c). To encourage the active participation of the private sector in transforming the
Clark and Subic military reservations and their extensions into other productive uses;

Further, in creating the SSEZ, the law declared it a policy to develop the zone into a "self-sustaining,
industrial, commercial, financial and investment center." 10

From the above provisions of the law, it can easily be deduced that the real concern of RA 7227 is to
convert the lands formerly occupied by the US military bases into economic or industrial areas. In
furtherance of such objective, Congress deemed it necessary to extend economic incentives to
attract and encourage investors, both local and foreign. Among such enticements are: (1) a11

separate customs territory within the zone, (2) tax-and-duty-free importation's, (3) restructured
income tax rates on business enterprises within the zone, (4) no foreign exchange control, (5)
liberalized regulations on banking and finance, and (6) the grant of resident status to certain
investors and of working visas to certain foreign executives and workers .

We believe it was reasonable for the President to have delimited the application of some incentives
to the confines of the former Subic military base. It is this specific area which the government intends
to transform and develop from its status quo ante as an abandoned naval facility into a self-
sustaining industrial and commercial zone, particularly for big foreign and local investors to use as
operational bases for their businesses and industries. Why the seeming bias for the big investors?
Undeniably, they are the ones who can pour huge investments to spur economic growth in the
country and to generate employment opportunities for the Filipinos, the ultimate goals of the
government for such conversion. The classification is, therefore, germane to the purposes of the law.
And as the legal maxim goes, "The intent of a statute is the law." 12

Certainly, there are substantial differences between the big investors who are being lured to
establish and operate their industries in the so-called "secured area" and the present business
operators outside the area. On the one hand, we are talking of billion-peso investments and
thousands of new, jobs. On the other hand, definitely none of such magnitude. In the first, the
economic impact will be national; in the second, only local. Even more important, at this time the
business activities outside the "secured area" are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive use for the benefit of the
Philippine economy. There is, then, hardly any reasonable basis to extend to them the benefits and
incentives accorded in RA 7227. Additionally, as the Court of Appeals pointed out, it will be easier to
manage and monitor the activities within the "secured area," which is already fenced off, to prevent
"fraudulent importation of merchandise" or smuggling.

It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As
13

long as there are actual and material differences between territories, there is no violation of the
constitutional clause. And of course, anyone, including the petitioners, possessing the requisite
investment capital can always avail of the same benefits by channeling his or her resources or
business operations into the fenced-off free port zone.

We believe that the classification set forth by the executive issuance does not apply merely to
existing conditions. As laid down in RA 7227, the objective is to establish a "self-sustaining,
industrial, commercial, financial and investment center" in the area. There will, therefore, be a long-
term difference between such investment center and the areas outside it.

Lastly, the classification applies equally to all the resident individuals and businesses within the
"secured area." The residents, being in like circumstances or contributing directly to the achievement
of the end purpose of the law, are not categorized further. Instead, they are all similarly treated, both
Page178

in privileges granted and in obligations required.

All told, the Court holds that no undue favor or privilege was extended. The classification occasioned
by EO 97-A was not unreasonable, capricious or unfounded. To repeat, it was based, rather, on fair
and substantive considerations that were germane to the legislative purpose.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution are
hereby AFFIRMED. Costs against petitioners. 1âwphi1.nêt

SO ORDERED

Page178
 January 11, 2016

G.R. No. 169507

AIR CANADA, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines, through a general sales
agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under
Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic
of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 ½% of
its gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review appealing the August 26, 2005 Decision of the Court of Tax Appeals En
1 2

Banc, which in turn affirmed the December 22, 2004 Decision and April 8, 2005 Resolution of the
3 4

Court of Tax Appeals First Division denying Air Canada’s claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]" On April
5

24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board,
subject to certain conditions, which authority would expire on April 24, 2005. "As an off-line carrier,
6

[Air Canada] does not have flights originating from or coming to the Philippines [and does not]
operate any airplane [in] the Philippines[.]"
7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general
sales agent in the Philippines. Aerotel "sells [Air Canada’s] passage documents in the Philippines."
8 9

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of ₱5,185,676.77, detailed as follows:
10

1âwphi1
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
Page178

3rd Qtr 2001 November 29, 2001 765,021.28

 Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
11
TOTAL P 5,185,676.77

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid
income taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue, Revenue District
12

Office No. 47-East Makati. It found basis from the revised definition of Gross Philippine Billings
13 14

under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and onehalf percent (2 1/2%) on its ‘Gross Philippine Billings’
as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the
ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the
Court of Tax Appeals on November 29, 2002. The case was docketed as C.T.A. Case No. 6572.
15 16

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the
Petition for Review and, hence, the claim for refund. It found that Air Canada was engaged in
17

business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it
should be taxed as a resident foreign corporation at the regular rate of 32%. Further, according to
18

the Court of Tax Appeals First Division, Air Canada was deemed to have established a "permanent
establishment" in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
19

Treaty by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an
20

outlet where sales of [airline] tickets are made[.]" 21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of
Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of merit. The First Division held
22

that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it
Page178
was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of
airline tickets within the Philippines pursuant to Section 28(A)(1).23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc. The appeal was
24

docketed as CTA EB No. 86. 25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the
First Division. The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation
26

doing business in the Philippines since it sold airline tickets in the Philippines. The Court of Tax
27

Appeals En Banc disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit. 28

Hence, this Petition for Review was filed.

29

The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage documents
through a general sales agent in the Philippines, is a resident foreign corporation within the meaning
of Section 28(A)(1) of the 1997 National Internal Revenue Code;

Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage
documents through a general sales agent can be subject to the regular corporate income tax of
32% on taxable income pursuant to Section 28(A)(1);
30

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining allegedly
to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second
quarter of 2002.

Petitioner claims that the general provision imposing the regular corporate income tax on resident
foreign corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code
does not apply to "international carriers," which are especially classified and taxed under Section
31

28(A)(3). It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in
32

the assailed Court of Tax Appeals Decision "does not render it ipso facto subject to 32% income tax
on taxable income as a resident foreign corporation." Petitioner argues that to impose the 32%
33

regular corporate income tax on its income would violate the Philippine government’s covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher
than 1½% of the carrier’s gross revenue derived from sources within the Philippines. It would also
34

allegedly result in "inequitable tax treatment of on-line and off-line international air carriers[.]"
35
Page178
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was
income from services and not income from sales of personal property. Petitioner cites the
36

deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually
became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile’s
statement, to reveal the "legislative intent to treat the revenue derived from air carriage as income
37

from services, and that the carriage of passenger or cargo as the activity that generates the
income." Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner
38

claims that its income derived "from services rendered outside the Philippines [was] not subject to
Philippine income taxation." 39

Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner
cannot be considered to have a "permanent establishment" in the Philippines pursuant to Article
40

V(6) of the Republic of the Philippines-Canada Tax Treaty. It points out that Aerotel is an
41

"independent general sales agent that acts as such for . . . other international airline companies in
the ordinary course of its business." Aerotel sells passage tickets on behalf of petitioner and
42

receives a commission for its services. Petitioner states that even the Bureau of Internal Revenue—
43

through VAT Ruling No. 003-04 dated February 14, 2004—has conceded that an offline international
air carrier, having no flight operations to and from the Philippines, is not deemed engaged in
business in the Philippines by merely appointing a general sales agent. Finally, petitioner maintains
44

that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the
ground that [it] is subject to income tax under Section 28 (A) (1)" since it has not been assessed at
45

all by the Bureau of Internal Revenue for any income tax liability. 46

On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax
as a resident foreign corporation doing business in the Philippines. Petitioner’s total payment of
₱5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its
plane tickets within the Philippines during the relevant period. Respondent further points out that
47

this court in Commissioner of Internal Revenue v. American Airlines, Inc., which in turn cited the
48

cases involving the British Overseas Airways Corporation and Air India, had already settled that
"foreign airline companies which sold tickets in the Philippines through their local agents . . . [are]
considered resident foreign corporations engaged in trade or business in the country." It also cites
49

Revenue Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines by offline international airlines
either by themselves or through their agents." 50

Respondent further contends that petitioner is not entitled to its claim for refund because the amount
of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still
short of the 32% income tax due for the period. Petitioner cannot allegedly claim good faith in its
51

failure to pay the right amount of tax since the National Internal Revenue Code became operative on
January 1, 1998 and by 2000, petitioner should have already been aware of the implications of
Section 28(A)(3) and the decided cases of this court’s ruling on the taxability of offline international
carriers selling passage tickets in the Philippines. 52

At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline international
carrier with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under
Section 28(A)(3) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. –

Page178

(A) Tax on Resident Foreign Corporations. -

 ....

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of
two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another
international airline form part of the Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any
port outside the Philippines on another airline, only the aliquot portion of the cost of
the ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage,
cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine
Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls
within the definition of resident foreign corporation under Section 28(A)(1) of the 1997 National
Internal Revenue Code, thus, it may be subject to 32% tax on its taxable income:
53

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32% ). (Emphasis supplied)
54

The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June
15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in
trade or business within the Philippines or having an office or place of business therein." 55
Page178
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110,
approved on August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
56

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939
National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended,
but it still provides that "[a] corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding taxable year from
all sources within the Philippines[.]" 57

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation declared British Overseas Airways Corporation, an international air carrier with no
58

landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company. This 59

court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"

business. Each case must be judged in the light of its peculiar environmental circumstances. The
term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object
of the business organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character.["]

BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in
the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series
corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which
are normally incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood
of the airline business, the generation of sales being the paramount objective. There should be no
doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the
period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax
upon its total net income received in the preceding taxable year from all sources within the
Philippines. (Emphasis supplied, citations omitted)
60

Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its
definition of "doing business" with regard to foreign corporations. Section 3(d) of the law enumerates
Page178

the activities that constitute doing business:

d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally incident
to, and in progressive prosecution of, commercial gain or of the purpose and object of the
business organization: Provided, however, That the phrase "doing business" shall not be deemed
to include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and for its own
account[.] (Emphasis supplied)
61

While Section 3(d) above states that "appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account" is not considered as
"doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or distributors, operating under full control
of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days or more[.]" 62

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who
sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes,
contracts, or arranges for such transportation." 63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority." Each offline carrier must file with the Civil Aeronautics Board
64

a monthly report containing information on the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received. 65

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to
petitioner. There is nothing on record to show that Aerotel solicited orders alone and for its own
66

account and without interference from, let alone direction of, petitioner. On the contrary, Aerotel
cannot "enter into any contract on behalf of [petitioner Air Canada] without the express written
consent of [the latter,]" and it must perform its functions according to the standards required by
67

petitioner. Through Aerotel, petitioner is able to engage in an economic activity in the Philippines.
68

Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.
69

Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from
sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is
income realized from the pursuit of its business activities in the Philippines.

III
Page178
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National
Internal Revenue Code must consider the existence of an effective tax treaty between the
Philippines and the home country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue, this court held70

that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage
of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule
under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an
international air carrier would be liable for the tax under Section 28(A)(1). 71

This court in South African Airways declared that the correct interpretation of these provisions is that:
"international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall be taxed at the
rate of 2½% of its Gross Philippine Billings[;] while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in the country [like sale of
airline tickets] will be taxed at the rate of 32% of such [taxable] income." 72

In this case, there is a tax treaty that must be taken into consideration to determine the proper tax
rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating
double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to foreign residents or
nationals." Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc. explained the
73 74

purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and for identical
periods.

The apparent rationale for doing away with double taxation is to encourage the free flow of goods
and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate. (Emphasis in the original, citations omitted)
75

Observance of any treaty obligation binding upon the government of the Philippines is anchored on
the constitutional provision that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]" Pacta sunt servanda is a fundamental international
76

law principle that requires agreeing parties to comply with their treaty obligations in good faith. 77

Hence, the application of the provisions of the National Internal Revenue Code must be subject to
the provisions of tax treaties entered into by the Philippines with foreign countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, this court stressed the
78

binding effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with
[Revenue Memorandum Order] RMO No. 1-2000 will deprive persons or corporations of the benefit
79

of a tax treaty." Upholding the tax treaty over the administrative issuance, this court reasoned thus:
80
Page178
Our Constitution provides for adherence to the general principles of international law as part of the
law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must
be performed by them in good faith. More importantly, treaties have the force and effect of law in
this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C.
Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into
to minimize, if not eliminate the harshness of international juridical double taxation, which is why they
are also known as double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken." Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose additional requirements that would negate the
availment of the reliefs provided for under international agreements. More so, when the RPGermany
Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said
agreement.

....

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax treaty. The
denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At most, the application for
a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief. (Emphasis supplied, citations omitted)
81

On March 11, 1976, the representatives for the government of the Republic of the Philippines and
82

for the government of Canada signed the Convention between the Philippines and Canada for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December
21, 1977.
Page178
Article V of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment"
83

as a "fixed place of business in which the business of the enterprise is wholly or partly carried on."84

Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to
have a permanent establishment in the other Contracting State if under certain conditions there is a
person acting for it.

Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person
acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an
agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually exercises in that State an
authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 1868 of the Civil Code of the Philippines.
85

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other Contracting State merely because it carries
on business in that other State through a broker, general commission agent or any other agent of
an independent status, where such persons are acting in the ordinary course of their business."

Considering Article XV of the same Treaty, which covers dependent personal services, the term
86

"dependent" would imply a relationship between the principal and the agent that is akin to an
employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of the
agent.87

Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier,
who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any
air transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise
as one who sells, provides, furnishes, contracts or arranges for, such air transportation." General
88

sales agents and their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board. A permit or authorization issued by the Civil
89

Aeronautics Board is required before a general sales agent may engage in such an activity. 90

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
"permanent establishment" in the Philippines as defined under the Republic of the Philippines-
Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of International
Air Transport Associationapproved and petitioner-approved sales agents, including the following
services:

ARTICLE 7
GSA SERVICES

The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
Page178
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every
matter relating to this Agreement;

....

c) Promotion of passenger transportation on AC;

....

e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA
[Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as
required by the passenger(s);

....

h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with the reasonable requirements of AC;

....

j) Distribution of official press releases provided by AC to media and reference of any press or public
relations inquiries to AC;

....

o) Submission for AC’s approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;

....

q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.

r) Provision of assistance on request, in its relations with Governmental and other authorities, offices
and agencies in the Territory [Philippines].

....

u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless
otherwise stated in the guidelines, refer all such claims and complaints to AC. 91

Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own
expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff,
equipment, documentation, facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency." "[I]t is the
92

sole employer of its employees and . . . is responsible for [their] actions . . . or those of any
subcontractor." In remuneration for its services, Aerotel would be paid by petitioner a commission
93

on sales of transportation plus override commission on flown revenues. Aerotel would also be
94

reimbursed "for all authorized expenses supported by original supplier invoices." 95

Page178
Aerotel is required to keep "separate books and records of account, including supporting documents,
regarding all transactions at, through or in any way connected with [petitioner Air Canada]
business." 96

"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way." Aerotel cannot "accept additional appointments as General Sales Agent of any other carrier
97

without the prior written consent of [petitioner Air Canada]." 98

The Passenger General Sales Agency Agreement "may be terminated by either party without cause
upon [no] less than 60 days’ prior notice in writing[.]" In case of breach of any provisions of the
99

Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which [petitioner Air
Canada] may terminate [the] Agreement[.]" 100

The following terms are indicative of Aerotel’s dependent status:

First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes
control of another entity or merges with or is acquired or controlled by another person or
entity[.]" Except with the written consent of petitioner, Aerotel must not acquire a substantial interest
101

in the ownership, management, or profits of a passenger sales agent affiliated with the International
Air Transport Association or a non-affiliated passenger sales agent nor shall an affiliated passenger
sales agent acquire a substantial interest in Aerotel as to influence its commercial policy and/or
management decisions. Aerotel must also provide petitioner "with a report on any interests held by
102

[it], its owners, directors, officers, employees and their immediate families in companies and other
entities in the aviation industry or . . . industries related to it[.]" Petitioner may require that any
103

interest be divested within a set period of time. 104

Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner
without the express written consent of the latter; it must act according to the standards required by
105

petitioner; "follow the terms and provisions of the [petitioner Air Canada] GSA Manual [and all]
106

written instructions of [petitioner Air Canada;]" and "[i]n the absence of an applicable provision in
107

the Manual or instructions, [Aerotel must] carry out its functions in accordance with [its own]
standard practices and procedures[.]" 108

Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]" All use of petitioner’s name, logo, and marks must be with the
109

written consent of petitioner and according to petitioner’s corporate standards and guidelines set out
in the Manual. 110

Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation
sold by Aerotel are for the account of petitioner, except in the case of negligence of Aerotel. 111

Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude contracts
or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third party is
enforceable against petitioner. While Aerotel maintains a certain independence and its activities may
not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the benefit of petitioner and according to the
latter’s Manual and written instructions. Aerotel is required to submit its annual sales plan for
petitioner’s approval.
Page178
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit
or outlet through which petitioner’s airline tickets are sold. 112

Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the
"business profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless the
enterprise carries on business in the other Contracting State through a permanent
establishment[.]" Thus, income attributable to Aerotel or from business activities effected by
113

petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph of Article VII in relation to Article VIII (Shipping and Air Transport) of the same Treaty,
114 115

the tax imposed on income derived from the operation of ships or aircraft in international traffic
should not exceed 1½% of gross revenues derived from Philippine sources.

IV

While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income from sale of airline tickets in the
116

Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article VIII
of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign
corporation organized and existing under the laws of Canada[.]" 117

Tax treaties form part of the law of the land, and jurisprudence has applied the statutory
118

construction principle that specific laws prevail over general ones. 119

The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became
valid and effective on that date. On the other hand, the applicable provisions relating to the
120

taxability of resident foreign corporations and the rate of such tax found in the National Internal
Revenue Code became effective on January 1, 1998. Ordinarily, the later provision governs over
121

the earlier one. In this case, however, the provisions of the Republic of the Philippines-Canada Tax
122

Treaty are more specific than the provisions found in the National Internal Revenue Code.

These rules of interpretation apply even though one of the sources is a treaty and not simply a
statute.

Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in
by at least two-thirds of all the Members of the Senate.

This provision states the second of two ways through which international obligations become
binding. Article II, Section 2 of the Constitution deals with international obligations that are
incorporated, while Article VII, Section 21 deals with international obligations that become binding
through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as well as definite
prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend
statutory provisions. Statutory provisions may also amend these types of treaty obligations.

We only deal here with bilateral treaty state obligations that are not international obligations erga
omnes. We are also not required to rule in this case on the effect of international customary norms
especially those with jus cogens character.
Page178
The second paragraph of Article VIII states that "profits from sources within a Contracting State
derived by an enterprise of the other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that
State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a
third State."

The Agreement between the government of the Republic of the Philippines and the government of
Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of
the Republic of the Philippines-Canada Tax Treaty:

ARTICLE XVI
(Taxation)

The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention
between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any amendments thereto, in respect of the operation of
aircraft in international traffic.
123

Petitioner’s income from sale of ticket for international carriage of passenger is income derived from
international operation of aircraft. The sale of tickets is closely related to the international operation
of aircraft that it is considered incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax
limited to a certain extent[.]" Thus, we are bound to extend to a Canadian air carrier doing business
124

in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1½% on
business profits derived from sale of international air transportation.

Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its claim for
refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax
under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed
at all by the Bureau of Internal Revenue for any income tax liability; and (b) internal revenue taxes
125

cannot be the subject of set-off or compensation, citing Republic v. Mambulao Lumber Co., et
126

al. and Francia v. Intermediate Appellate Court.

127 128

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, we have ruled that
129

"[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in lieu of the taxes paid." The 130

determination of the proper category of tax that should have been paid is incidental and necessary to
resolve the issue of whether a refund should be granted. Thus:
131

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains
tax or other taxes at the first instance. The Court of Tax Appeals has no power to make an
assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating that
petitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appeals was not
Page178

making an assessment. It was merely determining the proper category of tax that petitioner should
have paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax
imposed upon PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an incidental
matter necessary for the resolution of the principal issue, which is whether petitioner was entitled to
a refund.

The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are
due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were
correct. If the tax return filed was not proper, the correctness of the amount paid and, therefore, the
claim for refund become questionable. In that case, the court must determine if a taxpayer claiming
refund of erroneously paid taxes is more properly liable for taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for
refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did not
immediately grant South African’s claim for refund. This is because although this court found that
South African Airways was not subject to the 2½% tax on its gross Philippine billings, this court also
found that it was subject to 32% tax on its taxable income.

In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the
quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the
refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not
liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South
African Airways, petitioner’s request for refund can neither be granted nor denied outright without
such determination.

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of
the taxpayer’s liability should be computed and deducted from the refundable amount.

Any liability in excess of the refundable amount, however, may not be collected in a case involving
solely the issue of the taxpayer’s entitlement to refund. The question of tax deficiency is distinct and
unrelated to the question of petitioner’s entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be expected to perform the
BIR’s duties whenever it fails to do so either through neglect or oversight. Neither can court
processes be used as a tool to circumvent laws protecting the rights of taxpayers. 132

Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly
erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the
regular 32% tax on its taxable income received from sources within the Philippines. Its determination
of petitioner’s liability for the 32% regular income tax was made merely for the purpose of
ascertaining petitioner’s entitlement to a tax refund and not for imposing any deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are
based on different circumstances. In both cited cases, the taxpayer claimed that his (its) tax liability
133

was off-set by his (its) claim against the government.

Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the
amounts it paid to the government as reforestation charges from 1947 to 1956, not having been
used in the reforestation of the area covered by its license, may be set off or applied to the payment
of forest charges still due and owing from it. Rejecting Mambulao’s claim of legal compensation, this
134

court ruled:
Page178
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law
on compensation is inapplicable. On this point, the trial court correctly observed:

Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the government
as taxes collected, and the government does not owe anything to defendant Mambulao Lumber
Company. So, it is crystal clear that the Republic of the Philippines and the Mambulao Lumber
Company are not creditors and debtors of each other, because compensation refers to mutual debts.
* * *.

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can not be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. * * *. (80 C.J.S. 73–74.)

The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. * * * If the taxpayer can properly
refuse to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the collection of the tax
must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government
will be thrown into great confusion. (47 Am. Jur. 766–767.) (Emphasis supplied)
135

In Francia, this court did not allow legal compensation since not all requisites of legal compensation
provided under Article 1279 were present. In that case, a portion of Francia’s property in Pasay
136

was expropriated by the national government, which did not immediately pay Francia. In the
137

meantime, he failed to pay the real property tax due on his remaining property to the local
government of Pasay, which later on would auction the property on account of such
delinquency. He then moved to set aside the auction sale and argued, among others, that his real
138

property tax delinquency was extinguished by legal compensation on account of his unpaid claim
against the national government. This court ruled against Francia:
139

There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to
wit:

(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

Page178
 xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

....

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of ₱4,116.00 paid by the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the ₱4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
₱2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.140

The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission
on Audit and Philex Mining Corporation v. Commissioner of Internal Revenue. In Caltex, this court
141 142

reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have against the government.
Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off. (Citations omitted)
143

Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign
capacity." Rejecting Philex Mining’s assertion that the imposition of surcharge and interest was
144

unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period
since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal
Revenue, this court explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has
a pending tax claim for refund or credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer
the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex’s
theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities. (Citations omitted)
145

In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax
on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have
against the government. Such would merely be in keeping with the basic policy on prompt collection
Page178

of taxes as the lifeblood of the government. 1âwphi1

Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax
Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar arguments on the
denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax
refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the existence of
the deficiency income and business tax assessment against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably intertwined with the right of respondent bank to
claim for a tax refund for the same year. To award such refund despite the existence of that
deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent
cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created a
doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said
return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the
refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any
list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that the said list, statement, or return
was not false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should
subsequently be upheld, the Government will be forced to institute anew a proceeding for the
recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of
ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved.
This would necessarily require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust
be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding
the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that
the taxpayer and the Government alike be given equal opportunities to avail of remedies under the
law to defeat each other’s claim and to determine all matters of dispute between them in one single
Page178

case. It is important to note that in determining whether or not petitioner is entitled to the refund of
the amount paid, it would [be] necessary to determine how much the Government is entitled to
collect as taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as
to all the matters subject thereof or necessarily involved therein.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997
NIRC, is liable under Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in
doubt. As such, we cannot grant the prayer for a refund. (Emphasis supplied, citation omitted)
146

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, this court
147

upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that the taxpayer
had, through erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought
for erroneously paid Gross Philippine Billings tax on passenger revenues for the same taxable
period.148

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the
rate of 1 ½% of its gross revenues amounting to P345,711,806.08 from the third quarter of 2000 to
149

the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the
1997 National Internal Revenue Code [32% of t.axable income, that is, gross income less
deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII of
the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated
April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.

SO ORDERED.

Page178
January 24, 2018

G.R. No. 203160

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
COVANTA ENERGY PHILIPPINE HOLDINGS, INC., Respondent

DECISION

REYES, JR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking to reverse and
1

set aside the Decision dated March 30, 2012 and Resolution dated August 16, 2012 of the Court of
2 3

Tax Appeals (CTA) en banein CTA EB Case No. 713.

The CTA en banc denied the appeal of the Commissioner of Internal Revenue (CIR) and affirmed
the cancellation and withdrawal of the deficiency tax assessments on respondent Covanta Energy
Philippine Holdings, Inc. (CEPHI). The CIR avers, however, that CEPHI failed to comply with the
requirements of the tax amnesty law, or Republic Act (R.A.) No. 9480. 4

Factual Antecedents

On December 6, 2004, the CIR issued Formal Letters of Demand and Assessment Notices against
CEPHI for deficiency value-added tax (VAT) and expanded withholding tax (EWT). The deficiency
assessments were respectively in the amounts of ₱465,593.21 and ₱288,903.78, or an aggregate
amount of ₱754,496.99, representing CEPHI's VAT and EWT liabilities for the taxable year 2001. 5

CEPHI protested the assessments by filing two (2) separate Letters of Protest on January 19, 2005.
However, the CIR issued another Formal Letter of Demand and Assessment Notice dated January
11, 2005, assessing CEPHI for deficiency minimum corporate income tax (MCIT) in the amount of
₱467,801.99, likewise for the taxable year 2001. This assessment lead to CEPHI filing a Letter of
Protest on the MCIT assessment on February 16, 2015. 6

The protests remained unacted upon. Thus, CEPHI filed separate petitions before the CT A, seeking
the cancellation and withdrawal of the deficiency assessments. The petitions were filed on October
10, 2005, for the deficiency VAT and EWT, which was docketed as CTA Case No. 7338; and on
November 9, 2005, for the deficiency MCIT, which was docketed as CTA Case No. 7365. 7

On December 6, 2005, the CIR filed an Answer for CTA Case No. 7338, while the Answer for CTA
Case No. 7365 was filed on January 10, 2006. The cases were eventually consolidated upon the
CIR's motion.
Page178

8
After the parties' respective submission of their formal offer of evidence, CEPHI filed a Supplemental
Petition on October 7, 2008, informing the CT A that it availed of the tax amnesty under R.A. No.
9480. CEPHI afterwards submitted a Supplemental Formal Offer of Evidence, together with the
documents relevant to its tax amnesty. 9

The CTA then required the parties to submit their respective memoranda within 30 days. The case
was submitted for decision upon the parties' compliance. 10

Ruling of the CTA Second Division

In a Decision dated July 27, 2010, the CTA Second Division partially granted the petitions of CEPHI
with respect to the deficiency VAT and MCIT assessments for 2001. Since tax amnesty does not
extend to withholding agents with respect to their withholding tax liabilities, the CTA Second
11

Division ruled, after computation, that CEPHI is liable to pay the amount of ₱131,791.02 for the
deficiency EWT assessment, plus additional deficiency and delinquency interest. The dispositive
portion of this decision states: 12

WHEREFORE, the instant Petitions for Review are hereby PARTIALLY GRANTED. Accordingly, the
deficiency [VAT] and deficiency [MCIT] assessments for taxable year 2001 issued against petitioner
are CANCELLED and WITHDRAWN.

However, petitioner is ORDERED TO PAY respondent the amount of ONE HUNDRED THIRTY-ONE
THOUSAND SEVEN HUNDRED NINETY-ONE PESOS AND 02/100 (₱131,791.02), representing
deficiency [EWT], including the twenty-five percent (25%) surcharge imposed thereon.

Likewise, petitioner is ORDERED TO PAY:

(a) deficiency interest at the rate of twenty percent (20%) per annum on the
basic deficiency EWT of P29,415.00 computed from November 16, 2005 until
full payment thereof pursuant to Section 249(B) of the NIRC of 1997;and

(b) delinquency interest at the rate of 20% per annum of Pl 31, 791.02 which
is the total amount still due and on the 20% deficiency interest which have
accrued as afore-stated in paragraph (a) computed from January 10, 2005
until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997.

SO ORDERED. 13

The CIR moved for the reconsideration of this decision, which the CTA Second Division denied in its
Resolution dated December 13, 2010:
14

WHEREFORE, premises considered, respondent's "Motion for Reconsideration" is hereby DENIED

for lack of merit. SO ORDERED. 15

Unsatisfied with the ruling of the CTA Second Division, the CIR elevated the matter to the CTA en
bane through a Petition for Review dated January 4, 2011, pursuant to R.A. No. 1125, as amended
16

by R.A. No. 9282 and R.A. No. 9503. The sole issue raised in the CIR's appeal was whether the
17 18

CT A Second Division erred in upholding the validity of the tax amnesty availed by CEPHI. The CIR
was of the position that CEPHI is not entitled to the immunities and privileges under R.A. No. 9480
because its documentary submissions failed to comply with the requirements under the tax amnesty
Page178

law.
19
Ruling of the CTA En Banc

Finding the CIR's petition for review unmeritorious, the CTA en bane denied the appeal in the
assailed Decision dated March 30, 2012:
20

WHEREFORE, the Petition for Review filed by [CIR] is hereby DENIED for lack of merit. The
Decision dated July 27, 2010 and Resolution dated December 13, 2010 are hereby AFFIRMED.
Deficiency [VAT] and Deficiency [MCIT] in taxable year 2001 remain CANCELLED and
WITHDRAWN. Respondent, however, is ORDERED TO PAY the amount of ONE HUNDRED
THIRTY-ONE THOUSAND SEVEN HUNDRED NINETY-ONE PESOS AND 02/100 (₱131,791.02),
representing deficiency [EWT], including the twenty-five (25%) surcharge imposed thereon.
Likewise, respondent is ORDERED TO PAY:

(a) deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency EWT of
₱29,415.00 computed from November 16, 2005 until full payment thereof pursuant to Section 249(B)
of the NIRC of 1997;and

(b) delinquency interest at the rate of 20% per annum of ₱131,791.02 which is the total amount still
due and on the 20% deficiency interest which have accrued as afore-stated in paragraph (a)
computed from January 10, 2005 until full payment thereof, pursuant to Section 249(c) of the NIRC
of 1997. SO ORDERED. 21

The CTA en bane upheld the ruling that, without any evidence that CEPHI's net worth was
underdeclared by at least 30%, there is a presumption of compliance with the requirements of the
tax amnesty law. For this reason, CEPHI may immediately enjoy the privileges of the tax amnesty
program. The CIR disagreed with this decision, and on April 23, 2012, it moved for the
22

reconsideration of the CTA en bane's decision.

The CIR's motion for reconsideration was denied in the assailed CTA en bane Resolution dated 23

August 16, 2012:

WHEREFORE, premises considered, the Motion for Reconsideration is hereby DENIED for lack of
merit.

SO ORDERED. 24

Prompted by the denial of their petition for review and motion for reconsideration, the CIR elevated
the matter to this Court, by again assailing the validity of CEPHI's tax amnesty. The CIR reiterated its
argument that CEPHI's failure to provide complete information in its Statement of Assets, Liabilities
and Net worth (SALN), particularly the columns requiring the Reference and Basis of Valuation, is
sufficient basis to disqualify CEPHI from the tax amnesty program. The CIR also alleged that there
25

is no period of limitation in challenging CEPHI's compliance with the requirements of the tax amnesty
program. 26

Ruling of this Court

The Court dismisses the petition.

CEPHI is entitled to the immunities and privileges of the tax amnesty program upon full
compliance with the requirements of R.A. No. 9480.
Page178
R.A. No. 9480 governs the tax amnesty program for national internal revenue taxes for the taxable
year 2005 and prior years. Subject to certain exceptions, a taxpayer may avail of this program by
27 28

complying with the documentary submissions to the Bureau of Internal Revenue (BIR) and
thereafter, paying the applicable amnesty tax.
29

The implementing rules and regulations of R.A. No. 9480, as embodied in Department of Finance
(DOF) Department Order No. 29-07, laid down the procedure for availing of the tax amnesty:
30

SEC. 6. Method of Availment of Tax Amnesty. –

1. Forms/Documents to be filed. - To avail of the general tax amnesty,

concerned taxpayers shall file the following documents/requirements:

a. Notice of Availment in such forms as may be prescribed by the

BIR.

b. [SALN] as of December 31, 2005 in such forms, as may be

prescribed by the BIR.

c. Tax Amnesty Return in such form as may be prescribed by the BIR.

2. Place of Filing of Amnesty Tax Return. - The Tax Amnesty Return, together
with the other documents stated in Sec. 6 (1) hereof, shall be filed as follows:

a. Residents shall file with the Revenue District Officer (RDO)/Large

Taxpayer District Office of the BIR which has jurisdiction over the
legal residence or principal place of business of the taxpayer, as the
case may be.

b. Non-residents shall file with the office of the Commissioner of the

BIR, or with the RDO.

c. At the option of the taxpayer, the RDO may assist the taxpayer in
accomplishing the forms and computing the taxable base and the
amnesty tax payable, but may not look into, question or examine the
veracity of the entries contained in the Tax Amnesty Return, [SALN],
or such other documents submitted by the taxpayer.

3. Payment of Amnesty Tax and Full Compliance. - Upon filing of the

Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the
taxpayer shall pay the amnesty tax to the authorized agent bank or in
the absence thereof, the Collection Agents or duly authorized
Treasurer of the city or municipality in which such person has his
legal residence or principal place of business.

The RDO shall issue sufficient Acceptance of Payment Forms, as may be

prescribed by the BIR for the use of-or to be accomplished by - the bank, the
collection agent or the Treasurer, showing the acceptance by the amnesty tax
payment. In case of the authorized agent bank, the branch manager or the
assistant branch manager shall sign the acceptance of payment form.
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 The Acceptance of Payment Form, the Notice of Availment, the SALN, and
the Tax Amnesty Return shall be submitted to the RDO, which shall be
received only after complete payment. The completion of these requirements
shall be deemed fullcompliance with the provisions of RA 9480.

4. Time/or Filing and Payment of Amnesty Tax. -The filing of the Tax Amnesty
Return, together with the SALN, and the payment of the amnesty tax shall be
made within six (6) months from the effectivity of these Rules. (Emphasis
31

and underscoring Ours)

Upon the taxpayer's full compliance with these requirements, the taxpayer is immediately entitled to
the enjoyment of the immunities and privileges of the tax amnesty program. But when: (a) the
32

taxpayer fails to file a SALN and the Tax Amnesty Return; or (b) the net worth of the taxpayer in the
SALN as of December 31, 2005 is proven to be understated to the extent of 30% or more, the
taxpayer shall cease to enjoy these immunities and privileges. 33

The underdeclaration of a taxpayer's net worth, as referred in the second instance above, is proven
through: (a) proceedings initiated by parties other than the BIR or its agents, within one (1) year from
the filing of the SALN and the Tax Amnesty Return; or (b) findings or admissions in congressional
hearings or proceedings in administrative agencies, and in courts. Otherwise, the taxpayer's SALN is
presumed true and correct. The tax amnesty law thus places the burden of overturning this
34

presumption to the parties who claim that there was an underdeclaration of the taxpayer's net worth.

In this case, it is undisputed that CEPHI submitted all the documentary requirements for the tax
amnesty program. The CIR argued, however, that CEPHI cannot enjoy the privileges attendant to
35

the tax amnesty program because its SALN failed to comply with the requirements of R.A. No. 9480.
The CIR specifically points to CEPHI's supposed omission of the information relating to
the Reference and Basis for Valuation columns in CEPHI's original and amended SALNs. 36

The required information that should be reflected in the taxpayer's SALN is enumerated in Section 3
of R.A. No. 9480. The essential contents of the SALN are also itemized under the implementing
37

rules and regulations as follows:

SEC. 8. Contents of the SALN. - The SALN shall contain a true and complete declaration of assets,
liabilities and networth of the taxpayer as of December 31, 2005, as follows:

1. Assets within or without the Philippines, whether real or personal, tangible

or intangible, whether or not used in trade or business:

a. Real properties shall be accompanied by a description of their

classification, exact location, and valued at acquisition cost, if
acquired by purchase or the zonal valuation or fair market value,
whichever is higher, if acquired through inheritance or donation;

b. Personal properties other than money, shall be accompanied by a

specific description of the kind and number of assets (i.e.
automobiles, shares of stock, etc.) or other investments, indicating
the acquisition cost less depreciation or amortization, in proper cases,
if acquired by purchase, or the fair market price or value at the time of
receipt, if acquired through inheritance or donations;
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 c. Assets denominated in foreign currency shall be converted into the
corresponding Philippine currency equivalent, at the rate of exchange
prevailing as of December 31, 2005; and

d. Cash on hand and in bank in peso as of December 31, 2005, as

well as Cash on Hand and in Bank in foreign currency, converted to
peso as of December 31, 2005.

2. All existing liabilities which are legitimate and enforceable, secured and
unsecured, whether or not incurred in trade or business, disclosing or
indicating clearly the name and address of the creditor and the amount of the
corresponding liability.

3. The total networth of the taxpayer, which shall be difference between the
total assets and total liabilities.

It is evident from CEPHI's original and amended SALN that the information statutorily mandated in
R.A. No. 9480 were all reflected in its submission to the BIR. While the columns
for Reference and Basis for Valuation were indeed left blank, CEPHI attached schedules to its SALN
(Schedules 1 to 7), both original and amended, which provide the required information under R.A.
No. 9480 and its implementing rules and regulations. A review of the SALN form likewise reveals
38

that the information required in the Reference and Basis for Valuation columns are actually the
specific description of the taxpayer's declared assets. As such, these were deemed filled when
CEPHI referred to the attached schedules in its SALN. On this basis, the CIR cannot disregard or
simply set aside the SALN submitted by CEPHI.

More importantly, CEPHI's SALN is presumed true and correct, pursuant to Section 4 of R.A. No.
9480. This presumption may be overturned if the CIR is able to establish that CEPHI understated its
39

net worth by the required threshold of at least 30%.

However, aside from the bare allegations of the CIR, there is no evidence on record to prove that the
amount of CEPHI's net worth was understated. Parties other than the BIR or its agents did not
initiate proceedings within one year from the filing of the SALN or Tax Amnesty Return, in order to
challenge the net worth of CEPHI. Neither was the CIR able to establish that there were findings or
admissions in a congressional, administrative, or court proceeding that CEPHI indeed understated
its net worth by 30%.

As the Court previously held in CS Garment, Inc. v. CIR, taxpayers are eligible to the immunities of
40

the tax amnesty program as soon as they fulfill the suspensive conditions imposed under R.A. No.
9480:

A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains two types of
conditions - one suspensive, the other resolutory. Borrowing from the concepts under our Civil Code,
a condition may be classified as suspensive when the fulfillment of the condition results in the
acquisition of rights. On the other hand, a condition may be considered resolutory when the
fulfillment of the condition results in the extinguishment of rights. In the context of tax amnesty, the
rights referred to are those arising out of the privileges and immunities granted under the applicable
tax amnesty law.

xxxx
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This clarification, however, does not mean that the amnesty taxpayers would go scot-free in case
they substantially understate the amounts of their net worth in their SALN. The 2007 Tax Amnesty
Law imposes a resolutory condition insofar as the enjoyment of immunities and privileges under the
law is concerned. Pursuant to Section 4 of the law, third parties may initiate proceedings contesting
the declared amount of net worth of the amnesty taxpayer within one year following the date of the
filing of the tax amnesty return and the SALN. Section 6 then states that "All these immunities and
privileges shall not apply x x x where the amount of networth as of December 31, 2005 is proven to
be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of
Section 3 hereof." Accordingly, Section 10 provides that amnesty taxpayers who willfully understate
their net worth shall be (a) liable for perjury under the Revised Penal Code; and (b) subject to
immediate tax fraud investigation in order to collect all taxes due and to criminally prosecute those
found to have willfully evaded lawful taxes due. (Emphasis Ours)
41

Considering that CEPHI completed the requirements and paid the corresponding amnesty tax, it is
considered to have totally complied with the tax amnesty program. As a matter of course, CEPHI is
1âwphi1

entitled to the immediate enjoyment of the immunities and privileges of the tax amnesty
program. Nonetheless, the Court emphasizes that the immunities and privileges granted to
42

taxpayers under R.A. No. 9480 is not absolute. It is subject to a resolutory condition insofar as
the taxpayers' enjoyment of the immunities and privileges of the law is concerned. These
immunities cease upon proof that they underdeclared their net worth by 30%.

Unfortunately for the CIR, however, there is no such proof in CEPHI's case. The Court, thus, finds it
necessary to deny the present petition. While tax amnesty is in the nature of a tax exemption, which
is strictly construed against the taxpayer, the Court cannot disregard the plain text of R.A. No. 9480.
43

WHEREFORE, premises considered, the petition is DENIED for lack of merit. The Decision dated
March 30, 2012 and Resolution dated August 16, 2012 of the CTA en bane in CTA EB Case No. 713
are AFFIRMED.

SO ORDERED.

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